Delek Logistics Partners, LP — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. The Partnership owns and operates crude oil and refined-products logistics, transportation, storage, marketing and terminalling assets. A substantial portion of its business supports Delek’s refineries and depends on long-term agreements with Delek.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $164.1 million | $130.6 million | $498.3 million | $386.9 million |
| Operating income | $32.6 million | $22.6 million | $94.6 million | $64.5 million |
| Net income attributable to partners | $23.3 million | $16.9 million | $68.9 million | $50.5 million |
| EBITDA, non-GAAP | $43.0 million | $29.7 million | $123.2 million | $83.9 million |
| Distributable cash flow, non-GAAP | $32.4 million | $21.6 million | $94.1 million | $63.1 million |
| Operating cash flow | $6.0 million | $30.2 million | $57.6 million | $77.2 million |
Q3 revenue rose 25.6% and net income 37.8% year over year; nine-month revenue rose 28.8% and net income 36.5%. Operating margin was approximately 19.9% in Q3 versus 17.3% a year earlier, and 19.0% for nine months versus 16.7%. Management’s non-GAAP distributable cash flow exceeded declared distributions of $26.0 million for Q3 and $74.9 million for nine months; these figures imply approximate coverage of 1.25x and 1.26x, respectively.
At September 30, cash was $19.0 million, total assets $693.6 million, current assets $96.7 million and current liabilities $26.2 million. Long-term debt carrying value was $776.7 million, including $533.2 million drawn on the revolver and $250.0 million principal of 6.75% notes due 2025. The revolver had $316.8 million of unused capacity; its weighted-average borrowing rate was approximately 4.9%. The Partnership reported covenant compliance. The quarterly distribution increased to $0.790 per unit, or $3.16 annualized, and was payable November 9, 2018.
Material changes versus the prior comparable period
- Revenue and segment contribution margin increased, with contributions from the Big Spring assets and marketing agreement acquired from Delek effective March 1, 2018, higher west Texas product prices and margins, and increased Paline Pipeline revenue. Q3 contribution margin was $43.1 million versus $30.8 million.
- The Big Spring logistics assets cost $170.8 million and were financed with revolver borrowings. Because the acquisition was between entities under common control, assets were recorded at Delek’s historical carrying value; the $98.8 million excess cash payment was recorded in equity. A separate $144.2 million Big Spring marketing contract intangible was also debt-financed and is amortized over 20 years.
- Nine-month operating cash flow fell to $57.6 million from $77.2 million, mainly reflecting a $50.0 million increase in receivables from related parties, including amounts tied to a Delek capital project and new Big Spring agreements. Investing outflows increased substantially due to the acquisitions; financing included higher revolver borrowings and an acquisition-related $98.8 million distribution to Delek and the general partner.
- Interest expense rose to $11.1 million in Q3 from $7.1 million and to $30.1 million for nine months from $16.7 million, reflecting increased borrowing and the 2025 notes being outstanding for more of the comparison period.
- The revolver was amended September 28: commitments increased from $700 million to $850 million, the accordion capacity rose to $1.0 billion, and maturity was extended to September 28, 2023.
Outlook, risks and unusual items
- Management said it believed liquidity was sufficient for the next 12 months, including distributions and capital spending. No earnings or distribution-coverage guidance was provided. The 2018 capital-spending forecast was reduced from $19.0 million to $11.6 million, primarily due to revised project timing.
- Management cited improving drilling activity and demand in the Permian and west Texas markets. Results remain exposed to wholesale product margins, commodity-price movements, throughput volumes, operating costs, and seasonal refinery maintenance. A 1% change in rates on floating-rate debt outstanding would change annualized interest expense by approximately $5.3 million.
- Delek concentration is material: affiliate revenue was $63.8 million of Q3 revenue and $178.6 million of nine-month revenue. Long-term minimum-volume and capacity commitments support revenue, but the business remains dependent on Delek’s operations, credit and ability to meet its obligations.
- The DOJ and Arkansas brought a civil action concerning the 2013 Magnolia crude-oil release. The Partnership had accrued $1.0 million for the matter and said it believed the accrual was adequate and the case would not have a material adverse effect. Other releases and environmental compliance may entail further costs; certain qualifying costs are reimbursable by Delek under the Omnibus Agreement.
- A planned Green Plains joint-venture acquisition of two terminals terminated after regulatory-approval delays; the Partnership reported no further transaction or development plans with Green Plains at that time. The filing reported no material changes to previously disclosed risk factors and no material adverse effect expected from other pending litigation.
Most important facts for investors to verify
- Whether Delek continues to meet minimum-volume commitments and pay affiliate receivables promptly, including amounts related to the Permian capital project.
- Revolver utilization, borrowing costs, covenant headroom and the impact of floating rates on distributions and liquidity.
- Whether Big Spring assets and the marketing contract generate adequate cash returns relative to their acquisition cost and added debt.
- Distributable cash flow and distribution coverage, including the effects of working-capital movements and the Partnership’s non-GAAP calculation.
- Developments in the Magnolia Release enforcement action, related remediation obligations and Delek reimbursements.