Business context and reporting period
Delek Logistics Partners, LP filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The partnership operates pipelines, transportation, storage, wholesale marketing and terminalling assets, primarily supporting Delek’s Tyler and El Dorado refineries. A substantial portion of its business depends on Delek and its affiliates.
Comparative figures were retrospectively adjusted for assets transferred from Delek under common control. The filing cautions that predecessor results may not reflect the results those assets would have generated as part of an unaffiliated business.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $172.1 million | $236.3 million | $315.6 million | $439.9 million |
| Operating income | $21.1 million | $24.1 million | $37.6 million | $39.8 million |
| Net income | $18.3 million | $21.5 million | $32.3 million | $35.0 million |
| Common-unit basic earnings | $0.71 | $0.88 | $1.28 | $1.47 |
| Contribution margin | $28.8 million | $30.1 million | $53.2 million | $51.9 million |
| EBITDA | $25.7 million | $27.7 million | $46.6 million | $46.9 million |
| Distributable cash flow | $20.9 million | $23.9 million | $37.6 million | $39.6 million |
For the six months, operating cash flow was $46.6 million, versus $44.4 million a year earlier. Investing activities used $27.5 million, including $13.5 million for property, plant and equipment and $14.8 million invested in joint ventures. Financing activities used $20.8 million; cash declined $1.7 million to $0.1 million.
At June 30, 2015, the partnership had $316.9 million outstanding on its revolving facility, with a weighted-average borrowing rate of approximately 2.6%, and approximately $377.6 million of availability. Letters of credit totaled $5.5 million. The $700 million facility matures December 30, 2019. Current assets were $44.1 million and current liabilities $38.6 million. Total equity was a deficit of $15.8 million, compared with equity of $39.8 million at year-end; the filing attributes a major part of the decline to acquisition accounting for Delek asset transfers and distributions.
The quarterly distribution increased to $0.55 per limited partner unit ($2.20 annualized), from $0.475 in Q2 2014. The Q2 2015 distribution was declared after quarter-end and was scheduled for August 14, 2015.
Material changes versus the prior comparable period
- Q2 sales fell 27.2% and six-month sales fell 28.2%, principally because lower gasoline and diesel prices reduced reported wholesale marketing revenue. Lower product costs largely offset the price declines, but did not prevent weaker Q2 contribution margin.
- Q2 contribution margin declined 4.0%; the six-month figure increased 2.5%. Pipelines and transportation contribution margin rose 53.3% in Q2 and 56.9% for the six months, supported by higher Paline Pipeline fees, new Delek throughput arrangements and acquired assets.
- Wholesale marketing and terminalling contribution margin fell 51.6% in Q2 and 50.5% for the six months. Management cited weaker west Texas margins, lower crude prices and drilling activity, ethanol pricing relative to fixed-price contracts, and Tyler refinery turnaround-related downtime during the first half.
- Interest expense rose 11.7% in Q2 and 10.4% for the six months, reflecting financing charges and revolving-facility utilization and rates. Operating expenses and G&A also increased, including due to maintenance and acquisition- and project-related costs.
Outlook, risks and unusual items
- Management said available liquidity sources were expected to meet anticipated operating needs, including minimum quarterly distributions, for at least 12 months. The 2015 capital-spending forecast was approximately $19.8 million; approximately $9.8 million had been spent through June, under the filing’s stated forecast categories.
- The partnership invested $18.5 million in two equity-method pipeline ventures as of June 30. Total projected investment in those ventures was approximately $91 million, funded through operating cash and revolver borrowings.
- Delek acquired the El Dorado crude rail offloading assets and Tyler crude tank assets on March 31. The partnership paid $42.5 million and $19.4 million, respectively, funded with revolver borrowings; the transfers were recorded at Delek’s historical carrying values. Delek commercial agreements include minimum throughput arrangements, including a $1.5 million quarterly minimum throughput fee for the El Dorado rail facility.
- Management identified west Texas product margins, commodity and RIN price movements, interest rates, refinery utilization, maintenance, regulatory requirements, and dependence on Delek as key risks. It also noted FERC-related tariff increases effective July 1, 2015, including approximately 4.6% for applicable agreements.
- Environmental matters include a 130-barrel release near Fouke, Arkansas, for which $1.6 million was accrued and expected to be reimbursed under the omnibus agreement. The DOJ notified the partnership in June that it was evaluating potential Clean Water Act enforcement regarding the 2013 Magnolia Station release; no specific claim had been made. Management did not expect these events, net of expected reimbursement and insurance, to have a material adverse effect.
- Management reported compliance with credit covenants at June 30. It also cautioned that Delek’s separate credit arrangements may constrain the partnership’s ability to use the full capacity of its own revolver. No material changes to contractual obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether west Texas marketing margins and volumes recover, and the extent to which lower commodity prices continue to affect results.
- Delek’s refinery operations, payment capacity and minimum-volume obligations, given the partnership’s significant customer and sponsor concentration.
- Debt levels, covenant headroom and available revolver capacity, including any constraints arising from Delek’s credit agreements.
- Progress, funding needs and expected returns for the Caddo and RIO pipeline joint ventures, alongside the 2015 capital program.
- Final remediation and reimbursement outcomes for the Fouke and Magnolia releases, and any DOJ or other regulatory action.
- Distribution sustainability relative to distributable cash flow, which is a non-GAAP measure and includes adjustments such as capital-expenditure reimbursements.