Delek Logistics Partners, LP — 2014 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited. Amounts below are in millions, except per-unit data and where noted.
Business context
The Partnership operates crude oil and refined-products pipelines, storage assets, terminals and wholesale marketing businesses, primarily in Texas and the southeastern United States. A substantial majority of its assets support Delek’s refineries, and much of its contribution margin comes from agreements with Delek. Comparisons require care: results include predecessor operations retrospectively, but predecessor entities did not record certain intercompany terminalling and storage revenues in the same way the Partnership does.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $228.0 | $243.3 | $667.9 | $684.3 |
| Contribution margin | $23.7 | $16.1 | $75.9 | $42.3 |
| Operating income | $17.5 | $11.0 | $57.7 | $26.6 |
| Net income | $15.1 | $9.5 | $50.6 | $23.3 |
| Net income attributable to partners | $15.1 | $12.5 | $51.5 | $36.5 |
| EBITDA (non-GAAP) | $21.2 | $14.1 | $68.5 | $36.6 |
| Distributable cash flow (non-GAAP) | $17.7 | $9.5 | $57.5 | $22.5 |
- Despite lower sales, Q3 contribution margin rose 47% and operating income rose 59% year over year. Management attributed the margin improvement to stronger west Texas marketing margins and new Delek throughput and tankage agreements. Nine-month contribution margin increased 80%.
- Sales declined 6% in Q3 and 2% for the nine months, primarily reflecting lower fuel prices and lower west Texas sales volumes. Q3 west Texas marketing margin increased to $2.20 per barrel from $1.63; nine-month margin rose to $4.09 from $2.41.
- Operating cash flow was $64.9 for the first nine months, versus $29.6 a year earlier. Investing cash outflow was $2.8, and financing cash outflow was $62.4. Cash ended at $0.7.
- At September 30, debt under the revolving facility was $230.0; approximately $157.0 remained available, with $13.0 of letters of credit outstanding. The facility’s weighted-average interest rate was approximately 2.4%. Management said the Partnership was in covenant compliance.
- Current assets were $50.8 and current liabilities $45.8. The annualized quarterly distribution increased to $1.96 per unit; the declared Q3 distribution was $0.49 per unit. Nine-month distributions earned totaled $34.8 versus distributable cash flow of $57.5.
Material changes and notable items
- The February 2014 El Dorado acquisition added a terminal and 158 tanks for $95.9 in cash. New agreements with Delek contributed to higher pipeline and terminalling revenue. The acquisition was accounted for as a common-control transfer at historical book value, reducing equity by $70.7.
- On October 1, 2014, after quarter-end, the Partnership acquired the Greenville-Mount Pleasant assets for approximately $11.1, funded with cash and revolver borrowings.
- Management lowered its 2014 capital-spending forecast to approximately $9.9 from $13.1, mainly because North Little Rock expansion and tank replacement projects were delayed into 2015.
- Non-hedge commodity derivative gains recorded in earnings were $1.8 in Q3 and $1.5 for the nine-month period. The filing states changes in fair value flow through earnings.
Outlook, risks and contingencies
- Management believed operating cash flow, revolver capacity and potential debt or equity issuance would be sufficient for anticipated needs, including distributions, for at least the next 12 months. It expected to fund future capital spending primarily from operating cash flow and financing sources; no formal earnings guidance was provided.
- Key exposures include dependence on Delek and its ability to meet contractual commitments, refinery utilization and product demand, commodity-price effects on wholesale marketing, floating-rate debt, seasonal volume patterns and operational interruptions.
- The Partnership disclosed crude oil releases at Magnolia Station, near Macedonia, Arkansas, and near Haynesville, Louisiana. Accruals included $0.1 for Magnolia and $1.3 for additional expected costs associated with the Macedonia and Haynesville releases; the filing does not clearly allocate that $1.3 between the two events. Delek indemnification or reimbursement applies to certain costs, subject to contractual terms.
- Pipeline tariffs and operations are subject to federal and state regulation, and environmental and safety compliance may require ongoing spending. Management did not believe pending litigation would have a material adverse effect. No significant changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of the improved contribution margin and distributable cash flow is sustainable versus attributable to favorable west Texas market conditions and derivative gains.
- Delek’s share of revenue and cash flow, its ability to honor minimum-volume commitments, and the terms and duration of related-party agreements.
- Actual debt, borrowing availability, covenant headroom and interest costs following the October Greenville-Mount Pleasant acquisition.
- Final cost, timing and funding of the revised capital program, including projects deferred to 2015 and Delek reimbursement obligations.
- Updated remediation costs, indemnification recoveries and potential regulatory or safety liabilities related to the reported crude oil releases.