Delek Logistics Partners, LP — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparison with the three months ended March 31, 2015. The partnership operates crude oil and refined-products pipelines, storage, transportation, wholesale marketing and terminalling assets. It is controlled by Delek, and many assets support Delek refineries. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $104.1 | $143.5 | Down 27.5% |
| Contribution margin | $26.8 | $24.3 | Up 10.3% |
| Operating income | $19.0 | $16.4 | Up 15.6% |
| Net income attributable to partners | $15.4 | $14.6 | Up 5.5% |
| Basic common-unit earnings | $0.54 | $0.57 | Down $0.03 |
| Operating cash flow | $26.4 | $15.8 | Up $10.6 |
| EBITDA (non-GAAP) | $23.7 | $20.9 | Up 13.5% |
| Distributable cash flow (non-GAAP) | $20.4 | $16.7 | Up 22.5% |
- Calculated operating margin was approximately 18.2% of sales, versus 11.4% a year earlier; calculated net margin was approximately 14.8%, versus 10.2%. Contribution margin was 25.8% of sales, versus 17.0%, reflecting the substantial decline in wholesale sales prices and associated product costs.
- Investing cash outflow was $16.6 million, including $14.8 million contributed to equity-method joint ventures. Financing cash outflow was $9.6 million; cash increased by $0.2 million.
- At March 31, cash was $0.2 million and revolving-credit borrowings were $357.9 million. The $700 million facility had $337.1 million of unused commitments; $5.0 million of letters of credit were outstanding. The facility matures December 30, 2019. Weighted-average borrowing rate was approximately 2.8%; management reported covenant compliance.
- Total assets were $379.2 million and total liabilities were $390.2 million, leaving a $11.0 million deficit. Current assets were $40.1 million and current liabilities $18.0 million.
- The quarterly distribution increased to $0.610 per limited partner unit ($2.44 annualized); the $17.1 million total distribution was declared April 22, payable May 13, 2016. Distributable cash flow was approximately 1.2 times the declared total distribution, using the filing’s non-GAAP measure.
Material changes and management commentary
- Sales fell mainly because lower gasoline and diesel prices and lower diesel volumes reduced west Texas wholesale revenue. Gasoline selling price declined $0.42 per gallon and diesel $0.61 per gallon year over year.
- Despite lower sales, contribution margin rose on Delek throughput and tankage agreements for the El Dorado and Tyler assets, higher Paline Pipeline fees and lower pipeline allowance losses, and increased Tyler terminalling activity. These gains were partly offset by weaker west Texas margins and lower trucking contribution.
- West Texas marketing margin fell to $0.53 per barrel from $1.40; average throughput declined to 14,370 barrels per day from 16,645. The filing attributes weakness to competition and reduced regional drilling activity.
- Operating cash flow improved partly due to working-capital movements, including an excise-tax refund, lower inventory and other current assets, and higher supplier payables. Cash generation therefore was not solely from improved earnings.
- All 11,999,258 subordinated units converted into common units on February 25, 2016. This changed the unit classes and distribution participation, not total limited-partner units.
- Comparability has limitations: prior-year results include predecessor financial information for assets acquired from Delek, and predecessor accounting did not recognize certain intercompany service revenue in the same way as the partnership.
Outlook, risks and contingencies
- Management said expected liquidity sources—operating cash flow, revolver borrowings and potential securities issuances—should cover anticipated operating requirements, including minimum quarterly distributions, for at least the next 12 months.
- 2016 capital-spending forecast was reduced from $18.2 million to approximately $14.3 million, primarily by deferring discretionary pipeline and terminal maintenance projects to 2017. The forecast includes $9.3 million of maintenance, $1.5 million of regulatory spending and $3.5 million of discretionary projects.
- The partnership had contributed $56.1 million to two pipeline joint ventures by March 31, against projected total investment of approximately $96 million. RIO Pipeline completion was expected in July 2016 and Caddo Pipeline completion by January 2017; schedules and total investment could change.
- Floating-rate debt creates sensitivity: a hypothetical 1 percentage-point rate change would alter annual interest expense by approximately $3.6 million. Commodity derivatives covered 76,000 barrels at quarter-end; they produced a $0.2 million loss in Q1 2016 versus a $0.3 million gain in Q1 2015.
- Environmental matters include a January 2016 release of less than 30 barrels at Modisette and an approximately 350-barrel January release on the Paline Pipeline. Paline remediation was expected to continue through Q3 2016. Accruals at March 31 were $0.2 million for Paline and $1.0 million for the 2013 Magnolia release.
- The DOJ was evaluating a potential EPA enforcement action over possible Clean Water Act violations related to the 2013 Magnolia release; negotiations with federal and Arkansas authorities were ongoing and could result in penalties or other relief. The filing does not provide a clear estimate of any additional exposure.
- Key risks include reliance on Delek and its ability to meet commercial-agreement commitments, weaker commodity-linked wholesale margins and volumes, project execution and joint-venture returns, environmental and operating incidents, and possible effects of Delek’s own credit covenants on use of the partnership’s facility.
Investor facts to verify
- Whether reported margin and cash-flow improvement is sustainable after separating working-capital effects and the prior-year predecessor presentation.
- Delek’s share of revenue and contribution margin, contract minimums, and the effect of Delek refinery utilization and credit condition.
- Joint-venture remaining funding needs, construction progress, completion timing and projected returns.
- Actual costs, reimbursement eligibility and regulatory outcome for the Paline and Magnolia releases.
- Revolver covenant headroom, interest-rate exposure and capacity after considering letters of credit and any constraints arising from Delek’s credit agreements.
- Progress against the revised 2016 capital budget and the partnership’s ability to sustain distributions while funding debt service and investment commitments.