Delek Logistics Partners, LP — Q1 2013 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2013. Delek Logistics gathers, transports and stores crude oil and markets and terminals refined products, primarily in support of Delek’s Tyler, Texas and El Dorado, Arkansas refineries. The Partnership began operations following its November 2012 IPO; accordingly, Q1 2013 Partnership results are compared with Q1 2012 predecessor results, which are not fully comparable. The predecessor did not record all intercompany service revenue later recognized under the Partnership’s Delek agreements, and its business included bulk biofuel sales discontinued after the IPO.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $210.9 million | $239.1 million |
| Contribution margin | $17.2 million | $9.5 million |
| Operating income | $13.1 million | $4.9 million |
| Net income | $12.2 million | $2.5 million |
| EBITDA (non-GAAP) | $15.5 million | $7.1 million |
| Distributable cash flow (non-GAAP) | $13.1 million | Not provided on a comparable basis |
| Net cash from operating activities | $2.0 million | $6.5 million |
| Capital expenditures | $1.3 million | $1.0 million |
- Sales declined 11.8%, while contribution margin rose 81.4%. Operating margin was approximately 6.2%, versus 2.1% in the prior-year period.
- Net income per common and subordinated unit was $0.50. The Partnership declared a $0.385 quarterly distribution per unit, totaling approximately $9.4 million, payable May 15, 2013.
- At March 31, cash was $19.0 million; revolving-credit borrowings were $90.0 million; total assets were $260.8 million and total equity was $111.1 million. Approximately $73.5 million remained available under the $175 million facility, with $11.5 million of letters of credit outstanding. The facility matures November 2017; the reported weighted-average borrowing rate was about 2.30%. The Partnership reported covenant compliance.
- Operating cash flow fell despite higher earnings, primarily due to working-capital movements, including increases in receivables and inventories and changes in related-party balances. Cash declined $4.5 million during the quarter.
Material changes and operating drivers
- Pipelines and transportation contribution margin increased to $8.9 million from $3.4 million, mainly reflecting higher rates under post-IPO Delek agreements and increased revenue. Average East Texas system throughput was 51,147 barrels per day in Q1.
- Wholesale marketing and terminalling contribution margin rose to $8.3 million from $6.1 million. West Texas marketing margin improved to $3.69 per barrel from $2.24, supported by market conditions and higher Renewable Identification Number values.
- Lower sales and cost of goods sold largely reflected the discontinuation of bulk biofuel sales after the IPO; Q1 2012 included $44.5 million of bulk-biofuel cost of sales. Gasoline’s average selling price also declined by $0.15 per gallon.
- Income-tax expense was $0.1 million versus $1.9 million, as the Partnership is generally treated as a pass-through entity; the predecessor was subject to entity-level taxes. Interest expense rose to $0.8 million from $0.5 million.
Outlook, risks and unusual items
- Management said existing liquidity sources were expected to cover anticipated operating needs, including distributions, for at least 12 months. It intends to pay at least $0.375 per unit quarterly, but states there is no legal obligation to do so. The Q1 distribution was $0.385 per unit.
- Planned 2013 capital spending was approximately $8.8 million. Delek agreed to reimburse certain eligible maintenance and in-progress project costs, subject to contractual terms and limits.
- A third-party reconfigured system began transporting crude to the Tyler refinery in April 2013. Management expected East Texas system throughput to fall from approximately 55,000 barrels per day to below 10,000. Delek’s minimum-volume commitment was expected to preserve approximately $5.1 million of annual throughput fees, in addition to $3.0 million in annual storage fees, while the commitment remains applicable.
- A March 9 Magnolia Station crude release was estimated at approximately 5,900 barrels; about 2,650 barrels were not contained at the station, and some reached a nearby creek. Management estimated total costs, liabilities and potential penalties at $4.5 million and anticipated approximately $3.5 million of reimbursement from Delek under the omnibus agreement. The release did not interrupt pipeline operations.
- Big Sandy terminal remained non-operational because a third-party pipeline was out of service; the Partnership expected it might return to service during 2013 but did not control the timing. Delek continued to owe minimum payments under the agreement.
- The Paline customer had paid $229,000 per month pending completion of a connection agreement. The agreement was executed in April 2013, and the Partnership expected to receive the full $529,250 monthly amount from Q2 onward; Delek indemnified qualifying lost fees through December 2013.
- Key risks include reliance on Delek and its refineries, third-party infrastructure and suppliers, commodity and interest-rate exposure, pipeline safety and environmental obligations, regulation, and information-technology or cybersecurity failures. Management reported no pending litigation expected to have a material adverse effect and said disclosure controls were effective.
Important facts for investors to verify
- How durable Q1’s stronger contribution margin is, particularly given the non-comparable predecessor period and unusually favorable West Texas marketing and RIN margins.
- Whether Delek continues to meet minimum-volume and payment obligations, and the terms and duration of the East Texas minimum commitment after the new third-party crude route began operating.
- Actual Magnolia release cleanup costs, regulatory outcomes, insurance recoveries and Delek reimbursement received.
- Whether Big Sandy returns to service and whether the Partnership receives full Paline contract fees as expected.
- Cash conversion, working-capital needs, compliance with credit covenants, and the Partnership’s ability to fund distributions and its 2013 capital plan.
- Continued dependence on Delek, including the enforceability and continuity of related-party commercial agreements, reimbursements and guarantees.