Delek US Holdings, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2018 covers Delek’s integrated refining, logistics and retail businesses. Delek acquired Alon in July 2017; consequently, Q1 2018 includes Alon’s operations while Q1 2017 largely reflects legacy Delek. Year-over-year comparisons are therefore not directly comparable.
Financial performance and position
- Revenue: $2.353 billion, up 99.1% from $1.182 billion, primarily reflecting the Alon acquisition, higher product prices and increased refining and logistics volumes.
- Earnings: Operating income was $38.8 million versus $29.8 million. Delek reported a $20.0 million consolidated net loss and a $34.9 million net loss attributable to Delek, or $0.43 per share, compared with net income attributable to Delek of $11.2 million, or $0.18 per share. Continuing-operations loss attributable to Delek was $18.6 million.
- Segment contribution margin: Refining contributed $133.6 million versus $64.4 million; logistics contributed $36.3 million versus $26.6 million; retail contributed $11.9 million and had no comparable 2017 segment. Corporate, other and eliminations were negative $29.5 million. Refining benefited from improved crack spreads and RIN exemptions.
- Cash flow and investment: Operating cash outflow was $190.7 million versus $47.2 million. Investing cash outflow was $26.6 million, including $71.0 million of property, plant and equipment purchases and $39.7 million of proceeds from discontinued-operation sales. Financing provided $293.4 million; cash increased $76.1 million to $1.018 billion.
- Debt and liquidity: Total debt was approximately $1.960 billion, compared with $1.466 billion at year-end 2017. Delek reported $1.018 billion of cash, approximately $789.6 million of unused commitments or borrowing-base availability, and $115.7 million of letters of credit. Management said available sources should cover anticipated operating and capital needs for at least 12 months; the company reported compliance with debt covenants.
- Other metrics: Q1 capital spending was $70.1 million; the full-year 2018 forecast was $232.3 million, excluding approximately $79.6 million of Permian Basin midstream projects. The quarterly dividend was $0.20 per share; a $0.25 dividend was declared for payment in June.
Material changes and unusual items
- The July 2017 Alon merger materially expanded the business, adding Big Spring and Krotz Springs refineries and approximately 300 retail stores. Revenue and expense comparisons reflect this change in scope.
- Q1 included a $27.5 million impairment on asphalt assets held for sale and a $9.0 million loss on debt extinguishment related to refinancing. The refinancing established a $700 million term loan and a $1.0 billion asset-based revolver.
- The March sale of certain California assets resulted in a $41.2 million loss on sale; discontinued operations reported an $8.2 million net loss attributable to the consolidated company. Delek expected approximately $85.9 million in net proceeds, subject to adjustments, with some proceeds still due after quarter-end. Sale of remaining Long Beach assets was anticipated within six months.
- EPA small-refinery exemptions reduced RIN obligations and cost of goods sold by approximately $90.9 million in Q1 2018, compared with $47.5 million in Q1 2017.
- Delek repurchased $95.3 million of shares in Q1, including a $75.3 million purchase from Alon Israel. It approved a further $150 million repurchase authorization.
- The $17.0 million income tax benefit included provisional Tax Reform Act adjustments. Management said the tax accounting was not complete and future guidance or interpretations could change the estimates.
Outlook, commentary and risks
No specific earnings guidance was provided. Management cited expected liquidity sufficiency for at least the next 12 months. The filing notes that refining and retail results are generally seasonally weaker in Q1 and Q4, while asphalt demand is concentrated in May through October.
- Results are exposed to crude and refined-product prices, refining margins and regional crude differentials, RIN prices and the ability to recover compliance costs, derivative volatility, and operating reliability.
- Approximately $1.495 billion of debt was floating-rate at quarter-end; a hypothetical 1 percentage-point interest-rate change would affect annual interest expense by approximately $14.9 million.
- Environmental liabilities were approximately $74.4 million. A proposed Big Spring EPA consent decree, expected to become final in 2018, includes a $0.5 million penalty and potentially significant pollution-control capital spending over five years. The company also accrued $1.0 million for the Magnolia pipeline release matter.
- Other risks include acquisition integration, capital-project cost and timing, regulation, debt covenants, access to credit, and potential impairments. Management stated that pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of the year-over-year revenue and contribution-margin change reflects acquisition scope versus underlying operating performance.
- Final proceeds and settlement adjustments from the California asset sale, and the timing and outcome of the Long Beach and asphalt-terminal sales.
- Refinery margins, throughput, RIN exemption availability and the effects of RIN costs when exemptions are absent.
- Debt balances, floating-rate exposure, borrowing availability, upcoming maturities and compliance with facility covenants.
- Final Tax Reform Act accounting, environmental remediation estimates and the cost and timing of EPA-required capital projects.
- Execution and funding of the 2018 capital program, including the additional Permian Basin midstream projects and share repurchases.