Delek Logistics Partners, LP — Q3 2017 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2017; comparisons are with Q3 and the first nine months of 2016. The partnership operates crude-oil and refined-products pipelines, transportation, storage, wholesale marketing and terminalling assets. A substantial majority of its assets and contribution margin depend on Delek and its refining operations. Delek’s merger with Alon USA became effective July 1, 2017; the filing says the merger did not change the partnership’s commercial agreements with Delek.
Financial and operating highlights
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $130.6 million | $107.5 million | $386.9 million | $323.4 million |
| Operating income | $22.6 million | $17.0 million | $64.5 million | $58.5 million |
| Net income attributable to partners | $16.9 million | $13.2 million | $50.5 million | $47.5 million |
| EBITDA | $29.7 million | $22.0 million | $83.9 million | $72.9 million |
| Distributable cash flow | $21.6 million | $19.1 million | $65.6 million | $63.2 million |
| Common-unit earnings per unit, basic | $0.50 | $0.41 | $1.52 | $1.61 |
| Cash distributions per limited partner unit | $0.715 | $0.655 | $2.110 | $1.895 |
- Q3 operating margin was approximately 17.3%, versus 15.8% a year earlier; nine-month operating margin was approximately 16.7%, versus 18.1%.
- Contribution margin increased 24.9% to $30.8 million in Q3 and 9.3% to $89.1 million for nine months. Wholesale marketing and terminalling contributed $13.3 million in Q3 and $37.6 million year to date; pipelines and transportation contributed $17.5 million and $51.5 million, respectively.
- Cash from operations was $77.9 million for nine months, down from $86.8 million. Investing used $21.7 million and financing used $51.0 million; cash increased $5.2 million to $5.3 million.
- At September 30, cash was $5.3 million, current assets were $34.2 million and current liabilities were $28.7 million. Long-term debt carrying value was $401.3 million; total liabilities were $448.6 million and partners’ deficit was $25.8 million.
- Debt included $250 million principal of 6.75% senior notes due 2025 and $158.8 million outstanding on the revolving facility. The facility had $532.7 million of unused commitments, plus $8.5 million of letters of credit; its stated maturity is December 2019. The revolver’s weighted-average rate was approximately 4.0%.
Material changes versus prior period
- Q3 sales rose 21.5%; nine-month sales rose 19.6%, driven principally by higher west Texas gasoline and diesel prices and volumes. Cost of goods sold also increased, reflecting higher prices and volumes.
- West Texas contribution margin benefited from stronger drilling activity and demand, and temporarily higher margins during product supply disruptions associated with Hurricane Harvey. Management also cited higher Delek marketing-agreement fees from increased throughput.
- Nine-month pipelines and transportation contribution margin fell 9.1%, primarily because Paline Pipeline fees declined after its capacity moved from third-party monthly contracts to FERC-regulated tariffs. Wholesale marketing and terminalling contribution margin rose 51.3%.
- Interest expense increased 109.0% in Q3 and 68.4% year to date, mainly from the 2025 notes and higher revolver rates. Nine-month operating cash flow also declined, partly reflecting working-capital changes and income from equity-method investments.
- The partnership acquired the approximately 40-mile Big Spring Pipeline in Texas for about $9.0 million in September. It issued $250 million of notes in May and used substantially all net proceeds to reduce revolver borrowings.
- The quarterly distribution increased from $0.655 per unit in Q3 2016 to $0.715 in Q3 2017. The board declared a further $0.715 distribution for Q3 2017, payable November 14, 2017.
Outlook, risks and contingencies
- Management said expected liquidity sources—operating cash flow, revolver borrowings and possible debt or equity issuance—should cover anticipated requirements, including minimum quarterly distributions, for at least 12 months. The partnership expects to fund capital spending primarily through operations and financing.
- 2017 capital-spending forecast was approximately $17.0 million, reduced from $21.5 million due to revised timing of discretionary projects. Actual spending for the first nine months was $8.7 million. Forecasts remain subject to project cost and timing changes.
- Management cited improving market conditions and Permian drilling activity as potential supports for demand, while emphasizing risks from commodity prices, marketing margins, volumes, operating interruptions, regulation, financing costs and execution of projects and acquisitions.
- The partnership depends substantially on Delek and its assignees for commercial activity and payment. Delek’s credit covenants could indirectly constrain use of the partnership’s revolver. The filing reports compliance with the partnership’s credit covenants at quarter end.
- An EPA and Arkansas enforcement matter concerning the 2013 Magnolia crude-oil release remained under negotiation; $1.0 million was accrued for potential penalties or relief. The filing says remediation is substantially complete and Delek reimburses covered release costs under the Omnibus Agreement.
- The Noble Petro supply contract for west Texas products expires December 31, 2017 and has no renewal option. The filing does not state a replacement arrangement.
- Commodity swaps were not designated for hedge accounting. The partnership recorded a $1.5 million Q3 loss and a $0.4 million nine-month loss on commodity derivatives in cost of goods sold. A hypothetical 1% rate change on quarter-end floating-rate debt would change annual interest expense by approximately $1.6 million.
Investor verification priorities
- Confirm renewal or replacement of the Noble Petro supply contract and the potential effect on west Texas marketing activity.
- Assess whether Q3’s elevated west Texas margins, including the Hurricane Harvey-related benefit, are repeatable.
- Review distributable cash flow against distributions: nine-month DCF of $65.6 million compared with $65.1 million of distributions, and Q3 DCF of $21.6 million compared with $22.3 million of distributions.
- Track leverage, revolver usage, interest costs and the December 2019 revolver maturity, including any effects from Delek’s own covenants.
- Monitor the Magnolia Release enforcement negotiations, environmental obligations and the adequacy of the $1.0 million accrual.
- Verify execution and spending against the revised 2017 capital forecast and the operating performance of the Big Spring Pipeline and equity-method ventures.