Delek Logistics Partners, LP — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The partnership operates crude oil and refined-products pipelines, terminals, storage and marketing businesses, primarily supporting Delek’s refineries. Comparative 2013 results were retrospectively adjusted to include predecessor assets; historical predecessor accounting and revenue recognition differ from the partnership’s, limiting comparability.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $203.5 million | $210.9 million |
| Operating income | $15.9 million | $8.2 million |
| Net income | $13.7 million | $7.3 million |
| Net income attributable to partners | $14.7 million | $12.2 million |
| EBITDA (non-GAAP) | $19.3 million | $11.8 million |
| Distributable cash flow (non-GAAP) | $15.9 million | $6.9 million |
| Operating cash flow | $13.6 million | $(2.0) million |
| Capital expenditures | $1.0 million | $3.7 million |
- Operating margin was approximately 7.8%, versus 3.9% a year earlier. Segment contribution margin rose to $22.0 million from $14.0 million.
- Cash and cash equivalents were $4.1 million at March 31. Revolver borrowings were $260.5 million; approximately $126.0 million remained available, and $13.5 million of letters of credit were outstanding. The facility’s weighted-average interest rate was approximately 2.7%.
- Total assets were $301.3 million and total equity was a $4.1 million deficit. The deficit principally reflects the accounting for the El Dorado related-party acquisition.
- Cash distributions were $0.425 per unit for the quarter, up from $0.385. A $0.425-per-unit distribution was declared after quarter-end, payable May 14, 2014.
Material changes and unusual items
- On February 10, 2014, the partnership paid $95.9 million cash to Delek for El Dorado terminal and tank assets, funded principally through net revolver borrowings. Because this was a transfer under common control, assets were recorded at Delek’s historical carrying value, approximately $25.2 million, rather than fair value.
- Revenue declined 3.5%, mainly from lower gasoline and diesel prices and lower West Texas sales volumes; the Abilene Terminal was unavailable for part of the quarter for maintenance. New El Dorado and Tyler throughput and tankage agreements partly offset the decline and helped increase contribution margin.
- Interest expense increased to $2.0 million from $0.8 million, primarily reflecting acquisition-related borrowings and financing costs. General and administrative expense rose to $2.7 million from $2.2 million, partly due to El Dorado acquisition-related professional fees.
- The 2013 comparative cash flow was affected by working-capital movements. Operating cash flow improved from a $2.0 million outflow to $13.6 million in Q1 2014.
Outlook, risks and contingencies
- Management expects cash from operations, revolver borrowings and potential debt or equity issuance to cover anticipated needs, including distributions, for at least the next 12 months. The 2014 capital spending budget was approximately $18.5 million, including planned North Little Rock Terminal expansion.
- The partnership depends substantially on Delek and its assignees for volumes and payments under long-term commercial agreements. Delek’s refinery utilization, counterparties, and related-party arrangements are important drivers of results.
- Management cites seasonality, refinery maintenance, competition, commodity-price effects on wholesale marketing, variable interest rates, regulation, and operating and environmental hazards as risks. Direct commodity exposure is described as limited; no product swaps were outstanding at March 31.
- Credit-facility covenants include minimum interest coverage of 2.50-to-1.00 and maximum leverage of 4.00-to-1.00. The partnership reported compliance at quarter-end. Borrowings are secured by substantially all partnership and U.S. subsidiary assets.
- An April 25, 2014 crude-oil release near Haynesville, Louisiana was estimated at 300–400 barrels; emergency cleanup concluded May 7. Further site work or remediation may be needed, but management did not expect a material adverse effect after applicable reimbursement and insurance.
- The filing describes prior crude-oil releases and ongoing regulatory discussions, including possible additional monitoring or remediation at Magnolia Station. Management did not expect pending litigation to have a material adverse effect.
Investor verification priorities
- Assess whether Delek’s refinery operations and minimum-volume commitments support the partnership’s cash flows and distributions.
- Review revolver availability, covenant headroom, and the effect of acquisition-related debt and variable rates.
- Reconcile non-GAAP EBITDA and distributable cash flow to GAAP results and cash available for distributions, including maintenance capital needs.
- Check execution and costs of the $18.5 million 2014 capital program and the North Little Rock expansion.
- Monitor environmental remediation, reimbursement and indemnification terms, and the consequences of the Haynesville release.
- Interpret year-over-year comparisons with care because predecessor results were retrospectively included and predecessor revenue accounting differed.