Business context and reporting period
This Form 10-Q covers the three and nine months ended September 30, 2012. The reported financial statements are unaudited combined results of Delek Logistics Partners, LP Predecessor, not post-IPO results of the publicly traded Partnership. The IPO closed November 7, 2012; management cautions that predecessor results may not indicate the Partnership’s future results because of new agreements, capitalization, and public-company costs.
The business gathers, transports and stores crude oil and markets, transports, stores and terminals refined products. Its two segments are pipelines and transportation, and wholesale marketing and terminalling. Much of the asset base and expected contribution margin is tied to Delek, its parent and principal customer.
Financial performance and position
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $271.8 | $199.8 | $773.4 | $557.1 |
| Operating income | $6.1 | $5.8 | $14.9 | $15.3 |
| Net income | $3.0 | $3.4 | $8.0 | $9.2 |
| EBITDA (non-GAAP) | $8.3 | $7.2 | $21.6 | $18.6 |
| Operating cash flow | Not separately stated in the main cash-flow statement | $1.0 | $(2.8) |
Q3 sales rose 36.0%, but net income fell 12.7%; nine-month sales rose 38.8%, while net income declined 13.0%. Operating margins were approximately 2.2% in Q3 and 1.9% for the nine months, versus 2.9% and 2.7% in the comparable 2011 periods. EBITDA increased about 15.9% for both comparison periods.
Wholesale marketing and terminalling generated contribution margin of $6.6 million in Q3 and $18.2 million for the nine months; pipelines and transportation generated $3.4 million and $9.8 million, respectively. Pipeline contribution margin decreased year over year in Q3, principally from higher operating costs, but increased for the nine-month period, reflecting acquired assets.
At September 30, total assets were $250.7 million, current assets $77.9 million and current liabilities $49.8 million. Cash was only $0.2 million; receivables and inventory were $37.2 million and $32.3 million. Revolver debt was $53.2 million, with $11.5 million of letters of credit and approximately $10.3 million of borrowing availability under the predecessor facility. Nine-month cash flows were $1.0 million from operations, $(28.1) million from investing and $27.3 million from financing; investing included $23.3 million for the Nettleton and Big Sandy acquisitions. Capital spending excluding acquisitions was $4.8 million.
Material changes and significant transactions
- Bulk biofuel sales, primarily to Delek, began in late 2011 and contributed $59.4 million of Q3 2012 sales and $161.6 million of nine-month sales. Management attributed most of the sales growth to these higher-volume sales; cost of goods sold rose at a similar rate.
- Acquisitions included the Nettleton Pipeline for approximately $12.3 million and Big Sandy assets for approximately $11.0 million in early 2012. Big Sandy had no sales and a nominal loss during the nine months; the terminal was not operational because a third-party pipeline was out of service.
- The November 7 IPO sold 9.2 million common units at $21 each. The Partnership reported $176.2 million of proceeds net of offering costs and commissions. It retained $36.6 million for working capital and used approximately $63.0 million to repay predecessor revolver debt; the filing also describes distributions to Delek and proceeds from new borrowings in connection with the transaction.
- At IPO closing, the Partnership entered a $175 million senior secured revolving facility, with $90 million drawn and $73 million available after $12 million of letters of credit. The facility matures in 2017 and is secured by substantially all Partnership assets.
Outlook, risks and contingencies
No specific earnings guidance is provided. Management stated that operating cash flows and the new revolver should meet anticipated cash requirements for at least 12 months. The Partnership announced an initial distribution rate of $0.375 per unit per quarter ($1.50 annualized) and budgeted approximately $6.9 million of 2012 capital spending. Future results will differ from predecessor results: post-IPO agreements include minimum volume commitments and inflation-linked fees, while public-company status and administrative arrangements create different expenses and the Partnership is expected to be treated as a partnership for federal income tax purposes.
Management identifies substantial dependence on Delek and its ability to meet commercial-agreement obligations as a key risk. Other risks include refinery or facility disruptions, commodity-price and demand changes affecting wholesale marketing margins, competition, interest rates and financing access, acquisitions and project execution, and changes in regulation. Pipeline rates are subject to FERC and state oversight. Environmental and safety laws may require ongoing spending; management anticipates continuing capital investment and operating changes. The Partnership reported no outstanding commodity swaps at September 30 and no material pending litigation expected to adversely affect results.
Commercial agreements with Delek generally include minimum-volume commitments, but contain exceptions and termination provisions, including in specified long-term refinery shutdown or force-majeure circumstances. The Big Sandy terminal’s third-party pipeline outage and dependence on Delek-linked operations merit attention. The new credit facility includes leverage and interest-coverage tests and requires interest-rate hedging for at least 50% of closing borrowings within the specified period. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Review the IPO prospectus and subsequent filings for pro forma results, post-IPO cash flows, leverage and distributions; the reported historical results are predecessor statements.
- Reconcile IPO proceeds, distributions to Delek, debt repayment and the $90 million new-facility draw across the transaction disclosures.
- Assess the scale and margin quality of bulk biofuel sales and how results change under the Partnership’s post-IPO contracts, excluding predecessor intercompany accounting.
- Monitor Delek concentration, minimum-volume commitment terms, refinery utilization, and the duration or resolution of the Big Sandy pipeline outage.
- Verify actual capital spending and Delek reimbursements, debt-facility covenant headroom and required hedging, and any material environmental, regulatory or litigation developments.