Delek Logistics Partners, LP quarterly report, Q2 FY2019

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Delek Logistics Partners, LP — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. The Partnership owns and operates crude oil and refined-products logistics, transportation, storage, marketing and terminalling assets. A substantial portion of its business supports Delek Holdings’ refineries and is conducted under agreements with Delek Holdings or its affiliates. Amounts below are in U.S. dollars; financial statement figures are unaudited.

Financial performance and position

  • Q2 revenue: $155.3 million, down 6.6% from $166.3 million. Affiliate revenue rose to $61.9 million from $53.1 million; third-party revenue fell to $93.4 million from $113.2 million.
  • Q2 earnings: Operating income was $32.3 million, down from $34.7 million; net income was $24.9 million, down from $25.6 million. Basic and diluted earnings per common unit were $0.69 versus $0.79.
  • Q2 contribution margin: $44.2 million versus $45.3 million; the margin as a share of revenue was approximately 28.4% versus 27.3%. This contribution-margin measure is non-GAAP.
  • Q2 EBITDA and distributable cash flow: EBITDA was $44.8 million versus $45.4 million. Distributable cash flow (DCF) was $31.2 million versus $33.5 million. DCF covered the $28.9 million distribution for the quarter by approximately 1.08x, based on reported DCF and total distributions.
  • First-half results: Revenue was $307.8 million, down 7.9%; operating income was $61.4 million versus $62.0 million; net income was $44.6 million versus $45.6 million. EBITDA increased to $84.2 million from $80.2 million, while DCF declined to $60.1 million from $61.5 million. Cash distributions earned were $56.4 million versus $49.0 million.
  • Cash and cash flow: Cash was $5.4 million at June 30, 2019, up from $4.5 million at year-end. First-half operating cash flow was $50.3 million versus $51.6 million. Investing used $136.6 million, including $135.0 million of equity-method investment contributions; financing provided $87.1 million.
  • Debt and liquidity: Total debt carrying value was $840.9 million, up from $700.4 million at year-end. This included $596.7 million outstanding under the revolving facility and $250.0 million principal amount of 6.75% senior notes due 2025. The facility matures in September 2023; unused commitments were $253.3 million, with no letters of credit. Revolver borrowings carried a weighted-average rate of approximately 4.9%; management reported covenant compliance.
  • Balance sheet: Total assets were $769.3 million, including $241.6 million in equity-method investments, versus $624.6 million and $104.8 million, respectively, at year-end. Total deficit was $144.3 million. Adoption of lease accounting added $20.2 million of lease liabilities and corresponding right-of-use assets.

Changes and operating drivers

  • Segment mix: Q2 Pipelines and Transportation revenue rose 17.1% to $44.2 million and contribution margin increased 6.7% to $24.1 million. Wholesale Marketing and Terminalling revenue fell 13.5% to $111.1 million and contribution margin declined 11.8% to $20.0 million.
  • Lower gasoline and diesel selling prices and volumes in west Texas drove much of the revenue decline and reduced west Texas gross margin per barrel to $6.25 from $8.06. Increased Big Spring-related fees, Paline Pipeline tariff revenue and Delek Permian Gathering Project fees partly offset the decline.
  • Q2 operating expenses rose 16.2% and general and administrative expenses rose 41.3%. Management cited higher logistics operating and allocated employee costs, professional fees related to the Red River joint venture, and the absence of prior-year project-related expense reductions.
  • Interest expense increased 3.9% in Q2 and 19.3% for the first half, reflecting higher average borrowings and floating rates. Equity-method investment income increased to $4.5 million in Q2 and $6.5 million for the first half, partly due to the new Red River investment.
  • In May, the Partnership invested $124.7 million for a 33% interest in Red River Pipeline, plus $3.5 million for its planned expansion. Management said the investment was expected to generate significant EBITDA in its first 12 months, with an increase following the expansion, then expected in the first half of 2020.

Outlook, risks and unusual items

  • No specific earnings or DCF guidance is provided. Management said it believed available resources were sufficient for business needs over the next 12 months, including distributions and capital spending.
  • The 2019 capital-spending forecast was reduced to $8.8 million from $12.2 million, primarily due to changes in anticipated project completion timing. First-half spending was $2.2 million.
  • The quarterly distribution was raised to $0.85 per unit, or $3.40 annualized, for Q2 2019; payment was scheduled for August 13, 2019. The Partnership’s general partner held incentive distribution rights entitled to the maximum distribution tier.
  • Key risks include reliance on Delek Holdings and its refinery operations, related-party commercial agreements and payments, wholesale marketing margins and commodity-price volatility, floating-rate debt, asset integrity and environmental compliance, and execution of growth projects.
  • Several crude oil releases occurred in 2018 and Q1 2019; no significant spills occurred in Q2. The Partnership had accrued $0.7 million for remediation of releases, excluding the Magnolia matter. A $2.2 million Magnolia settlement accrual was recorded; a consent decree was submitted in July 2019 and was expected to be finalized in the second half of 2019. Management expected regulatory closure of other release remediation by year-end 2019, subject to possible further requirements.
  • Tariffs and certain fees changed July 1, 2019: FERC-indexed rates decreased approximately 0.1%; CPI-indexed fees decreased approximately 1.7%, while PPI-indexed fees increased approximately 4.7%.

Important facts for investors to verify

  • Whether Delek Holdings and its affiliates continue to meet contractual minimum-volume commitments and maintain their ability to pay; affiliate revenue was $61.9 million in Q2.
  • Red River’s operating performance, expansion schedule and resulting returns, given the $128.2 million invested and associated revolver borrowing.
  • Distribution coverage and cash generation after maintenance and regulatory spending, particularly as Q2 DCF was only modestly above distributions.
  • Debt balances, borrowing costs, covenant headroom and available revolver capacity; a 1 percentage-point rate change was estimated to alter annual interest expense by approximately $6.0 million at June 30 debt levels.
  • West Texas marketing volumes and per-barrel margins, and the effect of product-price and RIN volatility on segment contribution.
  • Final resolution and payment timing for the Magnolia consent decree, and any additional remediation or compliance costs from releases.
  • The comparability of year-over-year revenue classifications: 2019 lease accounting presentation differs from prior periods, and 2018 results include the Big Spring assets for only part of the comparison period.