Delek Logistics Partners, LP — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter earnings report; fourth-quarter information is included only where stated.
Business context and reporting period
Delek Logistics is a midstream partnership providing gathering, processing, transportation, storage, wholesale marketing, terminalling, and water-disposal services, principally in Texas, the Permian and Delaware Basins, and parts of the Gulf Coast region. Delek US Holdings is its sponsor, majority owner, and primary customer. In June 2022, the Partnership acquired 3 Bear for $628.3 million, adding Delaware Basin crude and natural gas gathering, processing, transportation, and water services and expanding third-party business. In the fourth quarter, it reorganized reportable segments into Gathering and Processing; Wholesale Marketing and Terminalling; Storage and Transportation; and Investments in Pipeline Joint Ventures.
Financial and operating performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $1,036.4 million | $700.9 million | +47.9% |
| Operating income | $209.7 million | $190.5 million | +10.1% |
| Net income | $159.1 million | $164.8 million | -3.5% |
| Net income per unit, basic and diluted | $3.66 | $3.79 | Down $0.13 |
| EBITDA (non-GAAP) | $311.9 million | $265.2 million | +17.6% |
| Distributable cash flow (non-GAAP) | $218.1 million | $215.8 million | +1.1% |
| Net cash from operating activities | $192.2 million | $275.2 million | Down $83.0 million |
| Capital expenditures | $130.7 million | $27.5 million | Higher, primarily reflecting growth investment |
Operating margin was approximately 20.2% of revenue, versus 27.2% in 2021; net margin was approximately 15.4%, versus 23.5%. Higher revenue largely reflected 3 Bear (which contributed $123.7 million of revenue and $14.2 million of net income from its June 1 acquisition date), higher wholesale product prices and volumes, and improved pipeline throughputs versus weather-affected 2021. Cost of materials rose 66.8%, operating expenses 42.8%, and G&A 59.3%; 3 Bear acquisition and integration costs included $10.6 million in G&A. Interest expense increased 63.9% to $82.3 million, weighing on net income.
By segment, Gathering and Processing EBITDA was $175.3 million, up from $126.8 million; Wholesale Marketing and Terminalling EBITDA was $83.1 million, up from $79.6 million; Storage and Transportation EBITDA was $56.3 million, essentially flat; and pipeline joint-venture income was $31.7 million, up from $24.6 million. Management reported higher Red River and Caddo throughput and earnings, partly offset by lower Rio earnings.
At year-end, cash and cash equivalents were $8.0 million. Available liquidity was reported as $187.5 million, including $179.5 million of unused revolving commitments. Long-term debt carrying value was $1,661.6 million, while principal debt was approximately $1,670.5 million: $720.5 million revolving borrowings, $300 million term debt, $250 million of 2025 notes, and $400 million of 2028 notes. Average borrowing rates were 7.55% on the revolver and 7.92% on the term facility. The filing reports covenant compliance at year-end. Total assets were $1,679.3 million and total partners’ deficit was $110.7 million.
Cash distributions were $3.975 per unit for 2022, versus $3.785 in 2021. The fourth-quarter distribution was $1.02 per unit ($4.08 annualized), paid February 9, 2023. The filing states 2023 distribution-growth guidance of 5% and forecasts 2023 capital spending of $81.3 million.
Material changes versus the prior comparable period
- Revenue grew substantially, but net income declined as higher operating costs, depreciation and interest expense offset improved operating income.
- Third-party revenue increased to $557.0 million from $282.1 million; Delek Holdings’ share of total revenue declined to 46.3% from 59.8%. Despite this improvement, the sponsor remains central to the business and generated a substantial share of contribution margin.
- Operating cash flow fell despite higher net income before interest and growth in EBITDA. Management attributed the decline to increased supplier and sponsor-related payments and higher cash interest; working-capital movements also affected reported distributable cash flow.
- Investing cash outflow rose to $770.4 million, primarily due to the 3 Bear acquisition and $141.1 million of property, plant and equipment purchases. Debt increased by approximately $764 million from year-end 2021.
Outlook, risks, contingencies, and unusual items
- Management expects continued hydrocarbon demand in the near term and views minimum-volume commitments and dedicated-acreage agreements as protections against downturns. It also cites inflation, potential economic weakness, energy-transition initiatives, and continued labor, supply-chain, fuel, and interest-rate cost pressures. The filing does not provide earnings or cash-flow guidance.
- The 2022 credit facility totals $1.2 billion: a $900 million revolver maturing in October 2027 and a $300 million term facility maturing in October 2024. The term facility has scheduled amortization and required prepayment from proceeds of certain senior-note issuances. Floating-rate exposure is material: a hypothetical 1% rate change would alter annual interest expense by approximately $10.2 million.
- Key risks include customer and asset concentration around Delek Holdings’ Tyler, El Dorado, and Big Spring refineries; sponsor creditworthiness and contract renewal; leverage and refinancing; commodity and wholesale fuel-margin volatility; operational outages and aging infrastructure; pipeline, environmental, and safety regulation; severe weather; and acquisition integration and valuation risk. Minimum commitments may not protect the Partnership in certain force-majeure events or if refinery operations are suspended.
- The Greenville, Texas pipeline release from August 2021 remained under cleanup and remediation; costs incurred through year-end were $4.7 million, with management expecting additional costs to be nominal. The Partnership received $3.7 million in 2022 to settle matters related to a separate 2019 release. It accrued $0.3 million for release-related matters and recorded $1.7 million of 2022 remediation expense, net of reimbursable amounts. Management did not expect pending litigation to have a material adverse effect.
- The 3 Bear purchase-price allocation remained preliminary. The $210 million customer-relationship intangible valuation depends on forecasts and discount-rate assumptions; the acquisition was also identified as a critical audit matter. 3 Bear represented 40.7% of year-end assets and 11.9% of 2022 revenue, and its controls were excluded from management’s and the auditor’s internal-control assessment under the new-acquisition accommodation.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. A new ERP system was implemented in the fourth quarter, with related control changes. No goodwill impairment was recorded.
Important facts for investors to verify
- Reconcile acquisition-adjusted performance, especially 3 Bear’s ongoing contribution, integration costs, valuation assumptions, and expected benefits against the preliminary pro forma figures.
- Review debt maturities, floating-rate exposure, covenant headroom, refinancing needs, and the $179.5 million of reported unused revolver capacity relative to forecast spending and distributions.
- Assess whether operating cash flow and distributable cash flow can sustainably support the distribution and 5% 2023 growth guidance, given 2022 cash-flow decline and capital requirements.
- Examine the durability of third-party growth and the continuing dependence on Delek Holdings, its refinery operations, assigned commercial agreements, and related-party transactions.
- Track remediation costs and regulatory developments related to pipeline releases, integrity, environmental compliance, and the Greenville Dixon site.