Delek Logistics Partners, LP — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. The partnership operates pipelines and transportation assets and a wholesale marketing and terminalling business, with substantial dependence on Delek Holdings as customer and controlling owner.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $142.3 million | $137.6 million | $423.3 million | $445.4 million |
| Operating income | $51.8 million | $34.7 million | $134.7 million | $96.1 million |
| Net income attributable to partners | $46.3 million | $30.5 million | $118.5 million | $75.1 million |
| Net income per limited partner unit, diluted | $1.26 | $0.89 | $3.30 | $2.08 |
| EBITDA (non-GAAP) | $67.8 million | $51.5 million | $181.3 million | $135.7 million |
| Distributable cash flow (non-GAAP) | $59.1 million | $33.7 million | $151.8 million | $93.8 million |
Q3 operating margin was approximately 36.4%, compared with 25.2% a year earlier. Nine-month operating margin was approximately 31.8%, versus 21.6%. Cash from operations for the first nine months was $134.7 million, up from $86.9 million; investing used $116.4 million and financing used $17.8 million. Cash at September 30 was $6.0 million.
Long-term debt was $1.006 billion, up $173.0 million from year-end 2019: $760.7 million drawn on the revolving credit facility and $250.0 million principal on 6.75% senior notes due 2025 (reported carrying value $245.4 million). Revolver borrowings bore a 2.69% weighted-average rate, with $89.3 million of unused commitments. Total liquidity was $95.3 million. The partnership reported compliance with debt covenants.
Material changes versus the prior comparable periods
- Q3 revenue increased 3.4%, while nine-month revenue declined 5.0%. Acquisition-related pipeline and trucking revenues supported growth; lower prices and demand weighed on wholesale marketing.
- Q3 operating income rose to $51.8 million from $34.7 million. Lower operating costs and the acquired assets contributed; depreciation increased with the expanded asset base.
- Pipelines and transportation contribution margin increased to $46.4 million in Q3 from $27.1 million. Wholesale marketing and terminalling contribution margin rose to $21.0 million from $19.4 million despite lower segment revenue.
- Q3 income from equity-method investments fell to $4.9 million from $8.4 million, primarily due to lower Red River volumes and lower refinery demand at the Caddo joint venture. Nine-month equity-method income increased to $16.9 million from $14.9 million.
Transactions, outlook and risks
- In March, the partnership acquired the Big Spring gathering assets from Delek Holdings for $100 million cash and 5.0 million common units. In May, it acquired trucking assets for approximately $48 million cash. Both were related-party transactions under common control.
- On August 13, the partnership eliminated incentive distribution rights and converted the 2% economic general-partner interest to a non-economic interest, in exchange for 14.0 million newly issued common units and $45 million cash. Delek Holdings owned approximately 80% of common units at quarter-end.
- The board declared a Q3 distribution of $0.905 per unit, or $39.3 million in total, payable November 12, 2020. Management stated 2020 distribution-growth guidance of $0.005–$0.015 per unit each quarter. The filing provides no broader earnings or revenue forecast.
- COVID-19 reduced demand for refined products and pressured wholesale volumes and prices. Minimum-volume commitments supported pipeline and transportation revenue, but management warned of possible customer volume reductions, renegotiations, credit and collection issues, joint-venture impacts, and future asset impairments. Management reduced planned capital spending and costs and said it believed liquidity was sufficient for the next 12 months.
- Key risks include dependence on Delek Holdings and related-party agreements, conflicts of interest, commodity and demand volatility, high leverage, covenant capacity, operational and environmental exposures, and uncertainty from the pandemic. A 1% change in floating rates would change annual interest expense by approximately $7.6 million.
- No material releases occurred in the first nine months of 2020. The 2019 Sulphur Springs diesel release remained under monitoring and remediation; $0.3 million was accrued for release matters overall. Management did not expect pending litigation to materially affect results.
Important facts for investors to verify
- Whether Delek Holdings’ financial condition and refinery operations support its minimum-volume and payment commitments, given the partnership’s customer and ownership concentration.
- Distribution coverage and sustainability, including the effect of the increased unit count, debt-funded transactions, and the partnership’s available revolver capacity.
- Whether COVID-19 demand conditions, customer credit quality, and commodity-price volatility create impairment, collection, or covenant risks beyond those assessed at September 30.
- Expected returns and integration outcomes from the Big Spring and trucking acquisitions, and performance of the Red River expansion that began operations October 1, 2020.
- Progress and potential costs of Sulphur Springs remediation and any further regulatory action; also review the filing’s non-GAAP EBITDA and distributable-cash-flow reconciliations.