Delek Logistics Partners, LP — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter results are unaudited.
Business context
Delek Logistics owns and operates crude oil and refined-product pipelines, gathering and storage assets, terminals, and wholesale marketing operations, primarily in Texas and the southeastern United States. Its two reportable segments are Pipelines and Transportation and Wholesale Marketing and Terminalling. Delek US Holdings is its primary customer and controls its general partner.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $584.0 million | $657.6 million |
| Operating income | $125.8 million | $125.8 million |
| Net income | $96.7 million | $90.2 million |
| Net income per common unit | $2.61 | $2.65 |
| EBITDA (non-GAAP) | $179.0 million | $164.0 million |
| Distributable cash flow (non-GAAP) | $127.0 million | $121.6 million |
| Cash from operations | $130.4 million | $153.0 million |
| Cash distributions per unit | $3.440 | $3.120 |
Revenue fell 11.2%, while operating income was essentially flat and net income increased. Cash from operations declined by $22.6 million. Distributable cash flow rose by $5.4 million; the filing reports total 2019 distributions earned of $117.4 million, so verify coverage using the Partnership’s definitions and period conventions.
At year-end, cash was $5.5 million and unused revolving-credit commitments were $261.6 million, for stated total liquidity of $267.1 million. Debt was $833.1 million on the balance sheet, including $588.4 million drawn under the revolving facility and $244.7 million carrying value of the 6.75% notes due 2025. The filing also cites $838.4 million of debt in its contractual-obligations table, reflecting principal amounts. The facility matures in 2023; its year-end weighted-average rate was approximately 4.7%. A one-percentage-point rate change would affect annual interest expense by about $5.9 million.
Current assets were $33.6 million versus current liabilities of $35.1 million. Total partners’ deficit was $151.1 million. The Partnership reported covenant compliance at year-end.
Material changes and operating results
- Wholesale Marketing and Terminalling contribution margin declined to $72.7 million from $76.0 million. West Texas wholesale throughput fell to 11,075 barrels per day from 13,323, and gross margin per barrel decreased to $4.44 from $5.57.
- Pipelines and Transportation contribution margin increased to $100.7 million from $93.8 million. Revenue and throughput benefited from the Big Spring assets, Paline tariff activity, higher Gathering Assets throughput, and trucking; operating expenses also rose.
- Consolidated contribution margin increased to $173.4 million from $169.8 million. Higher pipeline and transportation contribution partly offset weaker West Texas marketing results.
- Interest expense increased to $47.3 million from $41.3 million, mainly due to higher average borrowings and floating rates. Income from equity-method investments rose to $19.8 million from $6.2 million, including the new Red River Pipeline investment.
- Investing cash outflow was $147.4 million, including $139.3 million of joint-venture contributions, primarily for Red River and its planned expansion. The 2018 comparison included the Big Spring asset and marketing-contract acquisitions.
- Year-end quarterly distribution was $0.885 per unit, up from $0.810 for the fourth quarter of 2018. Fourth-quarter 2019 unaudited revenue was $138.6 million, operating income $29.7 million, net income $21.6 million, and common-unit earnings $0.52; fourth-quarter 2018 figures were $159.3 million, $31.1 million, $21.3 million, and $0.58, respectively.
Outlook, risks, and unusual items
- Management stated it intended to continue distribution growth and gave 2020 guidance of $0.01–$0.015 per unit of growth each quarter. It declared a $0.885 distribution for the fourth quarter of 2019, paid in February 2020. Distributions depend on available cash and are not legally guaranteed at a stated level.
- Management forecast 2020 capital spending of $22.7 million, including pipeline integrity and regulatory work and a planned refined-products pipeline connection. It said it expected sufficient resources for the next 12 months, while noting future financing availability and terms were not assured.
- Delek Holdings directly or indirectly accounted for 87% of contribution margin in 2019. Long-term agreements and minimum commitments support revenue, but customer concentration, refinery performance, contract renewals, force majeure, and affiliate conflicts remain significant risks.
- Wholesale marketing results are exposed to product-price, supply, demand, and RIN volatility. The Partnership also faces floating-rate debt exposure, pipeline safety and environmental regulation, aging infrastructure, spill and outage risks, and risks from joint ventures it does not control.
- A diesel release near Sulphur Springs, Texas, in October 2019 generated $7.1 million of cleanup costs through year-end and was not covered by the Delek reimbursement agreement; groundwater monitoring was expected to continue. Five releases occurred in 2019. Separately, the Magnolia Release settlement concluded with final payments totaling approximately $2.3 million in November 2019.
- The Gathering Assets decommissioning project, completed in August 2019, took approximately 350 miles of lines out of service; management reported no material effect on operating capability or financial results. A related right-of-way impairment was also not material.
- The Red River joint venture is a 33% investment; its pipeline expansion was expected to raise capacity from 150,000 to 235,000 barrels per day in 2020. Management’s statements about timing and benefits are forward-looking.
- Auditors gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow can support planned distributions, debt service, and capital spending; confirm the calculation and period basis of distribution coverage.
- Debt principal, facility availability, covenant headroom, refinancing needs, and sensitivity to floating interest rates.
- Delek Holdings’ financial and operating condition, contract minimums and renewal dates, and the degree to which J. Aron and other assignees affect customer and counterparty exposure.
- Final costs, insurance or indemnity recoveries, regulatory actions, and monitoring requirements related to the Sulphur Springs release and other environmental matters.
- Red River expansion completion, further capital calls, JV distributions, and realized returns on the investment.
- Progress and final cost of the 2020 capital program and whether West Texas wholesale margins and volumes recover.