Delek Logistics Partners, LP — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparisons are with Q1 2019 unless otherwise noted. The partnership operates crude oil and refined-products logistics, transportation, storage, wholesale marketing and terminalling businesses. A substantial portion of its assets and revenue is tied to Delek Holdings.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $163.4 million | $152.5 million |
| Operating income | $35.0 million | $29.1 million |
| Net income attributable to partners | $27.8 million | $19.7 million |
| Net income per limited partner unit, diluted | $0.76 | $0.51 |
| Operating cash flow | $34.8 million | $27.0 million |
| Distributable cash flow (non-GAAP) | $35.5 million | $29.8 million |
- Revenue increased 7.2%; operating income rose 20.4%. Contribution margin was $47.4 million, or approximately 29.0% of revenue, versus $40.2 million, or 26.3%.
- Affiliate revenue increased to $106.7 million from $63.0 million, while third-party revenue declined to $56.7 million from $89.5 million. Wholesale marketing and terminalling revenue growth reflected higher affiliate product revenue and lower third-party product revenue.
- Net income benefited from equity-method investment income of $5.6 million, up from $2.0 million. General and administrative expense rose 37% to $6.1 million; cost of materials included a $2.9 million inventory valuation charge.
- Investing cash outflow was $112.2 million, primarily including the $100.0 million cash component of the Big Spring acquisition and $8.2 million of equity-method investment contributions. Financing cash inflow was $76.0 million. Cash decreased $1.4 million to $4.2 million.
- At March 31, 2020, long-term debt was $940.0 million, including $695.0 million drawn on the revolving credit facility and $250.0 million principal of 6.75% senior notes due 2025 (carrying value approximately $245.0 million). The revolver had $155.0 million of unused commitments; total reported liquidity was $159.2 million. Revolver borrowings carried a weighted-average rate of about 3.70%.
- Quarterly distribution was $0.890 per unit, compared with $0.820 a year earlier. Q1 distributable cash flow divided by distributions earned of $30.9 million was approximately 1.15x; this is a derived, non-GAAP-based calculation, not a company-reported coverage figure.
Material changes and transactions
- On March 31, the partnership acquired the Big Spring Gathering Assets from Delek Holdings for $100.0 million cash and 5.0 million common units. The cash payment was funded with revolver borrowings. The assets were recorded at the seller’s historical carrying value of $209.5 million under common-control accounting; prior periods were not recast.
- The acquired system includes about 200 miles of gathering lines, approximately 65 tank battery connections and terminals with about 650,000 barrels of storage. A related 10-year agreement includes minimum commitments of 120,000 barrels per day on the system and 50,000 barrels per day to a Howard County redelivery point.
- Delek Holdings’ ownership of common units increased to 70.5% after the acquisition issuance. An agreement waives IDR distributions associated with the new units for at least two years, through at least the distribution for the quarter ending March 31, 2022, subject to the agreement’s terms.
- Segment contribution margin increased to $30.4 million from $24.2 million in pipelines and transportation, and to $17.0 million from $15.9 million in wholesale marketing and terminalling. West Texas gross margin per barrel decreased to $2.70 from $3.56.
Outlook, risks and unusual items
- Management warned that COVID-19, reduced fuel demand and the Russia/OPEC production dispute had sharply affected oil markets and could adversely affect customer throughputs, minimum-volume commitments, receivables, equity-method investments, financing access and asset values. The future effect was not estimable; management gave no assurance against a material adverse impact.
- Management said it had not experienced a significant decline in demand for its assets at the time of filing, but was seeing thinner West Texas margins. It reported covenant compliance at March 31 and expected to remain compliant, while noting that this depended on future operating performance and market conditions.
- Management reduced its 2020 capital spending forecast to $17.6 million from $22.7 million in response to COVID-19 and oil-market conditions, and described cost reductions and efforts to identify alternative financing. It stated that available resources were expected to meet funding needs for the next 12 months.
- Management’s distribution-growth guidance was $0.01–$0.015 per unit each quarter for 2020. The board declared a $0.890-per-unit distribution for Q1, payable May 12, 2020.
- A 1% change in interest rates on floating-rate debt outstanding at quarter-end would change annualized interest expense by approximately $7.0 million. The company also noted uncertainty around the future LIBOR transition.
- The Sulphur Springs, Texas diesel release from October 2019 had incurred $7.1 million of cleanup costs in 2019 and about $0.2 million in Q1 2020; monitoring was expected to continue for at least a year. The partnership had sued a contractor and had not received notice of regulatory fines or penalties. It reported no material adverse effect expected from pending legal matters.
Most important facts for investors to verify
- Whether COVID-19 demand weakness, lower oil prices or customer financial stress affect throughput, contractual minimums, collections or asset valuations after March 31.
- Revolver availability, covenant headroom, borrowing costs and the effect of the terminated Delek Marketing guaranty on financing flexibility.
- Big Spring acquisition performance, post-closing consideration adjustments, required connection spending of up to $33.8 million, and the enforceability and economics of its throughput commitments.
- Distribution sustainability and actual coverage, particularly given the partnership’s distribution policy, debt-funded acquisition and IDR waiver terms.
- Affiliate concentration and related-party terms, plus final remediation costs, monitoring results and any regulatory action related to the Sulphur Springs release.