Delek Logistics Partners, LP — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unless otherwise noted, financial amounts below are in millions of U.S. dollars. Interim results are unaudited.
Business context
The Partnership provides gathering, processing, transportation, storage, terminalling and wholesale marketing services, primarily in the Permian Basin and Gulf Coast region. Delek Holdings owned 78.7% of the limited partner interests at quarter-end. A substantial portion of the Partnership’s assets and revenues depend on Delek Holdings and its refining operations. The Delaware Gathering acquisition, completed in June 2022, expanded operations and third-party exposure in New Mexico’s Delaware Basin.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $275.8 | $294.0 | $766.3 | $767.4 |
| Operating income | $62.6 | $59.0 | $186.4 | $148.1 |
| Net income | $34.8 | $44.7 | $104.1 | $116.4 |
| Net income per unit, diluted | $0.80 | $1.03 | $2.39 | $2.67 |
| EBITDA, non-GAAP | $98.2 | $89.0 | $284.2 | $219.5 |
| Distributable cash flow, non-GAAP | $61.4 | $65.6 | $183.6 | $166.7 |
Q3 revenue fell 6.2% year over year, while net income declined 22.1%; for the first nine months, revenue was nearly flat and net income decreased about 10.5%. EBITDA rose about 10.4% in Q3 and 29.5% year to date. Higher interest and depreciation costs offset operating improvement: net interest expense rose to $36.9 million in Q3 and $104.6 million year to date, from $22.6 million and $53.6 million, respectively.
Q3 segment EBITDA was $52.9 million in Gathering and Processing (down from $56.6 million), $28.1 million in Wholesale Marketing and Terminalling (up from $20.3 million), $17.9 million in Storage and Transportation (up from $14.6 million), and $9.3 million from pipeline joint ventures (up from $8.6 million). Corporate and other costs were $10.0 million.
Cash flow, liquidity and debt
- Cash flow: Nine-month operating cash flow was $110.6 million, down from $297.5 million. Management cited increased supplier and allocated payroll payments, higher interest paid, and changes in working capital and related-party balances. Investing cash outflow was $55.6 million, versus $705.1 million, which included the prior-year acquisition. Financing cash outflow was $58.8 million; cash ended at $4.2 million.
- Capital spending: $68.6 million in the first nine months, including $61.2 million in Gathering and Processing growth spending. Full-year 2023 capital expenditure forecast was $85–$90 million; the Partnership also expected up to $10 million of other proceeds not included in that forecast.
- Liquidity: Quarter-end liquidity was reported as $93.2 million: $89.0 million of unused credit commitments and $4.2 million of cash. Management said it expected resources to meet requirements for the next 12 months, subject to operating and market conditions.
- Debt: Principal debt was $1.750 billion at September 30, up $79.5 million from year-end 2022. This included $811.2 million on the revolving facility, $288.8 million on the term facility, $250 million of 6.75% notes due 2025 and $400 million of 7.125% notes due 2028. Floating-rate borrowings were approximately $1.1 billion; a 1 percentage-point rate change would alter annual interest expense by approximately $11 million. The Partnership reported covenant compliance at quarter-end.
- Distribution: The Q3 distribution was $1.045 per unit, versus $0.990 a year earlier. The same $1.045 distribution was declared October 25, payable November 13, 2023. Nine-month distributable cash flow was $183.6 million versus $134.4 million of distributions paid during that period; these are non-GAAP and cash-period measures, respectively.
Changes, outlook and notable items
- Management attributed Q3 revenue weakness mainly to lower natural gas prices in Delaware Gathering and lower diesel sales prices in West Texas marketing. Natural gas averaged $2.54/MMBtu in Q3 2023, versus $8.20/MMBtu a year earlier. Higher throughput and volumes partly offset these pressures.
- Year-to-date Gathering and Processing EBITDA increased to $161.0 million from $127.1 million, benefiting from Delaware Gathering and Midland system connections. Wholesale Marketing and Terminalling EBITDA rose to $78.1 million from $59.8 million, reflecting higher terminalling utilization and improved wholesale margins.
- Management expected liquid transportation fuels to remain in high demand in Q4 2023 and cited minimum-volume commitments, dedicated acreage and inflation-linked fee adjustments as supports. No specific earnings or EBITDA guidance was provided. Rate adjustments effective July 1, 2023 included approximately 13.3% for certain FERC-indexed fees, 17.6% for CPI-indexed fees and 18.9% for PPI-indexed fees, subject to agreement terms.
- On November 6, 2023, after quarter-end, amendments increased revolving commitments by $150 million to $1.05 billion and extended the term loan maturity to April 15, 2025, subject to earlier maturity provisions. The Partnership also entered into an unsecured Delek Holdings revolving facility with $70 million of commitments, including a subordinated tranche whose initial borrowing depends on agreement with the administrative agent.
- Key risks include reliance on Delek Holdings and its ability to perform under commercial agreements; commodity, wholesale-margin and interest-rate volatility; refinancing and liquidity needs; operational interruptions; and environmental, safety and regulatory costs. The Partnership said it believed pending legal matters would not have a material adverse effect and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow sustain the increased distribution after capital spending and interest costs.
- Debt maturities and refinancing plans, especially the 2025 notes and term loan, including the effects of the post-quarter amendments and maturity-acceleration provisions.
- Availability and conditions attached to the new $70 million related-party facility, particularly the subordinated tranche.
- Continued performance of Delek Holdings’ minimum-volume and other commercial commitments, and the pace of customer diversification.
- How natural gas prices, West Texas marketing margins, inflation-linked rate increases and higher floating rates affect segment earnings and cash generation.