Delek Logistics Partners, LP — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The unaudited results include 3 Bear operations from its June 1, 2022 acquisition date. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and key financial metrics
The Partnership operates pipelines, gathering and processing assets, terminals, and wholesale marketing businesses, and holds interests in pipeline joint ventures. A substantial portion of its business remains linked to Delek Holdings through affiliate contracts and customers.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $294.0 | $189.6 | $767.4 | $511.0 |
| Operating income | $59.0 | $50.6 | $148.1 | $141.1 |
| Net income attributable to partners | $44.7 | $43.6 | $116.4 | $123.1 |
| Basic earnings per unit | $1.03 | $1.00 | $2.68 | $2.83 |
| EBITDA (non-GAAP) | $89.0 | $69.9 | $219.5 | $195.5 |
| Distributable cash flow (non-GAAP) | $65.6 | $55.5 | $166.7 | $161.9 |
Q3 operating margin was approximately 20.1% versus 26.7% a year earlier; nine-month operating margin was approximately 19.3% versus 27.6%. Higher product prices and acquisition-related revenue expanded reported sales, while materials costs and other expenses rose faster, compressing these margins.
For the nine months, cash provided by operating activities was $297.5 million, compared with $222.3 million. Investing used $705.1 million, primarily reflecting the 3 Bear acquisition and capital spending; financing provided $418.3 million. Cash at September 30 was $14.9 million.
At September 30, total assets were $1.638 billion, current assets $73.2 million, and current liabilities $266.0 million. Long-term debt carrying value was $1.449 billion, up from $899.0 million at year-end 2021; total principal debt was approximately $1.457 billion. Stated total liquidity was $208.0 million, including $193.1 million of unused credit commitments and $14.9 million cash. The Partnership reported compliance with debt covenants.
Material changes versus comparable periods
- Revenue increased 55.1% in Q3 and 50.2% for the nine months. Third-party revenue grew to $166.9 million in Q3 from $66.1 million, reflecting 3 Bear and wholesale marketing activity.
- 3 Bear contributed $60.9 million of revenue and $8.3 million of net income in Q3; from acquisition through September 30 it contributed $81.5 million of revenue and $9.8 million of net income.
- Q3 net income rose 2.4%, but nine-month net income declined 5.5%. Higher interest expense and depreciation and amortization weighed on earnings; nine-month interest expense increased 49.3% to $53.6 million.
- Q3 wholesale marketing and terminalling contribution margin declined to $18.3 million from $19.6 million, while pipelines and transportation contribution margin increased to $54.0 million from $47.4 million.
- Debt increased by approximately $549.8 million from December 31, 2021, principally to fund the acquisition. Nine-month cash distributions totaled $128.0 million, versus $120.4 million a year earlier.
Outlook, management commentary, and risks
- Management cited elevated hydrocarbon prices, stronger demand and higher utilization as supportive of Q3 activity. It also noted inflation, possible economic slowdown, energy-transition developments, regulatory intervention and commodity-market uncertainty as potential headwinds.
- Management expects long-term fee-based contracts, minimum-volume commitments and dedicated-acreage agreements to help stabilize cash flows, while acknowledging customer concentration and exposure to Delek Holdings and its refining operations.
- The Partnership declared a Q3 distribution of $0.990 per unit, payable November 10, 2022, equivalent to $3.96 annualized. Management stated a 5% distribution-growth guidance for full-year 2022; the declared Q3 rate was 4.2% above Q3 2021.
- Full-year 2022 capital spending was forecast at $116.9 million. The filing does not provide a specific earnings or revenue forecast.
- On October 13, 2022, after quarter-end, the Partnership entered a new $1.2 billion credit facility: a $900 million revolving facility maturing in 2027 and a $300 million term loan drawn in full, maturing in 2024. This replaced the prior facility structure; the term loan has required amortization and specified proceeds from certain note issuances must be used for prepayment.
- Key risks include successful integration and realization of benefits from 3 Bear; reliance on Delek Holdings and affiliate agreements; floating-rate debt and higher borrowing costs; wholesale margin and commodity-price volatility; operational interruptions, severe weather, spills and environmental obligations; and broader economic, regulatory and geopolitical uncertainty.
- The filing reports $4.0 million of costs incurred through September 30 for remediation of the Greenville Dixon release and says further costs are expected to be nominal. It also reports a $3.7 million settlement receipt in Q3 relating to a separate 2019 release. Management does not expect pending legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether 3 Bear integration, volumes and expected acquisition benefits develop as planned; purchase-price allocations were preliminary.
- How higher debt, interest rates and the October refinancing affect interest costs, leverage, covenant headroom and distribution coverage.
- Whether the stated 5% 2022 distribution-growth guidance is achieved and supported by recurring distributable cash flow.
- The sustainability and quality of revenue growth, distinguishing fee-based activity from product sales and wholesale marketing revenues exposed to commodity and margin volatility.
- Progress and final costs for planned capital projects, environmental remediation and other compliance obligations.