Delek Logistics Partners, LP — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. The partnership operates pipelines, gathering and transportation assets, terminals, and wholesale marketing businesses. A substantial majority of its assets and revenue are tied to Delek Holdings, its controlling affiliate and largest customer.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $152.9 million | $163.4 million | Down 6.4% |
| Operating income | $42.2 million | $35.0 million | Up 20.3% |
| Net income | $36.3 million | $27.8 million | Up 30.5% |
| Basic and diluted net income per unit | $0.83 | $0.76 | Up |
| Operating cash flow | $61.7 million | $34.8 million | Up $26.9 million |
| Distributable cash flow (non-GAAP) | $52.5 million | $35.5 million | Up 48.0% |
| Cash distributions per unit | $0.920 | $0.890 | Up 3.4% |
Contribution margin was $57.7 million, compared with $47.4 million; as a share of revenue, it was approximately 37.7%, versus 29.0%. Revenue declined while income and margins improved, reflecting lower materials costs and operating expenses, alongside higher pipeline and transportation contribution.
Segments: Pipelines and transportation revenue increased 35.5% to $65.0 million and contribution margin increased 37.2% to $41.7 million, helped by the Big Spring gathering and trucking acquisitions and new pipeline contracts. Wholesale marketing and terminalling revenue fell 23.8% to $87.9 million and contribution margin declined 5.8% to $16.0 million. West Texas gross margin per barrel improved to $3.42 from $2.70, while sales volumes were lower.
Liquidity, debt and capital
- Cash was $13.4 million at March 31, 2021, versus $4.2 million at year-end 2020. Total reported liquidity was $125.9 million, including $112.5 million of unused revolving credit commitments.
- Long-term debt was $983.4 million: $737.5 million drawn on the revolving facility and $245.9 million carrying value for the 6.75% senior notes due 2025. The revolver matures September 2023; its Q1 weighted-average borrowing rate was approximately 2.45%. The notes’ effective rate was approximately 7.25%.
- Management reported compliance with debt covenants at quarter-end and expected continued compliance. A hypothetical one-percentage-point increase in floating interest rates would raise annual interest expense by approximately $7.4 million, based on quarter-end debt.
- Capital spending was $7.8 million in Q1; the full-year 2021 forecast was $27.8 million. The filing states planned spending may change.
- Cash distributions paid in February totaled $39.5 million. The board declared a further $0.920 per-unit distribution, payable May 14, 2021. Management set 2021 distribution-growth guidance of $0.005–$0.015 per unit each quarter.
Material changes and management commentary
Q1 2021 results reflected recovery in economic activity and demand compared with the pandemic-affected prior-year period, but were also affected by severe February freezing conditions. Freezing weather reduced customer throughput and increased energy costs; minimum-volume commitments cushioned some impact. Scheduled Paline pipeline maintenance and lower West Texas gasoline and diesel sales volumes also weighed on revenue. Acquisitions completed in 2020 and new contracts boosted pipeline and transportation results and increased depreciation.
Management cited reduced floating interest rates and lower general and administrative costs as contributors to improved results. It described ongoing uncertainty from COVID-19, including possible effects on customers, operations, demand, and receivable collection. Management reported reducing planned capital spending, pursuing alternative financing, and taking cost-control measures. It stated it believed available resources were sufficient for the next 12 months, subject to operating performance and market conditions.
Outlook, risks and contingencies
- Customer concentration and related-party exposure: Delek Holdings is the largest customer and owns approximately 80% of the partnership’s common units. Commercial agreements and minimum-volume commitments support revenue, but financial stress or changes affecting Delek Holdings could affect payments, volumes, liquidity, and growth.
- Market and operating risks: COVID-19 uncertainty, crude and refined-product demand and prices, wholesale margins and RIN prices, severe weather, pipeline outages, and operating hazards could affect results. Variable-rate debt exposes the partnership to interest-rate changes; the filing also notes potential LIBOR transition effects.
- Environmental and legal matters: No material releases occurred in Q1. The partnership had accrued $0.3 million for remediation and related matters; it did not expect currently pending proceedings to materially adversely affect results. Additional remediation or regulatory requirements remain possible.
- Subsequent developments: In May 2021, the partnership entered a five-year exclusivity supply agreement with Baker Petrolite, with a five-year extension option and variable-price profit-sharing provisions. The filing describes annual minimum requirements as nominal.
- The partnership reported no material changes to the risk factors in its 2020 Form 10-K and no off-balance-sheet arrangements. Disclosure controls were reported effective.
Investor facts to verify
- Whether Delek Holdings continues to meet its obligations under commercial agreements and minimum-volume commitments, and how concentrated revenues remain.
- Whether operating cash flow and distributable cash flow sustain distributions, planned capital spending, and debt service; note that distributable cash flow is a non-GAAP measure.
- Revolver utilization, covenant headroom, refinancing needs ahead of the September 2023 maturity, and exposure to floating rates and LIBOR replacement.
- How severe weather, COVID-19 developments, customer throughput, and wholesale volumes and margins affect subsequent-period performance.
- Progress, costs, and economics of the Baker agreement and other capital projects, and any changes in environmental remediation or regulatory matters.