Delek Logistics Partners, LP — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results; dollar figures below are in millions unless stated otherwise. The Partnership operates pipelines, gathering, transportation, storage, wholesale marketing and terminalling assets, with substantial business dependence on Delek Holdings, which owns approximately 80% of its common units.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $189.6 | $142.3 | $511.0 | $423.3 |
| Operating income | $50.6 | $51.8 | $141.1 | $134.7 |
| Net income | $43.6 | $46.3 | $123.1 | $118.5 |
| Diluted net income per unit | $1.00 | $1.26 | $2.83 | $3.30 |
| EBITDA (non-GAAP) | $69.9 | $67.8 | $195.5 | $181.3 |
| Distributable cash flow (non-GAAP) | $55.5 | $59.1 | $161.9 | $151.8 |
Q3 operating margin was approximately 26.7% versus 36.4% a year earlier; nine-month operating margin was approximately 27.6% versus 31.8%. These percentages are calculated from reported revenue and operating income. Cash provided by operations for the nine months was $222.3 million versus $134.7 million.
- Liquidity: $594.0 million at September 30, comprising $589.1 million of unused revolving-credit commitments and $4.9 million cash. Current assets were $26.6 million and current liabilities $88.0 million.
- Debt: $901.4 million net carrying amount, down $90.9 million from December 31, 2020. It included $260.9 million drawn on the revolving facility, $250 million principal of 2025 notes and $400 million principal of 2028 notes. The revolver matures in September 2023; the notes mature in 2025 and 2028. Management reported compliance with debt covenants.
- Distributions: $0.95 per unit for Q3, or $3.80 annualized. Nine-month cash distributions earned were $122.1 million; distributable cash flow was about 1.3 times that amount.
Changes versus comparable periods
- Q3 revenue increased 33.3%, but net income declined 5.8% and diluted earnings per unit fell from $1.26 to $1.00. Higher revenue reflected increased product prices and volumes in wholesale marketing, along with higher pipeline, trucking and gathering activity. Materials costs rose faster than revenue, while interest expense increased $4.2 million, primarily due to the 2028 notes.
- Nine-month revenue rose 20.7% and net income increased 3.9%, while diluted earnings per unit declined from $3.30 to $2.83. The comparison reflects a substantially larger weighted-average unit count in 2021 and the prior-year IDR restructuring, as well as acquisitions included for more of 2021. Nine-month results also included reduced volumes beyond contractual minimums during February’s severe freezing conditions and scheduled Paline pipeline maintenance.
- Segment contribution margin in Q3 was $47.4 million for Pipelines and Transportation, up 2.1%, and $19.8 million for Wholesale Marketing and Terminalling, down 5.5%. For the nine months, the respective margins were $134.3 million, up 12.6%, and $54.8 million, down 3.4%.
- Operating cash flow increased materially year over year, while investing cash use fell to $8.0 million from $116.4 million, principally because the prior-year period included acquisitions. Financing used $213.7 million, including $120.4 million of distributions and repayment of revolving borrowings, partly funded by the May 2021 notes issuance.
Outlook, commentary and risks
- Management set 5% distribution-growth guidance for full-year 2021 and declared a $0.95-per-unit distribution for Q3, payable November 10, 2021. It stated that available resources should meet funding needs over the next 12 months, while noting that future operating performance and financing access are uncertain.
- The May 2021 issuance of $400 million of 7.125% senior notes due 2028 was used to repay part of the revolving facility. At September 30, the facility borrowing rate was approximately 2.62%; management estimated a 1 percentage-point rate change would alter annual interest expense by about $2.6 million.
- Management described economic recovery, higher crude and refined-product prices, and increased demand as supportive. Minimum-volume and fee-based contracts provide some revenue stability. However, wholesale margins remain exposed to product-price timing and RIN volatility; February freezing conditions reduced volumes outside minimum commitments.
- Key risks include dependence on Delek Holdings and its ability to meet contractual obligations, COVID-19 impacts, customer concentration, commodity and interest-rate volatility, refinancing and covenant capacity, operational interruptions, environmental regulation and releases. The Greenville Dixon pipeline release was under remediation; $2.4 million was accrued for that event at quarter-end. Management did not expect pending litigation or the releases to have a material adverse effect.
- The filing disclosed $1.53 billion of expected future revenue from remaining performance obligations under Delek Holdings agreements, principally minimum-volume and capacity commitments through periods extending to 2030. This is contractual expected revenue, not a guarantee of collection or profit.
Most important facts for investors to verify
- Whether Delek Holdings remains able and willing to honor agreements that account for a substantial share of revenue, and the impact of the related-party concentration.
- Distribution coverage and the sustainability of the stated 5% growth guidance, considering cash flow, capital spending, debt service and the Partnership’s distribution policy.
- Debt maturity, refinancing and interest-rate exposure, including the September 2023 revolver maturity and covenant headroom.
- Whether wholesale marketing margins recover, given sharply higher product costs and lower Q3 segment contribution margin.
- Updates on Greenville Dixon remediation, accrued contingencies and any further environmental or regulatory requirements.