Delek Logistics Partners, LP — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in millions of dollars unless stated otherwise.
Business context
The partnership operates crude oil and refined-products pipelines, gathering, storage, transportation, terminalling and wholesale marketing businesses. Its operations and a substantial portion of its contracted revenue depend on Delek Holdings, its majority owner and principal affiliate customer. It reports two segments: Pipelines and Transportation, and Wholesale Marketing and Terminalling.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $137.6 | $164.1 | $445.4 | $498.3 |
| Operating income | $34.7 | $32.6 | $96.1 | $94.6 |
| Net income attributable to partners | $30.5 | $23.3 | $75.1 | $68.9 |
| Basic earnings per common unit | $0.89 | $0.68 | $2.08 | $2.07 |
| EBITDA (non-GAAP) | $51.5 | $43.0 | $135.7 | $123.2 |
| Distributable cash flow (non-GAAP) | $33.7 | $32.4 | $93.8 | $94.1 |
Q3 revenue fell 16.2%, while operating income rose 6.5% and net income rose 30.9%. For the first nine months, revenue declined 10.6%, while operating income increased 1.6% and net income increased 9.0%. Higher affiliate investment income helped earnings: $8.4 million in Q3 and $14.9 million year to date, including contributions from the new Red River joint venture.
Wholesale Marketing and Terminalling revenue declined 25.2% in Q3 and 18.4% year to date, mainly because of lower west Texas gasoline and diesel sales volumes and prices. Its contribution margin nevertheless increased 8.7% in Q3, but decreased 3.3% year to date. Pipelines and Transportation contribution margin increased 7.4% in Q3 and 11.8% year to date. Consolidated contribution margin was $46.5 million in Q3 versus $43.1 million, and $130.8 million year to date versus $124.8 million.
Operating cash flow was $34.3 million in Q3 versus $6.0 million, and $84.6 million for nine months versus $57.6 million. Nine-month investing cash outflow was $141.4 million, including $137.4 million of equity-method investment contributions; financing cash inflow was $58.6 million. Distributable cash flow covered $86.7 million of nine-month cash distributions by approximately 1.08 times. Cash distributions were $0.88 per unit for Q3, up from $0.79; the annualized rate was $3.52. A further $0.88-per-unit distribution was declared for payment November 12, 2019.
Balance sheet, debt and liquidity
- At September 30, cash was $6.4 million, total assets $767.8 million, long-term debt $840.8 million, and total partners’ deficit $142.5 million. Current assets were $36.8 million and current liabilities $32.3 million.
- The $850 million revolving facility had $596.3 million drawn, $253.7 million of unused commitments and no letters of credit. Its maturity is September 2023; the reported weighted-average borrowing rate was approximately 4.9%. The partnership also had $250 million principal amount of 6.75% senior notes due 2025.
- Management said it believed resources were sufficient for the next 12 months, including distributions and capital spending, and reported covenant compliance at quarter-end. A 1 percentage-point change in floating rates would change annual interest expense by approximately $6.0 million, based on debt outstanding at quarter-end.
Outlook, commentary and notable items
- Management reduced its 2019 capital-spending forecast to $9.8 million from $12.2 million, citing changes in expected timing of maintenance and discretionary projects. Nine-month spending was $6.2 million.
- The partnership invested $124.7 million for a 33% interest in Red River Pipeline and contributed another $3.5 million toward expansion. The expansion is planned to raise capacity from 150,000 to 235,000 barrels per day and is expected to be completed in the first half of 2020. Management expected significant EBITDA contribution in the investment’s first 12 months, increasing after expansion.
- Management cited Permian Basin activity and demand for logistics assets as supportive, but noted exposure to crude and refined-product prices, wholesale margins, volumes and RIN prices. The wholesale business is exposed to margin volatility when selling prices do not adjust as quickly as purchase prices.
- Related-party reliance is significant: affiliate revenue was $66.6 million of Q3 revenue and $191.5 million of nine-month revenue. Delek Holdings’ ability to pay, refinery utilization, commercial agreements and its own financial condition are material dependencies.
- Five releases occurred in 2019 through September; remediation and regulatory closure remained ongoing at some sites. A $2.2 million payable was recorded for the Magnolia Release consent decree. A separate diesel release near Sulphur Springs occurred October 3, after quarter-end; estimated remediation and maintenance costs were $4–6 million, excluding possible fines or penalties, which the partnership could not estimate. No accrual was recorded at September 30 for that subsequent event.
- The partnership adopted lease accounting in 2019, recognizing approximately $20.2 million of lease liabilities and corresponding right-of-use assets. Management noted that the presentation of affiliate revenues is not directly comparable across periods as a result of the new accounting treatment. Management reported no material change to previously disclosed risk factors and effective disclosure controls at quarter-end.
Most important facts for investors to verify
- Whether operating cash generation and distributable cash flow continue to support the increased distribution, particularly as debt and interest costs rise.
- Red River’s operating performance, the timing and cost of its expansion, and the realization of management’s expected EBITDA contribution.
- Delek Holdings’ financial capacity and the durability, terms and volume commitments of affiliate commercial agreements.
- Final costs, penalties, reimbursements and regulatory outcomes for the Sulphur Springs and Magnolia releases and other remediation matters.
- Whether lower west Texas marketing volumes and prices, and the 2019 capital-spending forecast, develop as management expected.