Delek Logistics Partners, LP — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. The partnership provides gathering, processing, transportation, storage, terminalling and wholesale marketing services. A substantial portion of its assets and business depends on Delek Holdings, which owned 78.7% of its limited partner units.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $246.9 million | $266.8 million | $490.4 million | $473.3 million |
| Operating income | $59.9 million | $42.2 million | $123.9 million | $89.0 million |
| Net income | $31.9 million | $32.2 million | $69.3 million | $71.7 million |
| Net income per unit | $0.73 | $0.74 | $1.59 | $1.65 |
| EBITDA (non-GAAP) | $92.8 million | $64.5 million | $185.9 million | $130.5 million |
- Cash flow and investment: For the first half, operating cash flow was $63.8 million versus $133.1 million a year earlier; capital spending was $55.5 million. Distributable cash flow, a non-GAAP measure, was $122.2 million versus $101.1 million.
- Debt and liquidity: Principal debt was $1.754 billion at June 30, up $83.0 million from year-end. Cash was $7.7 million and reported total liquidity was $96.7 million, including $89.0 million of unused credit commitments. The partnership reported compliance with debt covenants.
- Distribution: The Q2 distribution was $1.035 per unit, up from $0.985 a year earlier. The board declared the same $1.035 per unit for payment in August 2023.
Material changes and drivers
- Q2 revenue declined 7.4%, principally because lower prices and sales volumes reduced West Texas wholesale marketing revenue. First-half revenue rose 3.6%, as Delaware Gathering and increased Midland Gathering volumes more than offset weaker West Texas marketing revenue.
- EBITDA increased in both periods: Q2 rose to $92.8 million from $64.5 million, and first-half EBITDA rose to $185.9 million from $130.5 million. Delaware Gathering and new Midland connections supported gathering results; wholesale marketing EBITDA also improved despite lower revenue.
- Net income was nearly flat in Q2 and declined for the first half. Higher depreciation following the Delaware Gathering acquisition and higher floating-rate debt costs offset stronger operating income. First-half net interest expense increased to $67.7 million from $31.1 million.
- Operating cash flow was lower year over year, reflecting changes in payables and related-party balances and higher interest payments. The prior-year comparison also included the $628.3 million Delaware Gathering acquisition; no acquisition occurred in the first half of 2023.
Outlook, risks and unusual items
- Management expects liquid transportation fuels to remain in high demand in the near term and cites minimum-volume commitments and dedicated acreage as support for cash flows. It also expects inflation-linked fee increases effective July 1, 2023: approximately 13.3% for certain FERC-indexed rates, 17.6% for certain CPI-indexed fees and 18.9% for certain PPI-indexed fees. Certain Delaware Gathering adjustments are capped at 3.0% under existing agreements.
- Management stated it believes resources are sufficient for the next 12 months, including working capital, distributions and capital expenditures. The 2023 capital spending forecast was $81.3 million; $55.5 million had been spent by June 30. The filing gives no quantified full-year earnings or EBITDA guidance.
- Floating-rate borrowings totaled approximately $1.104 billion. A hypothetical 1 percentage-point rate increase would add approximately $11.0 million to annual interest expense. The term facility matures in October 2024; $250 million of notes mature in 2025.
- Key risks include dependence on Delek Holdings and its refinery activity and creditworthiness, commodity and wholesale marketing volatility, interest and inflation costs, operational disruptions, environmental and pipeline-safety obligations, and access to financing. Management expects cost pressures and supply-chain challenges to continue through 2023. No currently pending legal proceeding was believed likely to have a material adverse effect; the filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Delaware Gathering and Midland volume growth can sustain EBITDA and offset weaker wholesale marketing revenue.
- Delek Holdings’ financial health, refinery utilization and ability to meet its commercial commitments, given the partnership’s affiliate concentration.
- Debt refinancing plans and borrowing costs ahead of the October 2024 term-facility maturity, as well as the effect of floating rates on cash available for distributions.
- Whether operating cash flow, capital spending and distribution levels remain supportable; compare non-GAAP distributable cash flow with actual cash distributions and review its reconciliation.
- Whether forecast capital spending and July 2023 tariff and fee adjustments are realized as described, and whether environmental, safety or operating events create unplanned costs.