Delek Logistics Partners, LP — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited results compared with Q1 2022. The Partnership operates gathering, processing, transportation, storage, wholesale marketing and terminalling assets, and pipeline joint ventures. A substantial portion of its business remains tied to Delek Holdings and its refining operations.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $243.5 million | $206.6 million | +17.9% |
| Operating income | $63.9 million | $46.8 million | +36.5% |
| Net income attributable to partners | $37.4 million | $39.5 million | -5.4% |
| Diluted earnings per unit | $0.86 | $0.91 | Down $0.05 |
| EBITDA (non-GAAP) | $93.2 million | $66.0 million | +41.1% |
| Operating cash flow | $29.2 million | $47.9 million | Down $18.7 million |
| Distributable cash flow (non-GAAP) | $61.8 million | $51.7 million | +19.4% |
Revenue growth reflected the Delaware Gathering acquisition, higher Midland Gathering volumes and new third-party trucking revenue. Net income declined despite higher operating income, mainly because interest expense rose to $32.6 million from $14.3 million and depreciation and amortization increased to $21.1 million from $10.3 million. Approximate operating margin increased to 26.3% from 22.7%; approximate net margin decreased to 15.3% from 19.1%.
Segments and business drivers
- Gathering and processing: Revenue was $92.4 million versus $42.0 million; EBITDA was $55.4 million versus $32.1 million. Delaware Gathering contributed $44.3 million in revenue and $11.5 million in net income in Q1 2023.
- Wholesale marketing and terminalling: Revenue fell to $112.3 million from $130.8 million, while EBITDA increased to $22.0 million from $20.7 million. Lower West Texas gasoline and diesel prices and sales volumes weighed on revenue; gross margin per barrel in West Texas declined to $2.58 from $3.04.
- Storage and transportation: Revenue increased to $38.8 million from $33.8 million and EBITDA to $13.4 million from $11.1 million, primarily reflecting additional third-party trucking business.
- Pipeline joint ventures: Equity-method income decreased to $6.3 million from $7.0 million, primarily due to lower income from Red River and Caddo, partly offset by Rio.
Cash, debt and distributions
- Cash was $11.0 million at March 31, 2023. Reported total liquidity was $140.4 million, including $129.4 million of unused credit commitments.
- Principal debt was $1.717 billion, up $46.1 million from year-end 2022. This included $770.6 million drawn on the revolving facility, $296.3 million on the term facility, $250 million of 2025 notes and $400 million of 2028 notes.
- Weighted-average rates were 7.57% on revolving borrowings and 8.41% on term borrowings. Floating-rate debt totaled approximately $1.067 billion; a hypothetical one-percentage-point rate increase would add about $10.7 million of annual interest expense. The Partnership reported covenant compliance.
- Cash from operations declined partly because of working-capital movements and higher interest paid. Investing cash outflow was $27.0 million, including $27.8 million of property and equipment purchases. Capital spending was $36.1 million, and full-year 2023 spending was forecast at $81.3 million.
- The Q1 distribution was $1.025 per unit, or $44.7 million in total, declared for payment in May. Management stated a 5% distribution-growth target for full-year 2023 and an annualized rate of $4.10 per unit. Distributable cash flow was approximately 1.38 times the Q1 distribution amount; this comparison uses a non-GAAP measure.
Outlook, risks and unusual items
Management cited strong hydrocarbon demand and increased asset utilization during much of the quarter, and expects liquid transportation fuels to remain in high demand in 2023. It views minimum-volume commitments and dedicated-acreage agreements as providing some protection in a downturn, while emphasizing that results depend on customer activity and operating conditions. The filing does not provide earnings or revenue guidance.
Management expects inflationary cost pressures and supply-chain challenges to continue through 2023. Other key exposures include floating interest rates, commodity and refined-product price volatility in wholesale marketing, operational disruptions, environmental and pipeline-safety regulation, and dependence on Delek Holdings. Affiliate revenue was $125.0 million, approximately half of consolidated revenue; Delek Holdings owned 78.7% of the Partnership’s limited partner units.
The $628.3 million Delaware Gathering acquisition closed in June 2022 and materially affects year-over-year comparability. Preliminary acquisition-date fair-value estimates remained subject to finalization. The acquired business represented 38.4% of Partnership assets at March 31, 2023; management excluded its controls from the quarter-end disclosure-controls assessment under SEC guidance. Management concluded disclosure controls were effective. No material changes to previously disclosed risk factors were reported. The Partnership reported no significant releases in Q1; it had accrued $0.3 million for remediation matters and said pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Delaware Gathering’s operating contribution and integration support continued growth in third-party revenue and EBITDA.
- How higher borrowing costs, debt levels and the October 2024 term-facility maturity affect cash available for investment and distributions.
- Whether operating cash flow and distributable cash flow can sustain planned capital spending and the stated distribution-growth target.
- The extent of ongoing customer and revenue concentration in Delek Holdings, and the terms and renewal prospects of related commercial agreements.
- Progress on inflation, supply-chain and regulatory costs, capital-project execution, and environmental remediation obligations.