Business context and reporting period
Delek Logistics Partners, LP (NYSE: DKL) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The partnership operates pipelines, gathering, transportation, storage, wholesale marketing and terminalling assets. Its largest customer and controlling owner is Delek US Holdings, which owned approximately 80% of the common units.
Unless stated otherwise, financial figures below are in millions of dollars. Comparisons are with the corresponding 2020 period.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $168.5 | $117.6 | $321.4 | $281.0 |
| Operating income | $48.4 | $47.9 | $90.6 | $82.9 |
| Net income attributable to partners | $43.2 | $44.4 | $79.5 | $72.2 |
| Basic net income per common unit | $1.00 | $1.18 | $1.83 | $1.98 |
| EBITDA (non-GAAP) | $66.8 | $64.8 | $125.6 | $113.5 |
| Distributable cash flow (non-GAAP) | $53.8 | $57.0 | $106.4 | $92.7 |
Quarterly consolidated contribution margin was $64.3 million, compared with $61.3 million. Pipelines and transportation contributed $45.2 million versus $42.5 million; wholesale marketing and terminalling contributed $19.1 million versus $18.8 million. Wholesale West Texas gross margin per barrel rose to $4.24 from $0.64.
Six-month operating cash flow was $147.5 million, up from $72.4 million. Investing used $5.2 million, versus $114.2 million, while financing used $144.4 million, compared with $52.5 million provided in 2020. Cash declined by $2.1 million to $2.2 million.
At June 30, 2021, reported long-term debt was $928.7 million, down from $992.3 million at year-end 2020. The partnership issued $400 million of 7.125% senior notes due 2028 and used net proceeds to repay revolving borrowings. Revolver borrowings were $288.8 million, with $561.2 million of unused commitments. Total liquidity, including cash, was $563.4 million. Management reported covenant compliance.
Material changes versus the prior period
- Q2 revenue increased 43.2%; third-party revenue rose to $79.8 million from $30.0 million, primarily reflecting higher wholesale sales and prices. Higher materials costs largely absorbed that revenue increase.
- Q2 operating income increased modestly, but net income declined 2.6%. Per-unit earnings were lower amid a substantially larger weighted-average unit count and the prior-year comparison’s general partner and incentive distribution rights allocation. The IDRs were eliminated in August 2020.
- Six-month revenue increased 14.4% and net income increased 10.1%. Per-unit earnings declined, while six-month distributable cash flow increased. February 2021 severe freezing conditions reduced volumes beyond contractual minimums and affected equity-method investees; scheduled Paline pipeline maintenance also reduced throughput.
- Six-month operating cash flow benefited from changes in working capital, including related-party balances. The filing reports a $39.8 million cash-flow benefit from changes in accounts receivable/payable to related parties.
Outlook, management commentary, risks and unusual items
- Management set 2021 distribution growth guidance of 5%. The board declared a $0.940-per-unit quarterly distribution, or $3.76 annualized, payable August 11, 2021. The filing says management expects adequate resources for the next 12 months but notes distributions are not otherwise guaranteed at a particular per-unit level.
- Management described economic recovery as supporting refined-product demand, prices and wholesale volumes, but highlighted uncertainty from COVID-19 and variants, customer operating conditions, and possible lasting changes in travel and fuel consumption. Minimum-volume commitments provide some protection to pipeline revenue.
- Revenue and cash flow are materially exposed to Delek Holdings: the partnership depends on the affiliate’s ability to honor commercial agreements. Affiliate revenues were $88.7 million of Q2 revenue; affiliate purchases were $74.1 million. Long-term agreements and minimum-volume commitments mitigate, but do not eliminate, this concentration risk.
- Commodity-price volatility can affect wholesale margins and RIN values. Floating-rate debt creates rate exposure: a hypothetical 1 percentage-point rate change would change annual interest expense by approximately $2.9 million. The filing also notes potential borrowing-cost effects from the LIBOR transition.
- Environmental, pipeline-safety, operational, regulatory, financing and customer risks remain. No material releases occurred in the first half of 2021; $0.3 million was accrued for remediation matters. The Sulphur Springs diesel release cleanup was substantially complete and site closure had been approved.
- The partnership identified impairment triggers for its Andeavor Logistics Rio Pipeline equity investment, including a major customer’s contract non-renewal and lower competing tariffs, but concluded there was no other-than-temporary impairment. Management cautioned that valuation depends on forward-looking assumptions.
- Management reported no material pending legal proceeding expected to adversely affect the partnership. A newly highlighted risk is possible legislative, judicial or administrative changes to publicly traded partnership tax treatment, including a proposal affecting fossil-fuel-related income for tax years beginning after 2026.
- On July 1, 2021, certain fees indexed to FERC decreased approximately 0.6%; CPI-indexed fees increased 4.4% and PPI-indexed fees increased approximately 2.3%. These adjustments followed quarter-end.
Important facts for investors to verify
- Whether Delek Holdings continues to meet its contractual commitments and maintain financial capacity to pay the partnership.
- Whether wholesale margin recovery persists, given higher sales prices and costs, commodity volatility and lower six-month sales volumes.
- Distribution coverage and cash generation: Q2 distributable cash flow was below the $40.8 million distribution declared for the quarter; review the partnership’s non-GAAP definition and cash-flow reconciliation.
- Debt structure and refinancing exposure, including the 2023 revolving facility maturity, 2025 and 2028 notes, interest costs and covenant headroom.
- Developments in the Rio Pipeline investment, customer contract replacement, tariff assumptions and potential impairment sensitivity.
- COVID-19 effects, severe-weather exposure, environmental remediation, regulatory requirements, and any changes to partnership tax rules.