Delek Logistics Partners, LP — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Delek Logistics owns and operates crude oil and refined-products logistics, transportation, terminalling and marketing assets, plus pipeline joint-venture investments. A substantial portion of its business depends on Delek Holdings, its controlling unitholder and a major customer.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $206.6 million | $152.9 million | +35.1% |
| Operating income | $46.8 million | $42.2 million | +11.1% |
| Net income attributable to partners | $39.5 million | $36.3 million | +9.0% |
| Basic/diluted net income per unit | $0.91 | $0.83 | +$0.08 |
| EBITDA (non-GAAP) | $66.0 million | $58.7 million | +12.4% |
| Distributable cash flow (non-GAAP) | $51.7 million | $52.5 million | -1.5% |
| Cash from operating activities | $47.9 million | $61.7 million | -22.4% |
Revenue growth reflected higher West Texas gasoline and diesel selling prices and increased diesel volumes, increased pipeline throughputs, and the new slurry-clarifying services agreement. Cost of materials rose 55.5%, faster than revenue, while contribution margin increased to $62.3 million from $56.9 million. Interest expense climbed 47.4% to $14.3 million, primarily due to the 2028 notes and higher floating rates.
Investing activities used $12.5 million, including $10.6 million in property and equipment purchases and $2.4 million for intangible assets. Financing activities used $37.0 million, including $42.4 million in distributions. Cash declined $1.6 million to $2.7 million. Distributable cash flow exceeded the quarter’s $42.6 million distribution; the filing does not present a distribution-coverage ratio as a headline metric.
At March 31, 2022, total debt was $905.5 million, consisting of $264.1 million drawn on the revolving facility and senior notes due 2025 and 2028. The $850 million facility had $585.9 million of unused commitments and matures September 2023. Total reported liquidity was $588.6 million. The Partnership reported compliance with debt covenants. Current liabilities were $96.3 million; total assets were $935.3 million and total deficit was $106.5 million.
Material changes and business developments
- Pipeline and transportation revenue rose 16.7% to $75.8 million; segment contribution margin increased 3.6% to $43.2 million. Higher throughput and the slurry agreement contributed, partly offset by higher operating and materials costs.
- Wholesale marketing and terminalling revenue increased 48.7% to $130.8 million and contribution margin rose 25.2% to $19.0 million. West Texas gross margin per barrel declined to $3.04 from $3.42 despite higher product prices.
- Income from equity-method investments increased to $7.0 million from $4.0 million, mainly reflecting stronger Red River and Caddo results, partly offset by lower Rio income.
- Delek Holdings held 78.9% of the Partnership at quarter-end. Affiliate revenue was $123.8 million, about 60% of total revenue.
- Capital spending was $9.1 million in Q1. The 2022 forecast was $72.6 million, including $58.8 million of discretionary pipeline and transportation projects. Separately, $45.8 million of additional receipt-point construction commitments was expected to be spent during 2022.
Outlook, risks and unusual items
- Management set 2022 distribution-growth guidance of 5%. The declared Q1 distribution was $0.98 per unit, or $3.92 annualized, payable May 12, 2022. The filing gives no specific full-year earnings or revenue guidance.
- On April 8, 2022, a subsidiary agreed to acquire 100% of 3 Bear Delaware Holding–NM for $624.7 million, subject to customary adjustments and closing conditions, with closing expected around mid-2022. A deposit of approximately $31.2 million was paid and may be forfeited under specified termination events. The transaction’s funding and integration requirements are important considerations.
- A shelf registration effective April 29, 2022 permits offers of up to $200 million of common units, subject to market conditions and capital needs; potential issuance could dilute unitholders.
- Management cited recovery in demand and higher crude and refined-product prices, alongside uncertainty from COVID-19 and the Russia-Ukraine war. Commodity volatility can affect wholesale margins; the Partnership also depends substantially on Delek Holdings and its refining operations and ability to meet contractual obligations.
- Floating-rate debt creates interest-rate exposure: a hypothetical 1% rate change would alter annual interest expense by approximately $2.6 million. The filing discusses LIBOR transition risk but does not expect a significant impact.
- The Greenville Dixon pipeline release remediation was ongoing; $3.6 million of costs had been incurred and $0.5 million accrued by March 31, 2022. The filing states that pending proceedings and release costs were not expected to have a material adverse effect. Environmental and safety regulation, releases, acquisition execution and integration, and access to financing remain risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How the $624.7 million 3 Bear acquisition will be financed, its final adjusted price, regulatory approval and closing status, and expected contribution to cash flow and leverage.
- Whether the 5% distribution-growth guidance is maintained and how distributions are supported by distributable cash flow and capital needs.
- Progress against the $72.6 million capital-spending forecast and the additional $45.8 million receipt-point commitments.
- Delek Holdings’ financial capacity and ongoing role as a major customer, affiliate counterparty and controlling unitholder.
- Wholesale marketing margins, throughput trends, floating-rate borrowing costs, and any changes in environmental remediation estimates or related contingencies.