Delek Logistics Partners, LP — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also provides unaudited fourth-quarter results. The Partnership owns and operates crude-oil and refined-product gathering, pipeline, transportation, storage, terminalling and marketing assets, mainly supporting Delek Holdings’ refineries. Delek Holdings remained its principal customer and owned 80.0% of its units at year-end.
Financial results and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net revenue | $563.4 million | $584.0 million |
| Operating income | $179.8 million | $125.8 million |
| Net income | $159.3 million | $96.7 million |
| Common-unit diluted earnings | $4.18 per unit | $2.61 per unit |
| Operating cash flow | $193.0 million | $130.4 million |
| Distributable cash flow (non-GAAP) | $207.7 million | $127.0 million |
| Year-end total assets | $956.4 million | $744.4 million |
| Year-end debt, carrying value | $992.3 million | $833.1 million |
Contribution margin increased to $238.0 million from $173.4 million. Operating margin was approximately 31.9% of revenue, compared with 21.5% in 2019. The filing reports year-end cash of $4.2 million and total liquidity of $107.6 million, including $103.4 million of unused revolving-credit commitments. Debt consisted of $746.6 million drawn on the revolving facility and $250.0 million principal on 6.75% senior notes due 2025; the notes’ carrying value was reduced by financing costs and discount. The revolving facility’s year-end weighted-average rate was 2.44%.
For fourth-quarter 2020, revenue was $140.1 million, operating income $45.1 million and net income $40.7 million; common-unit diluted earnings were $0.94.
Material changes and notable items
- Revenue declined 3.5% year over year, but operating income and net income rose substantially. Lower product prices and diesel sales weighed on reported revenue; lower material costs and operating expenses, new acquired-asset contributions, and higher equity-method income supported earnings and cash flow.
- Pipelines and transportation contribution margin rose to $163.3 million from $100.7 million, with Big Spring gathering assets and trucking assets contributing after their 2020 acquisitions. Wholesale marketing and terminalling contribution margin increased modestly to $74.8 million from $72.7 million, while West Texas gross margin per barrel fell to $2.37 from $4.44.
- The Partnership acquired Big Spring gathering assets effective March 31 for $100 million cash plus 5.0 million common units, and trucking assets effective May 1 for approximately $48 million cash. Both were related-party transactions with Delek Holdings and accounted for as transfers under common control.
- In August, the Partnership eliminated all incentive distribution rights and converted the general partner’s 2% economic interest to a non-economic interest, in exchange for 14.0 million newly issued common units and $45 million cash. The transaction increased unit count and Delek Holdings’ ownership; the Partnership received no proceeds from Delek Holdings’ subsequent resale registration.
- Cash distributions were $3.605 per limited partner unit for 2020, versus $3.440 in 2019. The fourth-quarter distribution was $0.910 per unit. Management indicated 2021 quarterly distribution growth guidance of $0.005–$0.015 per unit.
- The Red River joint venture completed an expansion, increasing pipeline capacity from 150,000 to 235,000 barrels per day; expanded service began October 1, 2020.
Outlook, risks and contingencies
Management said it expected sufficient resources to meet funding needs over the next 12 months and expected to remain in compliance with debt covenants, while emphasizing uncertainty from COVID-19, crude-oil markets and broader economic conditions. Planned 2021 capital spending was $20.8 million, compared with 2020 spending of $15.4 million; management also cited reduced planned spending, cost controls and efforts to identify alternative financing as responses to market uncertainty. No specific earnings or revenue guidance was provided.
- Customer concentration is a central risk: Delek Holdings accounted for 89% of contribution margin and 67.4% of total revenue in 2020. Many assets and minimum-volume contracts depend on its refineries, financial condition and continued performance.
- COVID-19-related demand weakness, refinery utilization, customer creditworthiness, force majeure claims, and possible asset or investment impairments could affect results. Management reported no impairment charges for 2020.
- Wholesale fuel margins remain exposed to product prices, volumes, ethanol and renewable-fuel credit values. Floating-rate debt creates interest-rate exposure; a 1 percentage-point rate change was estimated to affect annual interest expense by approximately $7.5 million.
- Pipeline integrity, environmental compliance, spills, regulatory changes, aging infrastructure, insurance limitations, leverage and access to capital present additional risks. The Partnership reported $0.3 million accrued for release-related remediation at year-end. The Sulphur Springs 2019 diesel release had incurred $7.1 million in 2019 and approximately $0.5 million in 2020; it was not covered by the Omnibus Agreement.
- The filing says pending legal proceedings were not expected to have a material adverse effect. The auditors issued unqualified opinions on the financial statements and internal controls; the audit identified related-party transaction presentation and completeness as a critical audit matter.
Key facts for investors to verify
- Whether Delek Holdings remains able and willing to meet contractual minimums, and the terms and renewal dates of material commercial agreements.
- How the acquired assets perform relative to their purchase costs and incremental debt, and the effect of the 14.0 million-unit IDR restructuring on per-unit cash generation and distributions.
- Quarterly distributable cash flow, distribution coverage and leverage; the filing’s reported distributable cash flow is a non-GAAP measure.
- Progress on 2021 capital projects, regulatory spending, pipeline integrity work and remaining environmental remediation or enforcement matters.
- The extent of COVID-19 effects on refinery throughput, wholesale margins, counterparties and liquidity, as well as the cost and timing of refinancing or transitioning from LIBOR-based borrowing.