Delek Logistics(DKL) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, equity, cash flows, and related notes Condensed Consolidated Balance Sheets Balance Sheet Summary (in thousands) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Assets | | | | Total current assets | $34,192 | $32,568 | | Property, plant & equipment, net | $306,879 | $312,562 | | Equity method investments | $107,830 | $104,770 | | Total assets | $640,208 | $624,593 | | Liabilities & Deficit | | | | Total current liabilities | $39,020 | $36,505 | | Total non-current liabilities | $743,093 | $722,911 | | Total deficit | $(141,905) | $(134,823) | | Total liabilities & deficit | $640,208 | $624,593 | Condensed Consolidated Statements of Income and Comprehensive Income Income Statement Summary (in thousands) | Metric | Three months ended March 31, 2019 (in thousands) | Three months ended March 31, 2018 (in thousands) | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net revenues | $152,483 | $167,921 | | Total operating costs and expenses | $123,372 | $140,644 | | Operating income | $29,111 | $27,277 | | Interest expense, net | $11,301 | $8,062 | | Income from equity method investments | $(1,951) | $(858) | | Income before income tax expense | $19,761 | $20,073 | | Net income attributable to partners | $19,696 | $19,995 | | Limited partners' interest in net income | $12,426 | $14,365 | | Net income per limited partner unit (basic)| $0.51 | $0.59 | | Cash distributions per limited partner unit| $0.820 | $0.750 | Condensed Consolidated Statements of Partner's Equity (Deficit) Partner's Equity Summary (in thousands) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :---------------------------------------- | :---------------------------- | :------------------------------- | | Balance at period start | $(134,823) | $(29,225) | | Cash distributions | $(26,919) | $(22,778) | | Net income attributable to partners | $19,696 | $19,995 | | Unit-based compensation | $144 | $147 | | Balance at period end | $(141,905) | $(130,646) | Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Metric | Three months ended March 31, 2019 (in thousands) | Three months ended March 31, 2018 (in thousands) | | :---------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by operating activities | $26,205 | $23,656 | | Net cash used in investing activities | $(3,766) | $(219,097) | | Net cash (used in) provided by financing activities | $(21,605) | $195,553 | | Net increase in cash and cash equivalents | $834 | $112 | | Cash and cash equivalents at period end | $5,356 | $4,787 | | Cash paid for interest | $5,997 | $3,009 | | Cash paid for income taxes | $58 | $0 | Note 1 - Organization and Basis of Presentation This note details the Partnership's formation, key acquisitions, and adoption of new accounting standards - The Partnership is a Delaware limited partnership formed in April 2012 by Delek US Holdings, Inc. (Delek Holdings) and its general partner, Delek Logistics GP, LLC[25] - Effective March 1, 2018, the Partnership acquired the Big Spring Logistic Assets from Delek Holdings, including assets near the Big Spring Refinery and a light products distribution terminal in Stephens County, Oklahoma[26] - The company adopted ASU 2017-12 (Derivatives and Hedging) and ASU 2016-02 (Leases) in Q1 2019. The adoption of ASU 2016-02 resulted in the recognition of a $20.2 million lease liability and a corresponding right-of-use asset, with no material impact on the income statement[33][37] Note 2 - Acquisitions This note details the acquisition of Big Spring Logistic Assets and a Marketing Contract Intangible, including financing and accounting - On March 1, 2018, the Partnership acquired the Big Spring Logistic Assets from Delek Holdings for $170.8 million, financed through its revolving credit facility, including storage tanks, terminals, pipelines, and saltwells[40][41] - The acquisition was treated as a common control transaction, with assets recorded at Delek Holdings' historical carrying value of $72.0 million, and the excess cash paid ($98.8 million) recorded as a reduction in equity[43][44] - Concurrent with the Big Spring acquisition, the Partnership acquired a Marketing Contract Intangible for $144.2 million, amortized over twenty years, for marketing refined products[47] Note 3 - Related Party Transactions This note outlines the Partnership's long-term, fee-based commercial agreements and other transactions with Delek Holdings - The Partnership has long-term, fee-based commercial agreements with Delek Holdings for crude oil gathering, transportation, storage, and marketing services, with initial terms of five to ten years and annual inflation-indexed fee adjustments[48] - New agreements related to the Big Spring Logistic Assets Acquisition include the Logistics Agreement, Asphalt Services Agreement, and Marketing Agreement, all with initial ten-year terms and annual inflation adjustments[50][53][54] - Under the Omnibus Agreement, the Partnership pays an annual fee of $3.9 million to Delek Holdings for centralized corporate services and is reimbursed for certain capital expenditures and asset failure costs, with $0.8 million reimbursed for capital expenditures and $3.5 million for asset failures in Q1 2019[55][56] Related Party Transaction Summary (in thousands) | Transaction Type | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Revenues from Affiliates | $62,965 | $61,644 | | Purchases from Affiliates | $79,434 | $83,401 | | Operating and maintenance expenses| $9,925 | $7,489 | | General and administrative expenses| $1,370 | $957 | Note 4 - Revenues This note details revenue sources from logistics services and marketing, primarily from long-term agreements with Delek Holdings - Revenue is generated from fees for gathering, transporting, offloading, storing crude oil and refined products, and marketing refined products, with a significant portion from long-term commercial agreements with Delek Holdings that include annual inflation-indexed fee adjustments[64] - The majority of commercial agreements with Delek Holdings are classified as leases under ASC 842, with $257.7 million of net property, plant, and equipment subject to operating leases as of March 31, 2019[65] Revenue Breakdown by Type (Q1 2019, in thousands) | Revenue Type | Pipelines and Transportation (in thousands) | Wholesale Marketing and Terminalling (in thousands) | Consolidated (in thousands) | | :-------------------------------- | :------------------------------------------ | :-------------------------------------------------- | :-------------------------- | | Service Revenue - Third Party | $3,974 | $120 | $4,094 | | Product Revenue - Third Party | — | $85,424 | $85,424 | | Product Revenue - Affiliate | — | $9,386 | $9,386 | | Lease Revenue - Affiliate | $36,659 | $16,920 | $53,579 | | Total Revenue (Q1 2019) | $40,633 | $111,850 | $152,483 | Expected Revenue on Remaining Performance Obligations (in thousands) | Period | Expected Revenue on Remaining Performance Obligations (in thousands) | | :-------------------------------- | :----------------------------------------------------------------- | | Remainder of 2019 | $126,236 | | 2020 | $167,965 | | 2021 | $167,714 | | 2022 | $166,587 | | 2023 and thereafter | $474,200 | | Total expected revenue | $1,102,702 | Note 5 - Net Income Per Unit This note explains the two-class method for calculating net income per unit, allocating earnings to common units, general partner units, and IDRs - The Partnership uses the two-class method for calculating net income per unit, allocating net income to common units, general partner units, and Incentive Distribution Rights (IDRs)[72] Net Income Per Unit Calculation (in thousands) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income attributable to partners | $19,696 | $19,995 | | General partner's earnings | $7,270 | $5,630 | | Limited partners' earnings on common units| $12,426 | $14,365 | | Common units - (basic) EPS | $0.51 | $0.59 | | Common units - (diluted) EPS | $0.51 | $0.59 | | Weighted average common units (basic) | 24,407,168 | 24,382,633 | | Weighted average common units (diluted) | 24,416,058 | 24,393,746 | Note 6 - Inventory This note describes the valuation of refined petroleum product inventory at the lower of cost or net realizable value using FIFO Inventory Value (in thousands) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :---------- | :---------------------------- | :------------------------------- | | Inventory | $6,669 | $5,491 | - Inventory consists of refined petroleum products, valued at the lower of cost or net realizable value using a first-in, first-out (FIFO) basis, with nominal charges recognized in Q1 2019 and Q1 2018[78] Note 7 - Long-Term Obligations This note details the Partnership's senior secured revolving credit facility and 6.75% senior notes due 2025 - On September 28, 2018, the Partnership amended its DKL Credit Facility, increasing commitments from $700.0 million to $850.0 million, with an accordion feature up to $1.0 billion, maturing on September 28, 2023[80][82] - As of March 31, 2019, the Partnership had $461.2 million in outstanding borrowings under the DKL Credit Facility, with $388.8 million in unused credit commitments and a weighted average interest rate of approximately 5.1%[82][83] - The Partnership has $250.0 million in aggregate principal amount of 6.75% senior notes due 2025, which are general unsecured senior obligations redeemable under specific conditions[84][85][88][89][91] Note 8 - Equity This note details the Partnership's ownership structure, including Delek Holdings' interests, public unitholdings, and cash distributions - As of March 31, 2019, Delek Holdings owned a 61.4% limited partner interest (15,294,046 common units) and a 94.6% interest in the general partner (498,110 general partner units), with public unitholders holding 9,113,359 common units[92] Units Outstanding | Unit Type | December 31, 2018 | March 31, 2019 | | :------------------------ | :---------------- | :------------- | | Common - Public | 9,109,807 | 9,113,359 | | Common - Delek Holdings | 15,294,046 | 15,294,046 | | General Partner | 498,038 | 498,110 | | Total Units Outstanding | 24,901,891 | 24,905,515 | - The general partner holds Incentive Distribution Rights (IDRs) entitling it to increasing percentages, up to a maximum of 48.0%, of cash distributed from operating surplus exceeding $0.43125 per unit per quarter[100] Cash Distributions (in thousands) | Distribution Metric | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :---------------------------------------- | :--------------------- | :--------------------- | | Total cash distributions | $27,438 | $23,997 | | General partner's distributions (including IDRs) | $7,424 | $5,710 | | Common limited partners' distributions | $20,014 | $18,287 | | Cash distributions per limited partner unit | $0.820 | $0.750 | Note 9 - Equity Based Compensation This note outlines unit-based compensation expense and unrecognized compensation cost for non-vested equity arrangements - The Partnership incurred approximately $0.1 million in unit-based compensation expense for both Q1 2019 and Q1 2018, included in general and administrative expenses[105] - As of March 31, 2019, $0.1 million of unrecognized compensation cost related to non-vested equity-based arrangements is expected to be recognized over a weighted-average period of 0.2 years[107] Note 10 - Equity Method Investments This note details the Partnership's equity method investments in joint ventures operating crude oil pipeline systems - The Partnership holds 50% interest in CP LLC and 33% interest in Andeavor Logistics (formerly Rangeland Energy II, LLC), both joint ventures operating crude oil pipeline systems[108] Equity Method Investment Details (in thousands) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Investment balance | $107,830 | $104,770 | | Current assets (100%) | $21,948 | $15,450 | | Non-current assets (100%) | $250,977 | $240,852 | | Current liabilities (100%)| $12,719 | $4,362 | | Revenues (100%) | $9,114 | $7,990 | | Net Income (100%) | $4,417 | $2,712 | Note 11 - Segment Data This note presents financial data for the Partnership's two reportable segments, measured by contribution margin - The Partnership operates in two reportable segments: (i) pipelines and transportation, and (ii) wholesale marketing and terminalling, with performance measured by contribution margin[112][113][116] Segment Performance (in thousands) | Segment Performance (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Pipelines and Transportation | | | | Total Net Revenues | $40,633 | $33,713 | | Segment Contribution Margin | $24,232 | $19,650 | | Capital Spending | $424 | $1,408 | | Wholesale Marketing and Terminalling | | | | Total Net Revenues | $111,850 | $134,208 | | Segment Contribution Margin | $15,928 | $16,662 | | Capital Spending | $480 | $789 | | Consolidated | | | | Total Net Revenues | $152,483 | $167,921 | | Contribution Margin | $40,160 | $36,312 | | Operating Income | $29,111 | $27,277 | | Capital Spending | $904 | $2,197 | Segment Assets and Depreciation (in thousands) | Segment Assets (in thousands) | March 31, 2019 | December 31, 2018 | | :--------------------------------- | :------------- | :---------------- | | Pipelines and transportation | $401,833 | $387,333 | | Wholesale marketing and terminalling | $238,375 | $237,260 | | Total assets | $640,208 | $624,593 | | Property, plant & equipment, net (March 31, 2019) | | | | Pipelines and Transportation | $247,043 | | | Wholesale Marketing and Terminalling | $59,836 | | | Consolidated | $306,879 | | | Depreciation expense (Q1 2019) | $5,241 | | | Wholesale Marketing and Terminalling | $1,333 | | | Consolidated | $6,574 | | Note 12 - Fair Value Measurements This note describes the Partnership's application of ASC 820 for fair value measurements, categorizing assets and liabilities by input observability - The Partnership applies ASC 820 for fair value measurements, categorizing assets and liabilities into Level 1, 2, or 3 based on input observability, with commodity derivatives generally classified as Level 2[121][122][123] Fair Value Hierarchy of Derivatives (in thousands) | Fair Value Hierarchy (in thousands) | March 31, 2019 | December 31, 2018 | | :---------------------------------- | :------------- | :---------------- | | Assets | | | | Commodity derivatives (Level 2) | $61 | $186 | | Total assets | $61 | $186 | | Liabilities | | | | Commodity derivatives (Level 2) | $(87) | $(2) | | Net liabilities | $(26) | $184 | Note 13 - Derivative Instruments This note details the Partnership's use of forward fuel contracts to hedge against price fluctuations for refined product purchases - The Partnership uses forward fuel contracts to hedge against price fluctuations for physical purchases of refined products, typically with terms less than 90 days, with changes in fair value marked to market as hedge accounting was not elected[130][131][134] Derivative Fair Values (in thousands) | Derivative Type (in thousands) | March 31, 2019 (Assets) | March 31, 2019 (Liabilities) | December 31, 2018 (Assets) | December 31, 2018 (Liabilities) | | :----------------------------- | :---------------------- | :--------------------------- | :------------------------- | :------------------------------ | | Commodity derivatives | $61 | $(87) | $186 | $(2) | | Total gross fair value | $61 | $(87) | $186 | $(2) | | Net fair value of derivatives | $244 | $0 | $590 | $0 | Recognized Gains (Losses) from Derivatives (in thousands) | Recognized Gains (Losses) (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Commodity derivatives (Cost of materials and other) | $(1,014) | $1,583 | Note 14 - Income Taxes This note clarifies the Partnership's federal income tax status and its subjection to entity-level tax in Tennessee and Texas - The Partnership is not a taxable entity for federal income tax purposes, with each partner accounting for its share of income/loss, but is subject to entity-level tax in Tennessee and Texas[136][137] Note 15 - Commitments and Contingencies This note addresses the Partnership's exposure to lawsuits, investigations, and claims, including environmental matters - The Partnership is subject to lawsuits, investigations, and claims, including environmental and employee-related matters, but management believes no currently pending legal proceeding will have a material adverse effect on financial statements[140] - The Partnership has experienced several crude oil releases, accruing $1.1 million for remediation as of March 31, 2019, with most expenses reimbursed by Delek Holdings under the Omnibus Agreement[144] - Regarding the Magnolia Release, the Partnership accrued $2.2 million as of March 31, 2019, for monetary penalties and other relief related to a civil action, with settlement expected in H2 2019[148] Note 16 - Leases This note details the Partnership's lease accounting policies, including short-term leases and operating lease liabilities - The Partnership leases pipeline and transportation equipment, with leases of 12 months or less not recorded on the balance sheet and expense recognized straight-line[150] Lease Costs and Terms (in thousands) | Lease Metric (in thousands) | Three months ended March 31, 2019 | | :-------------------------- | :-------------------------------- | | Operating lease cost | $1,427 | | Short-term lease cost | $477 | | Total lease cost | $1,904 | | Cash paid for operating leases | $(1,427) | | Weighted-average remaining lease term | 4.2 years | | Weighted-average discount rate | 8.0% | Operating Lease Liabilities Maturity (in thousands) | Operating Lease Liabilities Maturity (in thousands) | Under ASC 842 (March 31, 2019) | Under ASC 840 (December 31, 2018) | | :-------------------------------------------------- | :----------------------------- | :-------------------------------- | | April 1 to December 31, 2019 | $4,328 | $5,755 | | 2020 | $5,659 | $5,659 | | 2021 | $5,337 | $5,337 | | 2022 | $5,031 | $5,031 | | 2023 | $2,429 | $2,429 | | Thereafter | $8 | $8 | | Total future minimum lease payments | $22,792 | $24,219 | | Less: Interest | $3,606 | | | Present value of lease liabilities | $19,186 | | Note 17 - Subsequent Events This note reports the declaration of a quarterly cash distribution of $0.820 per unit by the general partner's board on April 26, 2019 - On April 26, 2019, the general partner's board declared a quarterly cash distribution of $0.820 per unit, payable on May 14, 2019, to unitholders of record on May 7, 2019[161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the Partnership's financial performance, trends, and prospects, including business, segments, and liquidity Statement of Operations and Non-GAAP Measures (in thousands) | Statement of Operations Data (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net revenues | $152,483 | $167,921 | | Total operating costs and expenses | $123,372 | $140,644 | | Operating income | $29,111 | $27,277 | | Net income attributable to partners | $19,696 | $19,995 | | EBITDA | $39,439 | $34,736 | | Distributable cash flow | $28,957 | $27,951 | Forward-Looking Statements This section highlights forward-looking statements reflecting current estimates and projections, subject to various risks - The report contains forward-looking statements reflecting current estimates and projections about future results, performance, prospects, and opportunities, identified by words like 'expects,' 'anticipates,' 'plans,' and 'believes'[168] - Key factors that could cause actual results to differ materially include dependence on Delek Holdings, commodity price fluctuations, legal actions, changes in insurance markets, growth strategies, and regulatory changes[169][170][171][173][174][175] Business Overview This section describes the Partnership's primary business of owning and operating crude oil and refined products logistics and marketing assets - The Partnership primarily owns and operates crude oil, intermediate, and refined products logistics and marketing assets, gathering, transporting, offloading, and storing products for Delek Holdings and third parties in the southeastern U.S. and Texas[177][178] - A substantial majority of assets are integral to and dependent on Delek Holdings' refining operations, with many assets exclusively contracted to support its Tyler, El Dorado, and Big Spring refineries[179] Our Reporting Segments and Assets This section outlines the Partnership's two reportable segments: pipelines and transportation, and wholesale marketing and terminalling - The Partnership has two reportable segments: (i) pipelines and transportation, and (ii) wholesale marketing and terminalling[181] - The pipelines and transportation segment includes pipelines, tanks, offloading facilities, trucks, and ancillary assets, providing crude oil gathering and product transportation/storage services without taking ownership of products, limiting commodity price exposure[182][183] - The wholesale marketing and terminalling segment generates revenue from marketing services for refined products from Tyler and Big Spring refineries, wholesale activity in west Texas, and terminalling services to third parties and Delek Holdings[186] How We Generate Revenue This section explains that revenue is generated by charging fees for logistics services and marketing, primarily through long-term agreements with Delek Holdings - Revenue is generated by charging fees to Delek Holdings and third parties for gathering, transporting, offloading, storing crude oil, and marketing/distributing intermediate and refined products, with a substantial majority of contribution margin from long-term, fee-based commercial agreements with Delek Holdings, often with minimum volume commitments and inflation-indexed fees[188] Commercial Agreements with Delek Holdings This section details the numerous long-term, fee-based commercial agreements with Delek Holdings for various logistics services - The Partnership maintains numerous long-term, fee-based commercial agreements with Delek Holdings for various logistics services, including crude oil gathering, transportation, storage, marketing, terminalling, and offloading, typically with minimum quarterly volume, revenue, or throughput commitments and tariffs or fees indexed to inflation-based indices[189] Other Transactions This section describes the Partnership's management of the Delek Permian Gathering Project for Delek Holdings, receiving monthly fees - Since 2018, the Partnership manages the Delek Permian Gathering Project, a 250-mile gathering system in the Permian Basin, for Delek Holdings under a construction management and operating agreement, receiving monthly operating and construction services fees[190] How We Evaluate Our Operations This section explains that operational performance is evaluated using metrics such as volumes, contribution margin, and non-GAAP measures - Operational performance is evaluated using metrics such as volumes (pipeline throughput, terminal volumes), contribution margin per barrel, operating and maintenance expenses, cost of materials and other, and non-GAAP measures like EBITDA and distributable cash flow[191][192][196][198][199] - Contribution margin is calculated as net revenues less cost of materials and other and operating expenses (excluding depreciation and amortization), with gross margin per barrel also measured for wholesale marketing[196][197] Financing This section outlines the Partnership's intention to make quarterly cash distributions and its funding strategy for future capital expenditures - The Partnership intends to make quarterly cash distributions of $0.82 per unit for Q1 2019 ($3.28 annualized), with future capital expenditures expected to be funded primarily from operating cash flows, borrowings under the revolving credit facility, and potential equity/debt issuances[200] Market Trends This section discusses market trends impacting the Partnership, including crude oil and refined product prices, and RINs - Crude oil and refined product prices, after decreasing in Q4 2018, began to rebound in Q1 2019, with drilling activity in the Permian Basin driving favorable market conditions for the Partnership's assets[203][205] - Volatility in refined product prices can impact west Texas marketing margins when selling prices do not adjust as quickly as purchase prices, and RINs generated from ethanol blending also affect results, with sales to Delek Holdings at market prices[208][213] Average Fuel Prices (Price per gallon) | Metric (Price per gallon) | Q1 2018 (Average) | Q2 2018 (Average) | Q3 2018 (Average) | Q4 2018 (Average) | Q1 2019 (Average) | | :------------------------ | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Gasoline Prices | $1.77 | $1.96 | $1.90 | $1.52 | $1.88 | | Diesel Prices | $1.93 | $2.14 | $2.01 | $1.60 | $1.88 | Average Ethanol RIN Prices (Price per RIN) | Metric (Price per RIN) | Q1 2018 (Average) | Q2 2018 (Average) | Q3 2018 (Average) | Q4 2018 (Average) | Q1 2019 (Average) | | :--------------------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Ethanol RIN Prices | $0.31 | $0.21 | $0.12 | $0.07 | $0.14 | Contractual Obligations This section states no material changes to the Partnership's contractual obligations and commercial commitments in Q1 2019 - There have been no material changes to the Partnership's contractual obligations and commercial commitments during the three months ended March 31, 2019, compared to those disclosed in the Annual Report on Form 10-K[219] Critical Accounting Policies This section identifies critical accounting policies, including impairment evaluations for assets and goodwill, with no material modifications - Critical accounting policies include evaluating impairment for property, plant and equipment and definite life intangibles, evaluating potential impairment of goodwill, and estimating environmental expenditures, with no material modifications in Q1 2019, except for the adoption of ASC 606 (Revenue from Contracts with Customers)[220] Non-GAAP Measures This section explains management's use of non-GAAP measures like EBITDA and distributable cash flow to evaluate performance - Management uses non-GAAP measures like EBITDA (Earnings before interest, taxes, depreciation, and amortization) and distributable cash flow to evaluate operating segment performance and financial prospects, used by external users to assess operating performance, cash flow for distributions, debt servicing ability, and capital expenditure funding[221][222] - EBITDA and distributable cash flow are supplemental measures and should not be considered alternatives to GAAP measures like net income or cash flow from operating activities, as they have limitations and may not be comparable to similarly titled measures of other partnerships[223] Results of Operations This section provides a detailed comparison of the Partnership's consolidated and segment-specific financial results for Q1 2019 versus 2018 Consolidated Results of Operations — Comparison of the three months ended March 31, 2019 compared to the three months ended March 31, 2018 This section provides a detailed comparison of the Partnership's consolidated financial performance for Q1 2019 versus Q1 2018 Consolidated Financial Performance (in thousands) | Consolidated Results (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Net Revenues | $152,483 | $167,921 | | Cost of materials and other | $96,265 | $119,032 | | Operating expenses | $16,058 | $12,577 | | Contribution margin | $40,160 | $36,312 | | General and administrative expenses | $4,473 | $2,975 | | Depreciation and amortization | $6,574 | $6,000 | | Operating income | $29,111 | $27,277 | - Net revenues decreased by $15.4 million (9.2%) due to lower average volumes and sales prices of gasoline and diesel in west Texas marketing operations, partially offset by revenues from the Big Spring Logistic Assets Acquisition[235][236] - Cost of materials and other decreased by $22.8 million (19.1%) due to lower average volumes and costs of gasoline and diesel purchased in west Texas[237][238] - Operating expenses increased by $3.5 million (27.7%) due to higher operating costs from the Big Spring Logistic Assets Acquisition, increased storage expenses at El Dorado Refinery, and higher allocated employee costs[241] - General and administrative expenses increased by $1.5 million (50.4%) due to higher employee-related expenses for managing projects for Delek Holdings and a higher proportion of incentive and payroll expense allocated by Delek Holdings[242] - Interest expense increased by $3.2 million (40.2%) due to increased borrowings under the DKL Credit Facility following the Big Spring Logistic Assets Acquisition and higher floating interest rates[244] Pipelines and Transportation Segment This section analyzes the financial performance of the Pipelines and Transportation segment, highlighting changes in net revenues and contribution margin Pipelines and Transportation Segment Performance (in thousands) | Pipelines and Transportation (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net Revenues | $40,633 | $33,713 | | Cost of materials and other | $5,567 | $4,441 | | Operating expenses | $10,834 | $9,622 | | Segment contribution margin | $24,232 | $19,650 | - Net revenues increased by $6.9 million (20.5%) due to increased revenues from Big Spring Logistic Assets Acquisition, fees from the Delek Permian Gathering Project, and trucking assets[254] - Segment contribution margin increased by $4.6 million (23.3%) driven by higher net revenues from the Big Spring Logistic Assets Acquisition, Delek Permian Gathering Project, and trucking assets[257] Pipelines and Transportation Throughputs (average bpd) | Throughputs (average bpd) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Lion Pipeline System (Crude pipelines) | 28,683 | 54,728 | | Lion Pipeline System (Refined products pipelines to Enterprise Systems) | 23,092 | 49,754 | | SALA Gathering System | 16,998 | 16,672 | | East Texas Crude Logistics System | 18,113 | 18,062 | Wholesale Marketing and Terminalling Segment This section analyzes the financial performance of the Wholesale Marketing and Terminalling segment, focusing on changes in net revenues and contribution margin Wholesale Marketing and Terminalling Segment Performance (in thousands) | Wholesale Marketing and Terminalling (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Revenues | $111,850 | $134,208 | | Cost of materials and other | $90,698 | $114,591 | | Operating expenses | $5,224 | $2,955 | | Segment contribution margin | $15,928 | $16,662 | - Net revenues decreased by $22.4 million (16.7%) due to lower average volumes and sales prices of gasoline and diesel in west Texas marketing operations, partially offset by revenue from the Big Spring Logistic Assets Acquisition[262][263][264] - Cost of materials and other decreased by $23.9 million (20.9%) due to lower average volumes and costs of gasoline and diesel purchased in west Texas[270][271] - Contribution margin decreased by $0.7 million (4.4%) primarily due to decreases in average sales prices of gasoline and diesel in west Texas, partially offset by increased revenue from the Big Spring Logistic Assets Acquisition[278][279] Wholesale Marketing and Terminalling Operating Information (average bpd) | Operating Information (average bpd) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | East Texas - Tyler Refinery sales volumes | 68,577 | 73,244 | | Big Spring marketing throughputs | 87,741 | 75,139 | | West Texas marketing throughputs | 13,314 | 15,942 | | West Texas gross margin per barrel | $3.56 | $5.16 | | Terminalling throughputs | 152,469 | 143,476 | Liquidity and Capital Resources This section assesses the Partnership's liquidity based on cash from operations, credit facility borrowings, and capital expenditures - The Partnership assesses liquidity based on cash from operations, revolving credit facility borrowings, and potential equity/debt issuances, believing it has sufficient resources for the next 12 months, including distributions and capital expenditures[282] Cash Flow Summary (in thousands) | Cash Flow Summary (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $26,205 | $23,656 | | Net cash used in investing activities | $(3,766) | $(219,097) |\ | Net cash (used in) provided by financing activities | $(21,605) | $195,553 | | Net increase in cash and cash equivalents | $834 | $112 | - Net cash provided by operating activities increased by $2.5 million, primarily due to a decrease in Accounts receivable/payable to related parties, shifting from a net receivable to a net payable position[285] - Net cash used in investing activities decreased by $215.3 million, mainly due to the absence of large acquisition activities comparable to the Big Spring Logistic Assets Acquisition and Marketing Contract Intangible Acquisition in Q1 2018[288] - Net cash provided by financing activities decreased by $217.2 million, primarily due to a decrease in net proceeds from the revolving credit facility and increased quarterly cash distributions, partially offset by the absence of the Big Spring Logistic Assets Acquisition-related distribution from Q1 2018[289] - As of March 31, 2019, the Partnership had $5.4 million in cash and cash equivalents, $705.2 million in total indebtedness, and $388.8 million in unused credit commitments under its revolving credit facility[290] Capital Expenditures (in thousands) | Capital Expenditures (in thousands) | Full Year 2019 Planned | Q1 2019 Actual | | :---------------------------------- | :--------------------- | :------------- | | Pipelines and Transportation | | | | Regulatory | $2,542 | $96 | | Maintenance | $4,129 | $314 | | Discretionary projects | $14 | $14 | | Segment Total | $6,685 | $424 | | Wholesale Marketing and Terminalling | | | | Regulatory | $2,722 | $9 | | Maintenance | $2,376 | $98 | | Discretionary | $433 | $373 | | Segment Total | $5,531 | $480 | | Total Capital Spending | $12,216 | $904 | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Partnership's exposure to market risks, primarily commodity price and interest rate risk - The Partnership has limited direct exposure to fluctuating commodity prices as it generally does not take title to crude oil and only limited volumes of light products, using forward fuel contracts (commodity swaps) to hedge exposure to price fluctuations for physical purchases of refined products[299] - As of March 31, 2019, open derivative contracts represented 68,000 barrels of refined petroleum products, with recognized losses from commodity derivatives not designated as hedging instruments at $(1.0) million in Q1 2019, compared to gains of $1.6 million in Q1 2018[299] - Debt under the revolving credit facility bears floating interest rates, exposing the Partnership to interest rate risk, where a hypothetical one percent change in interest rates would impact interest expense by approximately $4.6 million annually based on March 31, 2019, outstanding debt[302] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures were effective as of March 31, 2019[303] - No material changes in internal control over financial reporting were identified during Q1 2019[303] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section reiterates that the Partnership is subject to various legal proceedings, with no anticipated material adverse effect - The Partnership is routinely involved in lawsuits, investigations, and claims, including environmental and employee-related matters, but management does not believe any currently pending legal proceeding will have a material adverse effect on the business[307] - No material developments to previously reported proceedings in the Form 10-K have occurred, aside from the disclosures in Note 15[307] Item 1A. Risk Factors This section states no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[308] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered sales of general partner units to maintain the general partner's proportionate 2% interest Unregistered Sales of General Partner Units | Date of Sale | Number of General Partner Units Sold | Price per General Partner Unit | Consideration Paid to the Partnership | | :----------- | :----------------------------------- | :----------------------------- | :------------------------------------ | | January 7, 2019 | 72 | $30.22 | $2,191 | - The sales of general partner units were exempt from registration under Section 4(a)(2) of the Securities Act[310] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL financial statements - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2) and XBRL formatted financial statements (101)[312] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its submission by the General Partner - The report was signed on May 8, 2019, by Ezra Uzi Yemin (Chairman and CEO) and Assaf Ginzburg (EVP and CFO) on behalf of Delek Logistics Partners, LP's General Partner, Delek Logistics GP, LLC[315][316]