Delek Logistics(DKL) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Delek Logistics Partners, LP's unaudited financial statements and notes for Q2 2020 and 2019 Condensed Consolidated Balance Sheets The balance sheets detail the company's financial position as of June 30, 2020, showing increased assets and long-term debt, with a decreased total deficit Condensed Consolidated Balance Sheets (in thousands) | ASSETS / LIABILITIES AND DEFICIT | June 30, 2020 | December 31, 2019 | | :------------------------------- | :------------ | :---------------- | | Total current assets | $43,497 | $33,570 | | Property, plant and equipment, net | $473,744 | $295,044 | | Total assets | $973,737 | $744,447 | | Total current liabilities | $17,975 | $35,082 | | Long-term debt | $995,200 | $833,110 | | Total non-current liabilities | $1,034,077 | $860,484 | | Total deficit | $(78,315) | $(151,119) | | Total liabilities and deficit | $973,737 | $744,447 | - Total assets increased by $229.3 million, primarily due to a significant increase in net property, plant and equipment, reflecting recent acquisitions[9] - Total deficit decreased by $72.8 million, indicating an improvement in the equity position[9] Condensed Consolidated Statements of Income and Comprehensive Income Income statements show significant net income growth for Q2 and YTD June 30, 2020, driven by higher operating income despite lower net revenues Key Income Statement Data (in thousands, except per unit data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $117,637 | $155,342 | $281,038 | $307,825 | | Operating income | $47,881 | $32,256 | $82,923 | $61,367 | | Net income attributable to partners | $44,415 | $24,885 | $72,211 | $44,581 | | Net income per limited partner unit - basic | $1.18 | $0.69 | $1.98 | $1.20 | | Cash distributions per limited partner unit | $0.900 | $0.850 | $1.790 | $1.670 | - Net income attributable to partners increased by 78.5% for the three months and 61.9% for the six months ended June 30, 2020, year-over-year[13] - Operating income increased by 48.4% for the three months and 35.1% for the six months ended June 30, 2020, year-over-year[13] Condensed Consolidated Statements of Partner's Equity (Deficit) Partners' equity statements reflect a reduced total deficit from December 2019 to June 2020, primarily due to net income and unit issuance, partially offset by distributions Changes in Partners' Equity (Deficit) (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :------------------------------------------------------------------ | :------------ | :---------------- | | Balance at period end | $(78,315) | $(151,119) | | Net income attributable to partners (six months ended June 30, 2020) | $72,211 | $44,581 | | Issuance of units in connection with Big Spring Gathering Assets Acquisition | $109,514 | — | | Distribution to Delek Holdings for Trucking Assets Acquisition | $(47,558) | — | | Cash distributions (six months ended June 30, 2020) | $(61,540) | $(54,357) | - Total deficit decreased by $72.8 million from December 31, 2019, to June 30, 2020[18] - The issuance of units for the Big Spring Gathering Assets Acquisition contributed $109.5 million to equity[18] Condensed Consolidated Statements of Cash Flows Cash flow statements indicate increased operating cash, decreased investing cash use, and reduced financing cash provided for the six months ended June 30, 2020 Key Cash Flow Data (in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $72,381 | $51,823 | | Net cash used in investing activities | $(114,242) | $(136,556) | | Net cash provided by financing activities | $52,512 | $85,651 | | Net increase in cash and cash equivalents | $10,651 | $918 | - Net cash provided by operating activities increased by $20.6 million (39.7%) year-over-year[22] - Net cash used in investing activities decreased by $22.3 million (16.3%) year-over-year, despite significant asset acquisitions in 2020[22] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the financial statements, covering organization, accounting policies, acquisitions, related parties, revenue, equity, debt, and COVID-19 impact Note 1 - Organization and Basis of Presentation This note covers the Partnership's formation, recent acquisitions, financial statement basis, COVID-19 risks, and new accounting pronouncements - The Partnership acquired Trucking Assets effective May 1, 2020, and Big Spring Gathering Assets effective March 31, 2020, from Delek Holdings[28][29] - The COVID-19 Pandemic has significantly reduced global economic activity, leading to a decline in demand and market prices for crude oil and refined petroleum products, impacting sales volumes in the wholesale marketing business[33] - New accounting pronouncements adopted in 2020, including ASU 2018-13 (Fair Value Measurement), ASU 2016-13 (Credit Losses), and ASU 2018-15 (Cloud Computing), did not have a material impact on the Partnership's financial condition or results of operations[38][39][40] Note 2 - Acquisitions This note details the Q2 2020 acquisitions of Trucking Assets and Big Spring Gathering Assets from Delek Holdings, financed by cash and common units - Trucking Assets Acquisition: Acquired from Delek Holdings for approximately $48.0 million in cash, effective May 1, 2020. Assets include ~150 trucks and trailers, recorded at Delek Holdings' historical carrying value of $13.3 million[47][48][50] - Big Spring Gathering Assets Acquisition: Acquired from Delek Holdings for $100.0 million in cash and 5.0 million common units, effective March 31, 2020. Assets include crude oil pipelines, gathering systems, terminals, and rights-of-way, recorded at Delek Holdings' historical carrying value of $209.5 million[51][52][54] - Both acquisitions were financed by a combination of cash on hand and borrowings under the DKL Credit Facility[47][51] Note 3 - Related Party Transactions This note outlines commercial agreements, logistics services, and equity transactions with Delek Holdings, including new T&D agreements and an IDR Waiver - The Partnership has long-term, fee-based commercial agreements with Delek Holdings for crude oil gathering, transportation, storage, offloading, marketing, terminalling, and product sales, with fees subject to annual adjustments based on inflation indices[55][58] - New agreements include the Trucking Assets T&D Agreement (10-year term, $39.0 million/year minimum revenue) and the Big Spring T&D Agreement (10-year term, 120,000 bpd commitment on gathering assets and 50,000 bpd to a redelivery point)[61][62] - An IDR Waiver was adopted on March 31, 2020, for distributions related to the 5.0 million Additional Units for at least two years, reducing distributions to IDR holders[70] Summary of Related Party Transactions (in thousands) | Transaction Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $87,629 | $61,918 | $194,328 | $124,883 | | Purchases from Affiliates | $29,730 | $73,213 | $110,493 | $152,647 | | Operating & maintenance expenses | $10,310 | $10,590 | $23,067 | $20,515 | | General & administrative expenses | $2,703 | $1,748 | $6,072 | $3,118 | Note 4 - Revenues This note details revenue generation from logistics and wholesale marketing, largely from Delek Holdings, disaggregates revenue by segment, and outlines future lease revenues - Revenue is generated from gathering, transporting, offloading, storing crude oil and refined products, and wholesale marketing, with a significant portion from long-term commercial agreements with Delek Holdings[78] - The majority of commercial agreements with Delek Holdings are accounted for as leases under ASC 842, with $358.5 million of net property, plant, and equipment subject to operating leases as of June 30, 2020[79] Disaggregation of Revenue by Segment (in thousands) | Revenue Type / Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Pipelines and Transportation Total Revenue | $63,426 | $44,208 | $111,393 | $84,841 | | Wholesale Marketing and Terminalling Total Revenue | $54,211 | $111,134 | $169,645 | $222,984 | | Consolidated Total Revenue | $117,637 | $155,342 | $281,038 | $307,825 | Expected Revenue on Remaining Performance Obligations (in thousands) | Period | Amount | | :------------------ | :---------- | | Remainder of 2020 | $134,043 | | 2021 | $267,990 | | 2022 | $249,850 | | 2023 | $240,489 | | 2024 and thereafter | $733,292 | | Total | $1,625,664 | Note 5 - Net Income Per Unit This note explains net income per unit calculation using the two-class method and highlights the IDR Waiver impacting distributions - Net income per unit is calculated using the two-class method, allocating earnings to common units, general partner units, and IDRs[86] - An IDR Waiver is in effect for the 5.0 million Additional Units until at least March 31, 2022, reducing distributions to IDR holders[87] Net Income Per Limited Partner Unit (dollars, except units) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to partners | $44,415 | $24,885 | $72,211 | $44,581 | | Limited partners' interest in net income | $34,768 | $16,806 | $53,487 | $29,233 | | Common units - basic (weighted average) | 29,427,298 | 24,409,359 | 26,953,934 | 24,408,270 | | Net income per limited partner unit - basic | $1.18 | $0.69 | $1.98 | $1.20 | Note 6 - Inventory Inventory of refined petroleum products significantly decreased from December 2019 to June 2020, valued at lower of cost or net realizable value (FIFO) Inventory (in millions) | Date | Refined Petroleum Products | | :--------------- | :------------------------- | | June 30, 2020 | $2.1 | | December 31, 2019 | $12.6 | - Inventory decreased by $10.5 million (83.3%) from December 31, 2019, to June 30, 2020[92] - Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis[92] Note 7 - Long-Term Obligations This note details long-term debt, including the DKL Credit Facility and 6.750% Senior Notes Due 2025, with outstanding balances of $750.0 million and $250.0 million respectively - The DKL Credit Facility, a senior secured revolving credit agreement, has lender commitments of $850.0 million and an accordion feature to increase to $1.0 billion, maturing September 28, 2023[94] - As of June 30, 2020, $750.0 million was outstanding under the DKL Credit Facility with a weighted average interest rate of approximately 2.78%, and $100.0 million in unused credit commitments[101][100] - The Partnership has $250.0 million in outstanding 6.750% Senior Notes Due 2025, with an effective interest rate of approximately 7.22% as of June 30, 2020[105] Note 8 - Equity This note details the Partnership's equity structure, changes in units outstanding from acquisitions, and the IDR Waiver and cash distribution policies - As of June 30, 2020, Delek Holdings owned a 69.1% interest in the Partnership, including 20,745,868 common limited partner units (70.5% interest) and a 94.8% interest in the general partner[106] Changes in Units Outstanding (in units) | Category | Balance at Dec 31, 2019 | Balance at Jun 30, 2020 | | :---------------------------------------- | :---------------------- | :---------------------- | | Common - Public | 9,131,579 | 8,687,371 | | Common - Delek Holdings | 15,294,046 | 20,745,868 | | General Partner | 498,482 | 600,678 | | Total | 24,924,107 | 30,033,917 | - The IDR Waiver, effective March 31, 2020, waives distributions on IDRs associated with 5.0 million Additional Units for at least two years, impacting the general partner's share of distributions[115] Quarterly Cash Distributions Per Limited Partner Unit | Quarter Ended | Total Quarterly Distribution Per Limited Partner Unit | | :------------ | :---------------------------------------------------- | | June 30, 2019 | $0.850 | | Sep 30, 2019 | $0.880 | | Dec 31, 2019 | $0.885 | | Mar 31, 2020 | $0.890 | | June 30, 2020 | $0.900 | Note 9 - Equity Based Compensation Equity-based compensation expense under the LTIP was immaterial for the three and six months ended June 30, 2020 and 2019 - Equity-based compensation expense under the LTIP was immaterial for the periods presented[119] Note 10 - Equity Method Investments This note details equity method investments, including capital contributions to Red River and increased income, primarily financed by operating cash and the DKL Credit Facility - The Partnership holds a 33% membership interest in Red River Pipeline Company LLC, which owns a crude oil pipeline from Cushing, Oklahoma to Longview, Texas[120] - Additional capital contributions of $10.5 million were made to equity method investments during the six months ended June 30, 2020[123] Summarized Financial Information for Red River (100% basis, in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :------------- | :------------ | :---------------- | | Current Assets | $11,376 | $9,278 | | Non-current Assets | $416,554 | $381,778 | | Current liabilities | $17,869 | $8,291 | | Revenues (6 months) | $21,969 | $26,017 | | Net income (6 months) | $12,746 | $13,652 | - The Partnership's investment balance in these joint ventures was $255.3 million as of June 30, 2020, up from $247.0 million at December 31, 2019[125] Note 11 - Segments The Partnership operates in Pipelines and Transportation and Wholesale Marketing and Terminalling segments, with performance measured by contribution margin, showing growth in the former and declines in the latter - The two reportable segments are Pipelines and Transportation, and Wholesale Marketing and Terminalling[128][129] - Segment contribution margin is defined as net revenues less cost of materials and other and operating expenses (excluding depreciation and amortization)[130] Segment Operating Performance (in thousands) | Segment / Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Pipelines and Transportation | | | | | | Total Net Revenues | $63,426 | $44,208 | $111,393 | $84,841 | | Segment Contribution Margin | $42,513 | $24,123 | $72,926 | $48,355 | | Wholesale Marketing and Terminalling | | | | | | Total Net Revenues | $54,211 | $111,134 | $169,645 | $222,984 | | Segment Contribution Margin | $18,783 | $20,038 | $35,734 | $35,966 | Segment Total Assets (in thousands) | Segment | June 30, 2020 | December 31, 2019 | | :------------------------------- | :------------ | :---------------- | | Pipelines and transportation | $836,510 | $537,580 | | Wholesale marketing and terminalling | $137,227 | $206,867 | | Total assets | $973,737 | $744,447 | Note 12 - Income Taxes The Partnership is not a federal taxable entity, passing income/loss to partners, but is subject to entity-level taxes in Tennessee and Texas - The Partnership is not a taxable entity for federal income tax purposes; partners account for their share of income/loss[134] - The Partnership is subject to entity-level tax in Tennessee and Texas[135] Note 13 - Commitments and Contingencies This note addresses the Partnership's exposure to lawsuits, environmental claims, and remediation costs, including the Sulphur Springs Release, largely reimbursed by Delek Holdings - The Partnership is subject to various lawsuits, investigations, and claims, including environmental and employee-related matters, but does not believe any currently pending legal proceeding will have a material adverse effect[136][368] - The Partnership incurred approximately $0.1 million and $0.3 million in additional costs for the Sulphur Springs Release during the three and six months ended June 30, 2020, respectively, with cleanup operations substantially completed[146] - Most remediation expenses for crude oil and other releases are reimbursed by Delek Holdings under the Omnibus Agreement, except for the Sulphur Springs Release[147] Note 14 - Leases This note outlines accounting for operating leases, including costs, cash flows, weighted-average remaining lease term, and discount rate - Leases with initial terms of 12 months or less are not recorded on the balance sheet; lease expense is recognized on a straight-line basis[150] Lease Cost and Cash Flow Information (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $1,926 | $1,472 | $2,526 | $2,899 | | Total lease cost | $2,743 | $1,798 | $3,875 | $3,702 | | Operating cash flows from operating leases | $(1,926) | $(1,472) | $(2,526) | $(2,899) | - The weighted-average remaining lease term for operating leases is 3.8 years, with a weighted-average discount rate of 5.8% as of June 30, 2020[156][154] Note 15 - Subsequent Events A quarterly cash distribution of $0.900 per unit was declared on July 24, 2020, payable August 12, 2020, a 5.9% increase over Q2 2019 - A quarterly cash distribution of $0.900 per unit was declared on July 24, 2020, payable on August 12, 2020[157] - This distribution represents a 5.9% increase over the second quarter 2019 distribution[335] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, trends, and outlook, covering business overview, COVID-19 impact, segment performance, revenue, evaluation metrics, market trends, accounting policies, and liquidity Business Overview The Partnership operates crude oil and refined products logistics, dependent on Delek Holdings, facing COVID-19 related demand reduction, commodity price impacts, and operational risks - The Partnership's assets are integral to and dependent upon Delek Holdings' refining operations, providing crude oil gathering, transportation, offloading, storage, and refined product marketing services[173] - The COVID-19 Pandemic has led to reduced demand for refined petroleum products, particularly gasoline and jet fuel, and caused storage constraints due to over-supply of produced oil, maintaining downward pressure on commodity prices[178] - Management is actively responding to the pandemic by reducing planned capital expenditures for 2020, enacting cost reduction measures, and implementing site-specific precautionary measures[186] Forward-Looking Statements This section notes forward-looking statements are subject to risks including dependence on Delek Holdings, industry dynamics, commodity price volatility, regulatory changes, and COVID-19 impact - Forward-looking statements reflect current estimates and projections about future results, performance, prospects, and opportunities[165] - Key risks include substantial dependence on Delek Holdings, industry dynamics (Permian Basin growth, takeaway capacity), commodity price and demand changes due to COVID-19, and regulatory impacts[166][171] - The Partnership undertakes no obligation to revise or update any forward-looking statements[172] Our Reporting Segments and Assets The Partnership operates in Pipelines and Transportation (logistics services) and Wholesale Marketing and Terminalling (marketing and terminalling services) segments - The Pipelines and Transportation segment provides crude oil gathering and transportation services, primarily supporting Delek Holdings' refineries, and is not directly exposed to commodity price changes[189] - The Wholesale Marketing and Terminalling segment generates revenue from marketing refined products, wholesale activity, and terminalling services in Texas, Tennessee, Arkansas, and Oklahoma[190] 2020 Development 2020 developments include tariff and fee adjustments, the Trucking Assets and Big Spring Gathering Assets acquisitions, and an associated IDR Waiver - Tariffs on FERC regulated pipelines decreased by approximately 2.2% on July 1, 2020, while CPI-adjusted fees decreased by 0.5% and PPI-adjusted fees by 4.8%[191] - The Trucking Assets Acquisition was effective May 1, 2020, and the Big Spring Gathering Assets Acquisition was effective March 31, 2020[191][195] - Amendment No. 2 to the Partnership Agreement included an IDR Waiver for distributions associated with 5.0 million newly issued common units for at least two years, through March 31, 2022[196] How We Generate Revenue Revenue is generated from logistics service fees and wholesale marketing, with most contribution margin from long-term, fee-based agreements with Delek Holdings - Revenue is generated through fees for logistics services (gathering, transporting, storing) and wholesale marketing of refined products[197] - A significant portion of contribution margin is derived from long-term commercial agreements with Delek Holdings, featuring minimum volume/throughput commitments and inflation-indexed tariffs/fees[197][198] How We Evaluate Our Operations Operations are evaluated using metrics like volumes, contribution margin per barrel, operating expenses, and non-GAAP measures such as EBITDA and distributable cash flow - Key metrics for evaluating operations include volumes, contribution margin per barrel, operating and maintenance expenses, cost of materials and other, EBITDA, and distributable cash flow[200] - Contribution margin is defined as net revenues less cost of materials and other and operating expenses (excluding depreciation and amortization)[205] - Wholesale marketing gross margin per barrel is affected by commodity price volatility and fluctuations in RINs value[206] Market Trends Midstream energy market trends are influenced by crude oil prices and refined product demand, with Q1 2020 seeing reduced prices due to COVID-19 and OPEC+ actions, impacting West Texas margins - Reduced demand for crude oil and refined products due to the COVID-19 Pandemic, combined with OPEC+ production increases, led to a significant reduction in crude oil prices in Q1 2020[213] - Oil prices remained extremely volatile in Q2 2020, with WTI-Cushing reaching a low of ($37.63) per barrel and closing at $39.27 per barrel on June 30, 2020[213] - The volatility of refined products prices and changes in RINs prices significantly affect the margins in West Texas marketing operations[216][220] Ethanol RIN Prices (per gallon) | Quarter Ended | High | Low | Average | | :------------ | :----- | :----- | :------ | | 03/31/19 | $0.16 | $0.08 | $0.21 | | 06/30/19 | $0.17 | $0.13 | $0.27 | | 09/30/19 | $0.19 | $0.11 | $0.26 | | 12/31/19 | $0.14 | $0.09 | $0.24 | | 03/31/20 | $0.40 | $0.17 | $0.30 | | 06/30/20 | $0.52 | $0.28 | $0.40 | Contractual Obligations No material changes occurred in contractual obligations and commercial commitments during Q2 and YTD June 30, 2020, from the Annual Report on Form 10-K - No material changes to contractual obligations and commercial commitments occurred during the three and six months ended June 30, 2020[228] Critical Accounting Policies Critical accounting policies include impairment evaluation for assets and goodwill; an interim goodwill analysis due to COVID-19 found no impairment as of June 30, 2020 - Critical accounting policies involve evaluating impairment for property, plant and equipment, intangibles, and goodwill[229] - An interim goodwill impairment analysis was performed due to the COVID-19 Pandemic, concluding no impairment as of June 30, 2020, based on conditions at that time[231] - The Partnership continues to monitor developments, as sustained adverse changes could lead to future goodwill impairment[232] Non-GAAP Measures Management uses non-GAAP measures like EBITDA and distributable cash flow to evaluate performance, debt servicing, and distribution capacity, not as GAAP alternatives - Non-GAAP measures used include EBITDA (Earnings before interest, taxes, depreciation, and amortization) and distributable cash flow[235][237] - These measures help assess the ability to incur and service debt, fund capital expenditures, and generate cash flow for unitholder distributions[239] - EBITDA and distributable cash flow have limitations as analytical tools and may not be comparable to similarly titled measures of other partnerships[239] Results of Operations This section compares consolidated and segment-specific results for Q2 and YTD June 30, 2020 vs 2019, highlighting changes in revenues, costs, and contribution margins Consolidated Results of Operations Consolidated net revenues decreased in Q2 and YTD 2020 due to lower West Texas marketing volumes/prices, while operating income and net income significantly increased Consolidated Statement of Operations Data (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $117,637 | $155,342 | $281,038 | $307,825 | | Cost of materials and other | $43,892 | $93,854 | $145,185 | $190,119 | | Operating expenses | $12,449 | $17,327 | $27,193 | $33,385 | | Operating income | $47,881 | $32,256 | $82,923 | $61,367 | | Net income attributable to partners | $44,415 | $24,885 | $72,211 | $44,581 | | EBITDA | $64,842 | $44,751 | $113,538 | $84,190 | | Distributable cash flow | $56,972 | $31,184 | $92,709 | $60,140 | - Net revenues decreased by $37.7 million (24.3%) in Q2 2020 and $26.8 million (8.7%) YTD 2020, primarily due to lower volumes and sales prices of gasoline and diesel in West Texas marketing operations[253][256] - Operating income increased by $15.6 million (48.4%) in Q2 2020 and $21.6 million (35.1%) YTD 2020, driven by larger decreases in cost of materials and other, and operating expenses[252] - EBITDA increased by $20.1 million (44.9%) in Q2 2020 and $29.3 million (34.8%) YTD 2020[244] Pipelines and Transportation Segment The Pipelines and Transportation segment saw significant revenue and contribution margin growth in Q2 and YTD 2020, driven by acquisitions and decreased operating expenses Pipelines and Transportation Segment Performance (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Net Revenues | $63,426 | $44,208 | $111,393 | $84,841 | | Cost of materials and other | $11,182 | $7,357 | $17,280 | $12,924 | | Operating expenses | $9,731 | $12,728 | $21,187 | $23,562 | | Segment contribution margin | $42,513 | $24,123 | $72,926 | $48,355 | - Net revenues increased by $19.2 million (43.5%) in Q2 2020 and $26.6 million (31.3%) YTD 2020, primarily due to the Big Spring Gathering Assets and Trucking Assets acquisitions[290][291] - Segment contribution margin increased by $18.4 million (76.2%) in Q2 2020 and $24.6 million (50.8%) YTD 2020, driven by increased revenues from acquisitions and decreased operating expenses[299][300] Pipelines and Transportation Throughputs (average bpd) | Asset / System | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | El Dorado Assets: Crude pipelines | 79,066 | 37,625 | 75,995 | 33,179 | | Big Spring Gathering Assets | 105,162 | — | 105,162 | — | Wholesale Marketing and Terminalling Segment The Wholesale Marketing and Terminalling segment saw significant revenue and cost of materials decreases in Q2 and YTD 2020 due to lower West Texas marketing volumes/prices Wholesale Marketing and Terminalling Segment Performance (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Net Revenues | $54,211 | $111,134 | $169,645 | $222,984 | | Cost of materials and other | $32,710 | $86,497 | $127,905 | $177,195 | | Operating expenses | $2,718 | $4,599 | $6,006 | $9,823 | | Segment contribution margin | $18,783 | $20,038 | $35,734 | $35,966 | - Net revenues decreased by $56.9 million (51.2%) in Q2 2020 and $53.3 million (23.9%) YTD 2020, driven by lower volumes and sales prices of gasoline and diesel in West Texas marketing[305][308] - Cost of materials and other decreased by $53.8 million (62.2%) in Q2 2020 and $49.3 million (27.8%) YTD 2020, primarily due to lower volumes and costs of gasoline and diesel[316][317] West Texas Marketing Operating Information (average bpd) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | East Texas - Tyler Refinery sales volumes | 65,028 | 71,123 | 68,839 | 69,857 | | Big Spring marketing throughputs | 76,004 | 82,964 | 71,195 | 85,339 | | West Texas marketing throughputs | 9,143 | 11,404 | 12,612 | 12,418 | | West Texas gross margin per barrel | $0.64 | $6.25 | $1.96 | $4.84 | Liquidity and Capital Resources Liquidity at June 30, 2020, was $116.2 million, with funding expected from operating cash, DKL Credit Facility, and potential issuances, as cash distributions increased - Total liquidity as of June 30, 2020, was $116.2 million, consisting of $100.0 million in unused DKL Credit Facility commitments and $16.2 million in cash and cash equivalents[331] - The Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under the DKL Credit Facility, and potential future issuances of equity and debt securities[209] - A quarterly cash distribution of $0.900 per unit was declared for Q2 2020, representing a 5.9% increase over Q2 2019[335] Cash Flows Operating cash flows increased by $20.6 million, investing cash used decreased, and financing cash provided decreased for the six months ended June 30, 2020 Summary of Consolidated Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $72,381 | $51,823 | | Net cash used in investing activities | $(114,242) | $(136,556) | | Net cash provided by financing activities | $52,512 | $85,651 | | Net increase in cash and cash equivalents | $10,651 | $918 | - Operating cash flows increased by $20.6 million, primarily due to decreased cash payments to suppliers and increased dividends from equity method investments[340] - Investing cash used decreased by $22.3 million, mainly from lower equity method investment contributions, despite the Big Spring Gathering Assets and Trucking Assets acquisitions[341] - Financing cash provided decreased by $33.1 million, largely due to a $47.6 million distribution related to the Trucking Assets Acquisition, partially offset by higher net proceeds from the revolving credit facility[342] Debt Overview Total indebtedness was $995.2 million as of June 30, 2020, primarily from the DKL Credit Facility and Senior Notes, with the Partnership in compliance with debt covenants Total Indebtedness (in millions) | Debt Instrument | Principal Amount (June 30, 2020) | | :-------------------------- | :------------------------------- | | DKL Credit Facility | $750.0 | | 6.75% Senior Notes Due 2025 | $245.2 | | Total Indebtedness | $995.2 | - The DKL Credit Facility has an average borrowing rate of 2.78%, and the 2025 Notes have an effective interest rate of 7.22%[347][348] - The Partnership believes it was in compliance with all debt covenants as of June 30, 2020, and expects to remain so despite the impact of the COVID-19 Pandemic[334][348] Equity Units Overview On March 31, 2020, 5.0 million units were issued to Delek Holdings for an acquisition, with an IDR Waiver adopted to reduce distributions on these new units - 5.0 million units were issued to Delek Holdings on March 31, 2020, as part of the consideration for the Big Spring Gathering Assets Acquisition[350] - Additional general partner units were issued to maintain the 2.0% general partner interest[350] - An IDR Waiver was adopted, waiving distributions on IDRs associated with the 5.0 million Additional Units for at least two years, through March 31, 2022[351] Capital Spending The 2020 capital expenditure forecast was reduced to $18.3 million due to COVID-19, with non-essential projects suspended across regulatory, maintenance, and discretionary categories Capital Expenditures (in thousands) | Category / Segment | Full Year 2020 Forecast | Six Months Ended June 30, 2020 | | :--------------------------------- | :---------------------- | :----------------------------- | | Pipelines and Transportation | | | | Regulatory | $2,431 | $296 | | Maintenance | $1,584 | $134 | | Discretionary projects | $11,119 | $433 | | Total Pipelines and Transportation | $15,134 | $863 | | Wholesale Marketing and Terminalling | | | | Regulatory | $550 | $967 | | Maintenance | $1,111 | $395 | | Discretionary | $1,461 | $1,456 | | Total Wholesale Marketing and Terminalling | $3,122 | $2,818 | | Total Capital Spending | $18,256 | $3,681 | - The 2020 capital spending forecast was reduced to $18.3 million from $22.7 million due to COVID-19 uncertainties, with non-essential projects suspended[356] Off-Balance Sheet Arrangements The Partnership has no off-balance sheet arrangements as of the filing date of this Quarterly Report on Form 10-Q - The Partnership has no off-balance sheet arrangements[357] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses market risks, including commodity price and interest rate risks, and the potential impact of LIBOR transition on annual interest expense - Revenues and cash flows are sensitive to changes in commodity prices, particularly crude oil, refined products, and ethanol[360] - A hypothetical 1% change in interest rates on floating-rate debt would impact annual interest expense by approximately $7.5 million[361] - The transition from LIBOR to an alternative reference rate could materially impact borrowing costs on variable rate indebtedness[362] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control despite remote work - Disclosure controls and procedures were deemed effective as of June 30, 2020[363] - No material changes to internal control over financial reporting were identified during Q2 2020, despite the shift to remote work due to COVID-19[364] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Partnership faces various lawsuits and claims, including environmental and employee-related matters, but management does not foresee a material adverse effect - The Partnership is subject to lawsuits, investigations, and claims, including environmental and employee-related matters[368] - Management does not believe any pending legal proceeding will have a material adverse effect on the business[368] Item 1A. Risk Factors This section updates risk factors, highlighting the adverse impact of COVID-19 and global oil markets on business, financial condition, and distribution capacity - The COVID-19 Pandemic and global oil market developments have had, and may continue to have, an adverse impact on the business, future results, and financial performance[369] - The pandemic has led to reduced demand for oil and gas products, business disruptions, and downward pressure on commodity prices, potentially causing a prolonged economic slowdown[370][372] - The full impact of COVID-19 is unknown and rapidly evolving, potentially leading to impairments of long-lived or indefinite-lived assets and affecting the ability to sustain or increase quarterly distributions[373][374][375] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports the unregistered sale of 155 general partner units on June 11, 2020, to maintain the general partner's 2% interest, exempt under Section 4(a)(2) Unregistered Sales of Equity Securities | Date of Sale | Number of General Partner Units Sold | Price per General Partner Unit | Consideration Paid to the Partnership | | :------------ | :----------------------------------- | :----------------------------- | :------------------------------------ | | June 11, 2020 | 155 | $26.01 | $4,042 | - The sale was conducted to maintain the general partner's 2% interest in the Partnership[378] - The sales were exempt from registration under Section 4(a)(2) of the Securities Act of 1933[378] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including commercial agreements, CEO/CFO certifications, and XBRL financial statements - Exhibits include the Transportation Services Agreement, Third Amendment and Restatement of Schedules to Third Amended and Restated Omnibus Agreement, CEO/CFO certifications, and Inline XBRL formatted financial statements[380] SIGNATURES The report is signed by Ezra Uzi Yemin, Chairman and Chief Executive Officer, and Reuven Spiegel, Executive Vice President and Chief Financial Officer, on behalf of Delek Logistics Partners, LP's General Partner, Delek Logistics GP, LLC, on August 6, 2020 - The report was signed by Ezra Uzi Yemin (Chairman and CEO) and Reuven Spiegel (EVP and CFO) on August 6, 2020[383][384]