Delek Logistics(DKL) - 2020 Q3 - Quarterly Report

PART I Item 1. Financial Statements (unaudited) Unaudited financial statements for Q3 2020 show total assets increased to $957.6 million due to acquisitions, and net income attributable to partners rose to $46.3 million from $30.5 million Condensed Consolidated Balance Sheets As of September 30, 2020, total assets increased to $957.6 million from $744.4 million at year-end 2019, largely due to a $172.5 million increase in net property, plant, and equipment from acquisitions, while total liabilities grew to $1.07 billion Condensed Consolidated Balance Sheet Highlights (USD in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $957,586 | $744,447 | | Property, plant and equipment, net | $467,501 | $295,044 | | Equity method investments | $255,368 | $246,984 | | Total Liabilities | $1,069,040 | $895,566 | | Long-term debt | $1,006,145 | $833,110 | | Total Deficit | ($111,454) | ($151,119) | Condensed Consolidated Statements of Income and Comprehensive Income For the third quarter of 2020, net income attributable to partners was $46.3 million, a 51.7% increase from $30.5 million in Q3 2019, driven by a 49.1% rise in operating income to $51.8 million Q3 and Nine Months Income Statement Highlights (USD in thousands, except per unit data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $142,268 | $137,556 | $423,306 | $445,382 | | Operating Income | $51,765 | $34,729 | $134,688 | $96,097 | | Net Income Attributable to Partners | $46,328 | $30,530 | $118,539 | $75,112 | | Diluted Net Income per LP Unit | $1.26 | $0.89 | $3.30 | $2.08 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities increased to $134.7 million from $86.9 million in the prior-year period, while net cash used in investing activities was $116.4 million primarily for asset acquisitions Cash Flow Summary (Nine Months Ended Sep 30, USD in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $134,654 | $86,871 | | Net cash used in investing activities | ($116,419) | ($141,377) | | Net cash (used in) provided by financing activities | ($17,756) | $56,337 | | Net increase in cash | $479 | $1,831 | Notes to Condensed Consolidated Financial Statements The notes detail key accounting policies and events, including the impact of the COVID-19 pandemic, significant acquisitions, an IDR restructuring, and revenue recognition details - The COVID-19 pandemic has caused significant economic disruption, reducing demand for crude oil and refined products, and the company has considered these impacts in its financial statements, including evaluations for potential asset impairments[26][27] - Effective August 13, 2020, the Partnership eliminated all incentive distribution rights (IDRs) and converted the 2% general partner interest into a non-economic interest in exchange for 14.0 million common units and $45.0 million in cash[24][52] - Acquired the Big Spring Gathering Assets from Delek Holdings for $100.0 million cash and 5.0 million common units, and the Trucking Assets for approximately $48.0 million cash, both treated as common control transactions[36][37] - As of September 30, 2020, the company expects to recognize $1.6 billion in future lease revenues related to unfulfilled performance obligations under non-cancelable commercial agreements with Delek Holdings[63] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of COVID-19 and key 2020 strategic transactions, including asset acquisitions and IDR restructuring, noting a 45.1% increase in Q3 2020 consolidated contribution margin and $95.3 million in liquidity - The COVID-19 pandemic has significantly disrupted the global economy, reducing demand for refined products and creating downward pressure on commodity prices, which impacts the company's operations, particularly the West Texas wholesale marketing business[128][132] - Key 2020 developments include the IDR Restructuring Transaction, the acquisition of Big Spring Gathering Assets and Trucking Assets, and tariff adjustments based on FERC indexing[139][142][143] Non-GAAP Reconciliation Highlights (Q3 2020 vs Q3 2019, USD in thousands) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Net Income | $46,328 | $30,530 | | EBITDA | $67,782 | $51,514 | | Distributable Cash Flow | $59,098 | $33,700 | Results of Operations Consolidated contribution margin for Q3 2020 increased by 44.7% to $67.3 million, primarily due to a 71.2% surge in the Pipelines and Transportation segment's contribution margin to $46.4 million driven by acquisitions Consolidated Contribution Margin (USD in thousands) | Period | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Contribution Margin | $67,346 | $46,527 | $20,819 | 44.7% | Segment Contribution Margin (Q3 2020 vs Q3 2019, USD in thousands) | Segment | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Pipelines and Transportation | $46,388 | $27,091 | $19,297 | 71.2% | | Wholesale Marketing and Terminalling | $20,958 | $19,436 | $1,522 | 7.8% | - The increase in Pipelines and Transportation segment revenue and contribution margin was primarily driven by the Big Spring Gathering Assets and Trucking Assets acquisitions[218][224] - The Wholesale Marketing and Terminalling segment's revenue decreased due to lower average sales prices for gasoline and diesel, but contribution margin increased as the cost of materials decreased even more significantly[229][235][242] Liquidity and Capital Resources As of September 30, 2020, the Partnership had total liquidity of $95.3 million, consisting of $6.0 million in cash and $89.3 million available under its DKL Credit Facility, with total debt at $1.006 billion - Total liquidity as of September 30, 2020 was $95.3 million, comprising $6.0 million in cash and $89.3 million in unused credit commitments[246] - Total indebtedness was $1.006 billion, consisting of $760.7 million under the DKL Credit Facility and $245.4 million in senior notes (net of discounts and costs)[257] - A quarterly cash distribution of $0.905 per common unit was declared for Q3 2020, payable in November 2020[247] Capital Spending The Partnership forecasts total capital spending for the full year 2020 to be approximately $21.1 million, with actual spending for the nine months ended September 30, 2020, at $6.9 million Capital Spending Summary (USD in thousands) | Category | Full Year 2020 Forecast | Nine Months Ended Sep 30, 2020 (Actual) | | :--- | :--- | :--- | | Pipelines and Transportation | $13,573 | $3,424 | | Regulatory | $918 | $318 | | Maintenance | $1,531 | $149 | | Discretionary | $11,124 | $2,957 | | Wholesale Marketing and Terminalling | $7,478 | $3,494 | | Regulatory | $1,311 | $1,085 | | Maintenance | $758 | $395 | | Discretionary | $5,409 | $2,014 | | Total Capital Spending | $21,051 | $6,918 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The Partnership is exposed to market risks from commodity price fluctuations affecting margins and interest rate risk on its floating-rate debt, with a hypothetical 1% change in interest rates impacting annual interest expense by approximately $7.6 million - The company is exposed to commodity price risk, as shifts in crude oil and refined product prices can impact operating margins in the wholesale marketing and terminalling segment[269] - The company faces interest rate risk on its floating-rate debt, where a hypothetical 1% change in interest rates would change annual interest expense by approximately $7.6 million[270] - The company is preparing for the planned discontinuation of LIBOR after 2021, which is used as a reference rate in some of its debt agreements[271] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during Q3 - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period (September 30, 2020)[272] - No changes in internal control over financial reporting occurred during Q3 2020 that have materially affected, or are reasonably likely to materially affect, internal controls[272] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various lawsuits and claims in the ordinary course of business but does not believe any currently pending proceedings will have a material adverse effect on its financial condition or results of operations - The company is involved in ordinary course lawsuits, investigations, and claims, but does not expect them to have a material adverse effect on its business[276] Item 1A. Risk Factors Key risk factors include the adverse impacts of the COVID-19 pandemic and volatile oil markets on demand and prices, alongside potential conflicts of interest with the general partner and its parent, Delek Holdings - The COVID-19 pandemic and volatile oil markets pose a significant risk, potentially leading to reduced demand, lower commodity prices, business disruptions, and future asset impairments[277] - Significant conflicts of interest exist with the general partner and its parent, Delek Holdings, as Delek Holdings controls the general partner and may make decisions that favor its own interests over those of the Partnership's unitholders[280] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements related to the IDR restructuring, credit facility amendment, and CEO/CFO certifications - Key exhibits filed include agreements related to the IDR restructuring and credit facility amendment, as well as required CEO and CFO certifications[284]