10-K: Delek Logistics Partners, LP Outlines Unit Holder Rights and Operational Framework in 10-K Filing

Delek Logistics Partners, LP's 10-K filing details the rights of common unit holders, operational segments, and strategic initiatives, emphasizing its relationship with Delek US Holdings.

Summary

• Delek Logistics Partners, LP, a Delaware limited partnership formed in 2012, provides midstream services primarily for crude oil and natural gas.
• The partnership operates through four segments: gathering and processing, wholesale marketing and terminalling, storage and transportation, and investments in pipeline joint ventures.
• A significant portion of the Partnership's assets and revenue is tied to Delek US Holdings' refining operations in Tyler, El Dorado, and Big Spring.
• The document outlines the rights of common unit holders, including participation in distributions and limited liability, subject to Delaware law.
• The Partnership's strategy focuses on operational efficiencies, strategic investments, and acquisitions, with an increasing emphasis on environmental sustainability.
• The Partnership has a long-term sustainability framework with objectives including redirecting corporate culture, optimizing operations, implementing digital transformation, and identifying ESG-conscious investments.
• The Partnership's key initiatives include maintaining safe operations, creating shareholder value, and evaluating its business model for long-term sustainability.
• The Partnership has made several acquisitions in recent years, including the Big Spring Logistics Assets, Midland Gathering Assets, Trucking Assets, and 3 Bear Energy in the Delaware Basin.
• The Partnership's gathering and processing segment includes assets in the Midland and Delaware Basins, providing services to both Delek Holdings and third-party customers.
• The wholesale marketing and terminalling segment provides marketing services for refined products and engages in wholesale activity at terminals in Texas, Tennessee, and Arkansas.
• The storage and transportation segment provides transportation and storage services for crude oil, intermediate, and refined products, primarily supporting Delek Holdings' refineries.
• The Partnership has investments in three pipeline joint ventures in the Permian Basin and Gulf Coast regions.
• The Partnership is dependent on Delek Holdings as its primary customer, with a majority of revenue derived from fee-based commercial agreements.
• The Partnership's commercial agreements with Delek Holdings typically include minimum volume or throughput commitments, providing protection from market volatility.
• The Partnership's operations are subject to federal, state, and local laws and regulations relating to environmental protection, pipeline integrity, and safety.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While the Partnership highlights its strategic initiatives, growth, and sustainability efforts, it also acknowledges significant risks, including dependence on Delek Holdings, exposure to market volatility, and regulatory challenges. The decrease in net income and the goodwill impairment are negative factors, but the increase in EBITDA and the focus on long-term sustainability provide some positive aspects. Overall, the sentiment is neutral to slightly positive, reflecting a company with both opportunities and challenges.

Positives

• The Partnership has a diversified customer base, including third-party customers in the Delaware Basin.
• The Partnership has a strong position in the Permian Basin, with substantial organic growth from new connections.
• The Partnership has a history of successful acquisitions that have added value to its business model and recurring cash flows.
• The Partnership has a long-term sustainability framework that focuses on operational, economic, and environmental sustainability.
• The Partnership has built-in recessionary protections, including minimum volume commitments and dedicated acreage agreements.
• The Partnership has a strong balance sheet and is well-positioned to manage through economic volatility.
• The Partnership has implemented an enhanced screening process for proposed future growth projects to incorporate key considerations regarding their environmental and social impact.
• The Partnership has a strong safety record, with no lost time injuries for four years.

Negatives

• The Partnership is heavily dependent on Delek Holdings as its primary customer.
• The Partnership's operations are subject to risks and operational hazards, including business interruptions and shutdowns.
• The Partnership may be unsuccessful in integrating the operations of acquired assets.
• The Partnership's insurance policies and contractual protections do not cover all potential losses.
• The Partnership's ability to pay distributions depends on cash flow and not solely on profitability.
• The Partnership is exposed to the credit risks of its key customers and other contractual counterparties.
• The Partnership's debt levels may limit its flexibility to obtain financing and pursue other business opportunities.
• The Partnership's transportation on certain pipelines is subject to federal or state regulation, which could adversely affect operations and cash flows.
• The Partnership's general partner and its affiliates have conflicts of interest with the Partnership and limited duties to its unitholders.
• The Partnership's unitholders have limited voting rights and are not entitled to elect the general partner or its directors.
• The Partnership's unitholders are required to pay income taxes on their share of taxable income even if they do not receive cash distributions.

Risks

• The Partnership's relationship with Delek Holdings and its financial condition subjects the Partnership to potential risks beyond its control.
• Developments impacting global oil markets may adversely affect the Partnership's business and financial performance.
• A regional or global disease outbreak could have a material adverse effect on the Partnership's business, financial condition, and liquidity.
• The Partnership's operations are subject to risks and operational hazards, including business interruptions and shutdowns.
• The Partnership may be unsuccessful in integrating the operations of acquired assets.
• The Partnership's insurance policies and contractual protections do not cover all potential losses.
• The Partnership's ability to pay distributions could be impaired if it is unable to generate sufficient cash flow.
• The Partnership's assets and operations are subject to environmental, pipeline integrity, and safety laws and regulations.
• A material decrease in wholesale fuel margins or in the quantity of barrels sold could adversely affect the Partnership's financial condition.
• The Partnership's substantial dependence on Delek Holdings' refineries and lack of diversification could have a material adverse effect on its financial condition.
• A material decrease in the supply of attractively priced crude oil could materially reduce the volumes of crude oil and refined products that the Partnership transports and stores.
• The Partnership's ability to expand may be limited if Delek Holdings' business does not grow as expected.
• The costs, scope, timelines, and benefits of construction projects may deviate significantly from original plans and estimates.
• A shortage of skilled labor or disruptions in the labor force may make it difficult for the Partnership to maintain labor productivity.
• The Partnership's ability to obtain needed capital or financing on satisfactory terms may be diminished.
• An interruption or reduction of supply and delivery of refined products to the Partnership's wholesale marketing business could result in a decline in sales and profitability.
• The Partnership is exposed to the credit risks of its key customers and other contractual counterparties.
• Restrictions in the Partnership's revolving credit facility and indentures could adversely affect its business and ability to make distributions.
• The Partnership's debt levels may limit its flexibility to obtain financing and pursue other business opportunities.
• Transportation on certain of the Partnership's pipelines is subject to federal or state regulation.
• Delek Holdings' level of indebtedness and credit ratings could adversely affect the Partnership's ability to grow its business and make cash distributions.
• The Partnership's right of first offer to acquire certain of Delek Holdings' logistics assets is subject to risks and uncertainty.
• Climate change legislation or regulations could result in increased operating and capital costs and reduced demand for the Partnership's products and services.
• The Partnership's general partner and its affiliates have conflicts of interest with the Partnership and limited duties to its unitholders.
• The Partnership's Partnership Agreement replaces the fiduciary duties that would otherwise be owed by the general partner with contractual standards governing its duties.
• Delek Holdings may compete with the Partnership.
• The Partnership's unitholders have limited voting rights and are not entitled to elect the general partner or its directors.
• The Partnership's Partnership Agreement restricts the voting rights of certain unitholders owning 20% or more of its common limited partner units.
• The NYSE does not require a publicly traded limited partnership like the Partnership to comply with certain of its corporate governance requirements.
• The Partnership's unitholders are required to pay income taxes on their share of taxable income even if they do not receive cash distributions.
• As a result of investing in the Partnership's common limited partner units, unitholders may be subject to state and local taxes and return filing requirements in jurisdictions where the Partnership operates or owns or acquires properties.

Future Outlook

The Partnership expects that liquid transportation fuels will continue to be in high demand and will continue to leverage the strength of its cash flows and balance sheet in order to continue maximizing unitholder returns and the long-term prospects for return on investment.

Management Comments

• The Partnership has a long history of operating successfully in our core segments by focusing on operating efficiencies and market fundamentals, balanced with the continued pursuit of strategic investments and acquisitions, both with our sponsor and with third parties.
• We believe the world's reliance on hydrocarbons will not disappear, and oil and gas will continue to remain relevant in meeting global energy demand.
• It is critical that we understand not only our current ESG positioning in the market, but also that we integrate a broader sustainability view to all of our activities, both operational and strategic.

Industry Context

The Partnership operates in the midstream energy sector, which is influenced by global oil markets, supply and demand dynamics, and regulatory changes. The Partnership's focus on the Permian Basin and its relationship with Delek Holdings are key factors in its competitive position.

Comparison to Industry Standards

• The Partnership's reliance on long-term, fee-based contracts with minimum volume commitments is a common practice in the midstream industry, providing stability in cash flows.
• The Partnership's focus on operational efficiencies and strategic acquisitions is consistent with industry trends for growth and value creation.
• The Partnership's increasing emphasis on environmental sustainability and ESG factors aligns with growing investor and societal expectations in the energy sector.
• The Partnership's use of EBITDA and distributable cash flow as key performance metrics is common among publicly traded partnerships in the midstream energy industry.
• The Partnership's joint venture investments are a common strategy for expanding pipeline networks and accessing new markets, similar to other midstream companies.
• The Partnership's dependence on a single major customer, Delek Holdings, is a risk factor that is not uncommon in the midstream sector, but it is a risk that is mitigated by long-term contracts and minimum volume commitments.
• The Partnership's exposure to commodity price risk in its wholesale marketing business is a common challenge for companies that engage in the purchase and sale of refined products.

Related Party Transactions

• The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings.
• The Partnership pays an annual administrative fee to Delek Holdings for centralized corporate services.
• The Partnership reimburses Delek Holdings for certain operating expenses and capital expenditures.
• The Partnership purchases refined products from Delek Holdings.
• The Partnership sold RINs to Delek Holdings.
• The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement.
• The Partnership entered into a Related Party Revolving Credit Facility with Delek Holdings.

Stakeholder Impact

• Shareholders: The Partnership's ability to pay distributions is dependent on its cash flow, which is affected by various factors.
• Employees: The Partnership's employees are employed by its general partner and its non-Partnership affiliates.
• Customers: The Partnership's customers include Delek Holdings and other major oil companies, independent refiners, and marketers.
• Suppliers: The Partnership purchases refined products from Delek Holdings and other third-party suppliers.
• Creditors: The Partnership's debt levels may limit its flexibility to obtain financing and pursue other business opportunities.

Next Steps

• The Partnership will continue to evaluate and pursue opportunities to grow its business through strategic acquisitions and expansion projects.
• The Partnership will continue to seek opportunities to further diversify its customer base by increasing third-party throughput volumes.
• The Partnership will continue to look for ways to grow its business while minimizing its negative environmental impact.
• The Partnership will continue to negotiate new terms for expiring commercial agreements with Delek Holdings.

Key Dates

Keywords

Midstream, Logistics, Crude Oil, Natural Gas, Pipelines, Terminals, Storage, Gathering, Processing, Refined Products, Delek US Holdings, Permian Basin, Delaware Basin, Sustainability, ESG