10-K: Delek Logistics Partners Reports Fiscal Year 2024 Results, Outlines Strategic Priorities

Delek Logistics Partners reports its financial results for the year ended December 31, 2024, highlighting strategic acquisitions and future growth plans in the Permian Basin.

Summary

• Delek Logistics Partners, LP (DKL) has released its Form 10-K for the fiscal year ending December 31, 2024.
• The Partnership focuses on providing gathering, transportation, storage, wholesale marketing, and water disposal services, primarily in the Permian Basin and Gulf Coast region.
• A significant portion of DKL's assets are integral to Delek US Holdings' (Delek Holdings) refining operations in Tyler, El Dorado, and Big Spring.
• DKL is not a taxable entity for federal income tax purposes.
• In 2024, DKL closed the H2O Midstream Acquisition and the Gravity Acquisition, expanding its water-related services in the Midland Basin.
• DKL's core vision is to be a full-suite service provider in the Permian Basin, focusing on crude, gas, and water solutions.
• The Partnership is committed to environmental responsibility and long-term sustainability, integrating ESG considerations into its strategic objectives.
• DKL's strategy includes strengthening its presence in the Midland Basin and expanding gas processing capabilities in the Delaware Basin.
• The Partnership has a history of successful acquisitions that have added value to its business model and recurring cash flows.
• DKL is evolving its strategic view to enhance environmental stewardship and sustainable carbon efficiency.
• The Partnership's reportable operating segments are gathering and processing, wholesale marketing and terminalling, storage and transportation, and investments in pipeline joint ventures.
• DKL's revenue streams include product sales, gathering and processing services, and pipeline throughput fees.
• The Partnership faces competition from other midstream companies in the Permian Basin.
• DKL's financial performance is influenced by supply and demand in the markets it serves, with agreements with Delek Holdings helping to mitigate seasonal effects.
• The Partnership is dependent on Delek Holdings as its primary customer, with Delek Holdings accounting for 55.0% of total revenues in 2024.
• DKL has no employees directly; instead, employees are employed by its general partner and affiliates.
• The Board of Directors of DKL's general partner oversees ESG-related matters, with responsibilities delegated to its standing committees.
• DKL is subject to federal and state laws and regulations relating to environmental protection, pipeline integrity, and safety.
• The Partnership's rates, terms, and conditions of service on certain pipelines are subject to regulation by the FERC and state regulatory commissions.
• DKL is exposed to risks and operational hazards inherent in gathering, transporting, and storing crude oil and related products.
• The Partnership's insurance policies and contractual protections from Delek Holdings do not cover all potential losses, costs, or liabilities.
• DKL's ability to pay quarterly distributions depends on cash flow and may be affected by factors beyond its control.
• The Russia-Ukraine War and other global events may have an adverse impact on DKL's business and financial performance.
• Climate change legislation or regulations could result in increased operating costs and reduced demand for DKL's products and services.
• DKL's general partner and its affiliates, including Delek Holdings, have conflicts of interest with DKL and limited duties to DKL and its unitholders.
• Holders of DKL's common limited partner units have limited voting rights and are not entitled to elect DKL's general partner or its directors.
• DKL's unitholders are required to pay income taxes on their share of DKL's taxable income even if they do not receive any cash distributions from DKL.
• As a result of investing in DKL's common limited partner units, DKL's unitholders may be subject to state and local taxes and return filing requirements in jurisdictions where DKL operates or owns or acquires properties.
• The Partnership's ongoing study of strategic options could materially impact our strategic direction, business and results of operations.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. While net income increased, EBITDA decreased, and there are several risk factors outlined. The strategic acquisitions and growth plans are positive, but the dependence on Delek Holdings and regulatory uncertainties temper the outlook.

Positives

• DKL reported an increase in net income for the year ended December 31, 2024.
• The Partnership closed the H2O Midstream Acquisition and the Gravity Acquisition, expanding its water-related services in the Midland Basin.
• DKL acquired a 50% equity interest in W2W Holdings, which includes a 15.6% indirect interest in the Wink to Webster Pipeline.
• The Partnership is constructing a new natural gas processing plant in the Permian Basin, expected to have a capacity of approximately 110 MMcf/d.
• DKL's Board of Directors declared a distribution of $1.105 per common unit for the quarter ended December 31, 2024, representing a 4.7% increase over the fourth quarter 2023 distribution.
• The Partnership completed public offerings of its common units in March and October 2024, generating net proceeds of $132.2 million and $165.6 million, respectively.
• The Partnership is committed to environmental responsibility and long-term sustainability, integrating ESG considerations into its strategic objectives.

Negatives

• DKL's EBITDA decreased in 2024 compared to 2023, primarily due to a change in classification of certain commercial agreements with Delek.
• The Partnership is dependent on Delek Holdings as its primary customer, with Delek Holdings accounting for 55.0% of total revenues in 2024.
• DKL is exposed to risks and operational hazards inherent in gathering, transporting, and storing crude oil and related products.
• Climate change legislation or regulations could result in increased operating costs and reduced demand for DKL's products and services.
• DKL's general partner and its affiliates, including Delek Holdings, have conflicts of interest with DKL and limited duties to DKL and its unitholders.
• DKL's unitholders are required to pay income taxes on their share of DKL's taxable income even if they do not receive any cash distributions from DKL.

Risks

• DKL's relationship with Delek Holdings and its financial condition subjects DKL to potential risks beyond its control.
• Developments impacting global oil markets may adversely affect DKL's business and financial performance.
• A regional or global disease outbreak could have a material adverse effect on DKL's business, financial condition, results of operation and liquidity.
• DKL's operations are subject to risks and operational hazards, which may result in business interruptions and liability for damages.
• DKL may be unsuccessful in integrating the operations of acquired assets with its operations, and in realizing the anticipated benefits of such acquisitions.
• DKL's insurance policies and contractual protections from Delek Holdings do not cover all potential losses, costs, or liabilities.
• The physical effects of climate change and severe weather present risks to DKL's operations.
• If DKL is unable to generate sufficient cash flow, its ability to pay quarterly distributions to its common unitholders could be impaired.
• A material decrease in wholesale fuel margins or in the quantity of barrels sold to wholesale customers could adversely affect DKL's financial condition.
• If Delek Holdings satisfies only its minimum obligations under, or if DKL is unable to renew or extend, the various commercial agreements it has with Delek Holdings, DKL's financial condition, results of operations, cash flows, ability to service its indebtedness and ability to make distributions to unitholders could suffer.
• A material reduction in the volumes of crude oil or refined products that DKL handles for Delek Holdings could adversely affect DKL's financial condition, results of operations, cash flows and ability to make distributions to unitholders.
• DKL's substantial dependence on Delek Holdings' Tyler, El Dorado and Big Spring refineries, as well as the lack of diversification of its assets and geographic locations, could have a material adverse effect on DKL's financial condition, results of operations, cash flows, ability to service its indebtedness and ability to make distributions to unitholders.
• A material decrease in the supply of attractively priced crude oil could materially reduce the volumes of crude oil and refined products that DKL transports and stores, which could materially and adversely affect DKL's financial condition, results of operations, cash flows, ability to service its indebtedness and ability to make distributions to its unitholders.
• DKL's ability to expand may be limited if Delek Holdings' business does not grow as expected.
• The costs, scope, timelines and benefits of any construction projects DKL undertakes may deviate significantly from its original plans and estimates, which could have a material adverse effect on DKL's financial condition, results of operations, cash flows, ability to service its indebtedness and ability to make distributions to unitholders.
• A shortage of skilled labor or disruptions in DKL's labor force may make it difficult for DKL to maintain labor productivity.
• If DKL is unable to obtain needed capital or financing on satisfactory terms to fund expansions of its asset base, its ability to make quarterly cash distributions may be diminished or its financial leverage could increase.
• An interruption or reduction of supply and delivery of refined products to DKL's wholesale marketing business could result in a decline in its sales and profitability.
• DKL is exposed to the credit risks and certain other risks of its key customers and other contractual counterparties, including Delek Holdings, and any material nonpayment or nonperformance by its key customers or other counterparties could adversely affect its business.
• Restrictions in DKL's revolving credit facility and in the respective indentures governing the 2028 Notes and 2029 Notes could adversely affect DKL's business, financial condition, results of operations and ability to make quarterly cash distributions to its unitholders.
• DKL's debt levels may limit its flexibility to obtain financing and to pursue other business opportunities.
• Transportation on certain of DKL's pipelines is subject to federal or state regulation, and the imposition and/or cost of compliance with such regulation could adversely affect its operations and cash flows available for distribution to its unitholders.
• Delek Holdings' level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect DKL's ability to grow its business, its ability to make cash distributions to its unitholders and its credit profile. DKL's current and future credit ratings may also be affected by Delek Holdings' level of indebtedness and creditworthiness.
• DKL's right of first offer to acquire certain of Delek Holdings' existing logistics assets and certain assets that it may acquire or construct in the future is subject to risks and uncertainty, and DKL ultimately may not acquire any of those assets.
• Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating and capital costs and reduced demand for DKL's products and services.
• DKL's general partner and its affiliates, including Delek Holdings, have conflicts of interest with DKL and limited duties to DKL and its unitholders, and they may favor their own interests to the detriment of DKL and its other common unitholders.
• DKL's Partnership Agreement replaces the fiduciary duties that would otherwise be owed by its general partner with contractual standards governing its duties.
• Delek Holdings may compete with DKL.
• Holders of DKL's common limited partner units have limited voting rights and are not entitled to elect DKL's general partner or its directors.
• DKL's Partnership Agreement restricts the voting rights of certain unitholders owning 20% or more of DKL's common limited partner units.
• The NYSE does not require a publicly traded limited partnership like DKL to comply with certain of its corporate governance requirements.
• DKL's unitholders are required to pay income taxes on their share of DKL's taxable income even if they do not receive any cash distributions from DKL.
• As a result of investing in DKL's common limited partner units, DKL's unitholders may be subject to state and local taxes and return filing requirements in jurisdictions where DKL operates or owns or acquires properties.
• An impairment of DKL's long-lived assets or goodwill could reduce its earnings or negatively impact its financial condition and results of operations.
• DKL's ongoing study of strategic options could materially impact its strategic direction, business and results of operations.
• If DKL's cost efficiency measures are not successful, it may become less competitive.

Future Outlook

The Partnership expects liquid transportation fuels to remain in high demand and plans to leverage its cash flows and balance sheet to maximize unitholder returns and long-term prospects for return on investment.

Management Comments

• The Partnership is positioned to be a full-suite service provider, delivering crude, gas, and water solutions to our customers in the Permian Basin.
• We are continuing to strengthen our offering in the Midland basin through the acquisitions of H2O Midstream and Gravity.
• On the Delaware side, our gas processing plant expansion, including adding acid gas injection (AGI) and sour gas treating capabilities, are setting us up for multiple years of growth in the basin.
• These growth opportunities will continue to support our strong distribution growth while maintaining a healthy distributable cash flow coverage and leverage ratios.

Industry Context

The announcement reflects the ongoing trend of midstream companies expanding their service offerings and geographic footprint in key shale basins like the Permian, with a focus on water management and gas processing capabilities.

Comparison to Industry Standards

• The focus on long-term contracts and minimum volume commitments is a common strategy among midstream companies to ensure stable revenue streams, similar to Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP).
• The expansion into water disposal and recycling services aligns with the industry trend of providing comprehensive solutions to producers, as seen with companies like Select Water Solutions (WTTR) and WaterBridge Resources.
• The emphasis on ESG considerations and sustainable carbon efficiency is becoming increasingly important for midstream companies to attract investors and maintain a competitive edge, similar to initiatives undertaken by Kinder Morgan (KMI) and Williams Companies (WMB).

Related Party Transactions

• The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which we provide various services, including crude oil gathering and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings.
• The Partnership entered into an omnibus agreement with Delek Holdings, our general partner, Delek Logistics Operating, LLC, Lion Oil Company, LLC and certain of the Partnerships and Delek Holdings' other subsidiaries on November 7, 2012, which has been amended and restated from time to time in connection with acquisitions from Delek Holdings (collectively, as amended, the Omnibus Agreement).
• The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the DPG Management Agreement) for the construction of gathering systems in the Permian Basin.
• We purchased refined products from Delek Holdings, totaling $349.3 million during the year ended December 31, 2024.
• We sold RINs in the amount of approximately $7.0 million to Delek Holdings during the year ended December 31, 2024.

Stakeholder Impact

• The Partnership's performance and strategic decisions will impact its unitholders, employees, customers, suppliers, and creditors.
• The Partnership's commitment to environmental responsibility and long-term sustainability will impact the communities in which it operates.

Next Steps

• Continue to integrate the H2O Midstream and Gravity acquisitions.
• Complete the construction of the new natural gas processing plant and add AGI and sour gas processing capabilities.
• Evaluate and pursue opportunities to grow the business through organic growth and bolt-on acquisitions.
• Continue to enhance the profitability of existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization.
• Continue to look for ways to grow the business whilst staying conscious of and minimizing the negative environmental impact.

Key Dates