Delek Logistics(DKL) - 2019 Q4 - Annual Report

PART I Item 1. Business Delek Logistics Partners, LP operates crude oil and refined products logistics, highly integrated with Delek US Holdings, Inc., across pipelines and wholesale marketing segments - Delek Logistics Partners, LP, a Delaware limited partnership, was formed in 2012 by Delek US Holdings, Inc. and its subsidiary Delek Logistics GP, LLC[10] - The Partnership's assets are integral to and dependent on Delek Holdings' refining operations, with Delek Holdings as the primary customer for the majority of the contribution margin[11] - In May 2019, the Partnership invested $124.7 million for a 33% interest in the Red River Pipeline Joint Venture, plus $3.5 million for an expansion project to increase pipeline capacity from 150,000 bpd to 235,000 bpd[18] - On July 1, 2019, tariffs on FERC-regulated pipelines and throughput/storage fees decreased by approximately 0.1% due to changes in the FERC oil pipeline index[16] - Capacity agreements on the Paline Pipeline System with an unrelated third party and Delek Refining, Ltd. terminated on February 28, 2019, making capacity available at a tariff of $1.64 per barrel[17] Company Overview Significant Acquisitions 2019 Developments Assets and Operations Pipelines and Transportation Segment Wholesale Marketing and Terminalling Segment Joint Ventures Commercial Agreements Commercial Agreements with Delek Holdings Other Agreements with Delek Holdings Other Agreements with Third Parties Major Customers Employees Seasonality and Customer Maintenance Programs Working Capital Competition Pipelines and Transportation Wholesale Marketing and Terminalling Governmental Regulation and Environmental Matters Rate Regulation of Petroleum Pipelines Department of Transportation Environmental, Health and Safety Air Emissions and Climate Change Renewable Fuel Standard Hazardous Substances and Substances Water Item 1A. Risk Factors The Partnership faces significant risks from its dependence on Delek Holdings, operational hazards, cash flow, commodity price volatility, regulatory compliance, and partnership structure conflicts - The Partnership is substantially dependent on Delek Holdings, which accounted for approximately 87% of its contribution margin in 2019, exposing it to risks from Delek Holdings' nonpayment or operational difficulties[106] - Operations are subject to inherent risks and operational hazards, including business interruptions, mechanical failures, natural disasters, and cyber-attacks, which could lead to substantial losses and affect financial performance[112][113] - The Partnership's ability to pay quarterly distributions depends on cash flow, which can be affected by uncontrollable economic, financial, competitive, and regulatory factors, potentially decreasing unit price[123][124] - The Partnership is exposed to direct commodity price risk in its wholesale marketing business and interest rate risk on floating-rate debt, with potential losses from unsuccessful derivative strategies[159][160] - Conflicts of interest exist between the general partner (controlled by Delek Holdings) and unitholders, as the general partner may prioritize its own or Delek Holdings' interests, and unitholders have limited voting rights[258][259] Item 1B. Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments[363] Item 2. Properties Descriptions of the Partnership's properties are detailed in Item 1. 'Business - Assets and Operations' - Descriptions of the Partnership's properties are included in Item 1. 'Business - Assets and Operations'[364] Item 3. Legal Proceedings The Partnership is subject to routine legal proceedings, including environmental matters, with a 2013 Magnolia Release civil action settled in 2018, and no material adverse effects expected from current cases - The Partnership is subject to routine lawsuits, investigations, and claims, including environmental claims and employee-related matters[364] - A civil action related to the 2013 Magnolia Release was settled in December 2018 for $2.2 million, with final payments of $0.6 million to the State of Arkansas and $1.7 million to the DOJ made in November 2019[365] - Management does not believe that any currently pending legal proceeding will have a material adverse effect on the business, financial condition, or results of operations[364] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Partnership - Mine safety disclosures are not applicable[366] PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The Partnership's common units trade on the NYSE as 'DKL', with Delek Holdings holding a 63.4% ownership interest and a target of 5% annual distribution growth through 2020 - Common units trade on the NYSE under the symbol 'DKL'[369] - As of February 21, 2020, Delek Holdings and its affiliates owned 15,294,046 common units and 498,482 general partner units, representing a 63.4% ownership interest[369] - The Partnership Agreement requires quarterly distribution of all available cash to unitholders[370] - The general partner is entitled to 2.0% of all quarterly distributions and holds incentive distribution rights (IDRs) that can reach a maximum of 48.0% of cash distributed from Operating Surplus above $0.43125 per unit per quarter[373][374] - The Partnership aims to grow its distribution per limited partner unit by 5% annually through 2020[372] Unregistered Sales of General Partner Equity Securities (Q4 2019) | Date of Sale | Number of General Partner Units Sold | Price per General Partner Unit | Consideration Paid to the Partnership | | :-------------- | :----------------------------------- | :----------------------------- | :------------------------------------ | | December 10, 2019 | 170 | $32.72 | $5,569 | Item 6. Selected Financial Data This section presents selected consolidated financial data for the five years ended December 31, 2019, including income and balance sheet data, noting key acquisitions' impact on comparability - The Partnership acquired El Dorado Rail Offloading Racks and Tyler Crude Tank assets from Delek Holdings in March 2015, accounted for as common control transfers with retrospective adjustments to prior years' results[379][380] - In March 2018, the Partnership acquired Big Spring Logistic Assets from Delek Holdings as a common control transaction, with prior periods not recast as these assets did not constitute a business[380] Statements of Income and Other Comprehensive Income Data (2015-2019, in thousands except per unit data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :---------------------------------------------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net revenues | $583,992 | $657,609 | $538,075 | $448,059 | $589,669 | | Operating costs and expenses | 458,180 | 531,852 | 449,898 | 370,409 | 512,407 | | Operating income | 125,812 | 125,757 | 88,177 | 77,650 | 77,262 | | Net income attributable to partners | $96,749 | $90,182 | $69,409 | $62,804 | $66,848 | | Limited partners' interest in net income | $63,669 | $64,639 | $50,980 | $50,611 | $61,685 | | Net income per limited partner unit (Common - basic) | $2.61 | $2.65 | $2.09 | $2.08 | $2.55 | | Cash distributions per limited partner unit | $3.440 | $3.120 | $2.835 | $2.575 | $2.240 | Balance Sheet Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--------------------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Property, plant and equipment, net | $295,044 | $312,562 | $255,068 | $251,029 | $253,848 | | Total assets | 744,447 | 624,593 | 443,530 | 415,547 | 375,288 | | Total debt, including current maturities | 833,110 | 700,430 | 422,649 | 392,600 | 351,600 | | Total liabilities | 895,566 | 759,416 | 472,755 | 428,831 | 386,306 | | Total deficit | (151,119) | (134,823) | (29,225) | (13,284) | (11,018) | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A reviews the Partnership's financial performance, strategies, and market trends, aiming for stable cash flows and distribution growth through acquisitions and asset optimization, with 2019 seeing decreased net revenues but increased net income from equity investments - The Partnership's business consists of two reportable segments: Pipelines and Transportation, and Wholesale Marketing and Terminalling[404][405] - Key business strategies include generating stable cash flow through long-term, fee-based contracts, growing the business via strategic acquisitions and expansion projects (including joint ventures), engaging in mutually beneficial transactions with Delek Holdings, and optimizing existing assets while expanding the customer base[411][412][413][414][415][416][417] - Net revenues decreased by $73.6 million (11.2%) in 2019 compared to 2018, primarily due to lower average volumes and sales prices of gasoline and diesel in West Texas marketing operations[482][483] - Operating expenses increased by $15.4 million (26.2%) in 2019, driven by $7.1 million in cleanup costs for a diesel fuel release near Sulphur Springs, Texas, and higher allocated contract and employee costs[489] - Income from equity method investments increased by $13.6 million (218.3%) in 2019, primarily due to the addition of the Red River Pipeline Joint Venture and increased income from other joint ventures (Andeavor Logistics and CP LLC)[496] Forward-Looking Statements Business Overview Our Reporting Segments and Assets 2019 Developments Business Strategies Commercial Agreements with Delek Holdings Other Transactions How We Evaluate Our Operations Market Trends Non-GAAP Measures Results of Operations Non-GAAP Reconciliations Critical Accounting Policies and Estimates Consolidated Results of Operations - Comparison of the Year Ended December 31, 2019 versus the Year Ended December 31, 2018 Operating Segments Pipelines and Transportation Segment Wholesale Marketing and Terminalling Segment Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Partnership faces market risks from commodity price fluctuations and interest rate changes on floating-rate debt, with a 1% rate change impacting interest expense by $5.9 million, and LIBOR transition posing future borrowing cost risks - The Partnership's revenues and cash flows are sensitive to changes in commodity prices (crude oil, refined products, ethanol) and interest rates[564][565] - A hypothetical 1% change in interest rates on floating-rate debt outstanding as of December 31, 2019, would change interest expense by approximately $5.9 million[565] - The discontinuation of LIBOR after 2021 poses a risk, as the transition to an alternative reference rate could materially impact borrowing costs on variable rate indebtedness[566] Item 8. Financial Statements and Supplementary Data This item incorporates by reference the financial statements and supplementary data from page F-1 of this Annual Report on Form 10-K - The information required by Item 8 is incorporated by reference to the section beginning on page F-1[568] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in and disagreements with accountants on accounting and financial disclosure[568] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2019[569] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[572] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2019[573] Item 9B. Other Information There is no other information to report under this item - No other information to report[574] PART III Item 10. Directors, Executive Officers and Corporate Governance Delek Logistics GP, LLC, the general partner, is controlled by Delek Holdings, appointing officers and directors, with the Board comprising eight members, a majority being independent, and committees overseeing governance and executive incentives - Delek Logistics GP, LLC, the general partner, is an indirect subsidiary of Delek Holdings, which controls its officers and directors[577] - The Board of Directors has eight members, with five qualifying as independent directors under SEC and NYSE rules[580] - Executive officers of the general partner are employees of Delek Holdings; most devote less than 50% of their time to the Partnership's business, except for Mr. Sakazi[582] - The Board has an Audit Committee, Conflicts Committee, and EHS Committee, all composed of independent directors[606][609][613] - The Conflicts Committee administers the Long-Term Incentive Plan (LTIP) for awards to executives, aligning their interests with unitholders[616] Item 11. Executive Compensation Executive officers are compensated by Delek Holdings via long-term incentives under the LTIP, with no 2019 equity awards for NEOs, while non-officer directors receive cash retainers and annual phantom unit awards - Executive officers are employees of Delek Holdings and do not receive traditional fixed or discretionary compensation directly from the Partnership[621][626] - Executive compensation is primarily through long-term incentive awards (phantom units) under the LTIP, administered by the Conflicts Committee, to align interests with unitholders[627][628] - No plan-based equity awards were granted to NEOs in 2019, and no outstanding equity awards were held by NEOs at December 31, 2019[641][642][643] - Compensated Directors (non-officer/employee directors) receive cash retainers for Board and committee service, plus an annual equity award of phantom units[651] Compensation of Directors in 2019 | Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Total ($) | | :-------------------- | :------------------------------ | :--------------- | :-------- | | Charles J. Brown, III | 87,000 | 99,991 | 186,991 | | Francis C. D'Andrea | 90,900 | 99,991 | 190,891 | | Eric D. Gadd | 88,100 | 99,991 | 188,091 | | Ron W. Haddock | 78,900 | 99,991 | 178,891 | | Reuven Spiegel | 96,500 | 99,991 | 196,491 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of February 21, 2020, Delek US Holdings, Inc. beneficially owned 62.7% of common units and 100% of general partner units, with other significant holders and 582,505 securities available for future issuance under equity compensation plans Security Ownership of Certain Beneficial Owners and Management (as of Feb 21, 2020) | Name of Beneficial Owner | Common Units () | Common Units (%) | General Partner Units () | General Partner Units (%) | Common Stock Delek US Holdings, Inc. () | Common Stock Delek US Holdings, Inc. (%) | | :-------------------------------- | :--------------- | :--------------- | :------------------------ | :------------------------ | :--------------------------------------- | :--------------------------------------- | | Delek US Holdings, Inc. | 15,294,046 | 62.7 | 498,482 | 100.0 | n/a | n/a | | Tortoise Capital Advisors, L.L.C. | 60,250 | 7.2 | — | n/a | n/a | n/a | | Ezra Uzi Yemin | 267,522 | 1.1 | — | n/a | 761,124 | 1.0 | | Assaf Ginzburg | 16,510 | * | — | n/a | 33,641 | * | | Frederec Green | 68,552 | * | — | n/a | 125,085 | * | Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | | :------------------------------------------------------- | :---------------------------------------------------------------------------------------- | :---------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | 582,505 | N/A | 87,310 | | Equity compensation plans not approved by security holders | — | N/A | — | | TOTAL | 582,505 | N/A | 87,310 | Item 13. Certain Relationships and Related Transactions, and Director Independence The Partnership has significant related party transactions with Delek Holdings due to its majority ownership, including cash distributions and commercial agreements, governed by the Omnibus Agreement and a formal related party transactions policy - Delek Holdings and its affiliates hold a 63.4% ownership interest in the Partnership, leading to numerous related party transactions[667] - In 2019, $83.0 million of the $113.7 million in total cash distributions were paid to Delek Holdings and the general partner, including incentive distribution rights[671] - The Partnership has long-term, fee-based commercial agreements with Delek Holdings for various logistics and marketing services, with minimum throughput commitments[673] - The Omnibus Agreement outlines non-compete clauses, a right of first offer for Delek Holdings' logistics assets, reimbursement for certain operating and capital expenditures, and indemnification for environmental, title, and tax matters[674] - The Board has a formal written related party transactions policy, generally requiring approval by the Board or the Conflicts Committee for transactions exceeding $2.5 million annually or those outside the ordinary course of business[681][684] Item 14. Principal Accountant Fees and Services Ernst & Young LLP served as the independent auditor, with audit fees of $694,050 in 2019 and audit-related fees of $54,622, all pre-approved by the Audit Committee to ensure independence Principal Accountant Fees (in USD) | Fee Type | 2019 | 2018 | | :---------------- | :-------- | :-------- | | Audit fees | $694,050 | $677,525 | | Audit-related fees | $54,622 | $81,447 | | Tax fees | $0 | $0 | | All other fees | $0 | $0 | - All services performed by Ernst & Young LLP were pre-approved by the Audit Committee, which has a policy to ensure auditor independence[691][692] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K, including organizational documents, commercial agreements, and certifications - The section includes the Index to Financial Statements and Schedule, and a list of exhibits[696] - Exhibits include organizational documents (Certificate of Limited Partnership, Partnership Agreement), debt instruments (Indenture for 2025 Notes, Credit Agreement), commercial agreements with Delek Holdings and third parties, and equity compensation plans[699][700] - Certifications by the Chief Executive Officer and Chief Financial Officer, and the Report of Independent Registered Public Accounting Firm for Red River Pipeline Company LLC are also filed as exhibits[703] Financial Statements Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Partners' Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 1. General 2. Accounting Policies 3. Acquisitions 4. Related Party Transactions 5. Revenues 6. Net Income Per Unit 7. Inventory 8. Property, Plant and Equipment 9. Goodwill 10. Other Intangible Assets 11. Long-Term Obligations 12. Equity 13. Equity Based Compensation 14. Equity Method Investments 15. Segment Data 16. Income Taxes 17. Commitments and Contingencies 18. Leases 19. Selected Quarterly Financial Data (Unaudited) 20. Subsequent Events This section presents the audited consolidated financial statements of Delek Logistics Partners, LP for 2017-2019, including reports, balance sheets, income statements, equity statements, cash flows, and detailed notes on financial position and policies - The consolidated financial statements include the balance sheets as of December 31, 2019 and 2018, and statements of income, partners' equity, and cash flows for the three years ended December 31, 2019[708] - Ernst & Young LLP issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[708][710][716] - The financial statements are prepared in conformity with U.S. GAAP and include estimates and assumptions that affect reported amounts[740] Item 16. Form 10-K Summary This item states that there is no Form 10-K Summary - No Form 10-K Summary is provided[916] Signatures The report is signed by Delek Logistics GP, LLC's Director, EVP, and CFO, Assaf Ginzburg, along with the Chairman and other directors, affirming compliance with the Securities Exchange Act of 1934 - The report is signed by Assaf Ginzburg, Director, Executive Vice President and Chief Financial Officer of Delek Logistics GP, LLC, on behalf of Delek Logistics Partners, LP[920] - Signatures also include Ezra Uzi Yemin, Chairman of the Board of Directors and Chief Executive Officer, and other directors, affirming compliance with the Securities Exchange Act of 1934[920]