Delek Logistics(DKL) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the unaudited financial statements and management's analysis of the Partnership's financial performance and condition Item 1. Financial Statements (unaudited) This section presents unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with detailed notes on key financial aspects Condensed Consolidated Balance Sheets This section provides the condensed consolidated balance sheets, detailing assets, liabilities, and partners' equity at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Total Assets | $1,709,464 | $1,679,299 | $30,165 | 1.8% | | Total Current Assets | $117,641 | $65,230 | $52,411 | 80.3% | | Accounts receivable from related parties | $67,089 | $— | $67,089 | N/A | | Total Liabilities | $1,848,616 | $1,790,000 | $58,616 | 3.3% | | Long-term debt, net of current portion | $1,726,429 | $1,646,567 | $79,862 | 4.8% | | Total Deficit | $(139,152) | $(110,700) | $(28,452) | 25.7% | Condensed Consolidated Statements of Comprehensive Income This section presents the condensed consolidated statements of comprehensive income, detailing revenues, operating income, interest expense, and net income per unit Condensed Consolidated Statements of Comprehensive Income (in thousands, except per unit data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | 3M Change | 3M % Change | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | 9M Change | 9M % Change | | :----------------------------------- | :------------------------------ | :------------------------------ | :---------- | :------------ | :----------------------------- | :----------------------------- | :---------- | :------------ | | Net Revenues | $275,824 | $294,025 | $(18,201) | -6.2% | $766,260 | $767,356 | $(1,096) | -0.1% | | Operating Income | $62,554 | $59,017 | $3,537 | 6.0% | $186,433 | $148,061 | $38,372 | 25.9% | | Interest Expense, net | $36,901 | $22,559 | $14,342 | 63.6% | $104,581 | $53,621 | $50,960 | 95.0% | | Net Income Attributable to Partners | $34,825 | $44,674 | $(9,849) | -22.1% | $104,088 | $116,352 | $(12,264) | -10.5% | | Basic Net Income Per Limited Partner Unit | $0.80 | $1.03 | $(0.23) | -22.3% | $2.39 | $2.68 | $(0.29) | -10.8% | | Diluted Net Income Per Limited Partner Unit | $0.80 | $1.03 | $(0.23) | -22.3% | $2.39 | $2.67 | $(0.28) | -10.5% | | Cash Distributions Per Common Limited Partner Unit | $1.045 | $0.990 | $0.055 | 5.6% | $3.105 | $2.955 | $0.150 | 5.1% | Condensed Consolidated Statements of Partners' Equity (Deficit) This section details the condensed consolidated statements of partners' equity (deficit), including changes in total deficit, cash distributions, and net income attributable to partners Condensed Consolidated Statements of Partners' Equity (Deficit) (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change | | :----------------------------------- | :----------- | :----------- | :------- | | Balance, Total Deficit | $(139,152) | $(110,700) | $(28,452) | | Cash distributions (9M) | $(134,374) | $(128,030) | $(6,344) | | Net income attributable to partners (9M) | $104,088 | $116,352 | $(12,264) | Condensed Consolidated Statements of Cash Flows This section presents the condensed consolidated statements of cash flows, summarizing cash activities from operations, investing, and financing, and their impact on cash and cash equivalents Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change | % Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net cash provided by operating activities | $110,630 | $297,482 | $(186,852) | -62.8% | | Net cash used in investing activities | $(55,634) | $(705,087) | $649,453 | -92.1% | | Net cash (used in) provided by financing activities | $(58,784) | $418,258 | $(477,042) | -114.1% | | Net (decrease) increase in cash and cash equivalents | $(3,788) | $10,653 | $(14,441) | -135.6% | | Cash and cash equivalents at the end of the period | $4,182 | $14,945 | $(10,763) | -72.0% | | Cash paid during the period for: Interest | $89,524 | $37,890 | $51,634 | 136.3% | Notes to Condensed Consolidated Financial Statements This section provides detailed notes offering context and additional information for the condensed consolidated financial statements Note 1 - Organization and Basis of Presentation This note describes the Partnership's formation, operational expansion through acquisitions, and the basis for preparing its unaudited financial statements - The Partnership, formed in April 2012 by Delek US Holdings, Inc. ("Delek Holdings"), provides gathering, pipeline, transportation, storage, wholesale marketing, terminalling, and water disposal/recycling services[19][21] - The Delaware Gathering Acquisition, completed on June 1, 2022, expanded operations into crude oil and natural gas gathering, processing, and transportation, as well as water disposal and recycling in the Delaware Basin of New Mexico[20][21] - Unaudited condensed consolidated financial statements are prepared in conformity with GAAP; the adoption of ASU 2023-03 in July 2023 had no material impact, and ASU 2023-06 is not expected to have a material impact[22][25][27] Note 2 - Acquisitions This note details the Delaware Gathering Acquisition, including its purchase price, financing, scope of operations, and the allocation of the purchase price - The Delaware Gathering Acquisition was completed on June 1, 2022, for a purchase price of $628.3 million, financed by cash on hand and DKL Credit Facility borrowings[28][31] - The acquisition included crude oil and natural gas gathering, processing, and transportation, as well as water disposal and recycling operations in the Delaware Basin of New Mexico[28] - Goodwill of $14.8 million was recognized, primarily attributed to enhancing third-party revenues, diversifying customer and product mix, expanding footprint, and bolstering ESG optionality[35] Delaware Gathering Acquisition Purchase Price Allocation (in thousands, as of June 1, 2022) | Asset/Liability | Fair Value | | :-------------------------------- | :--------- | | Property, plant and equipment | $382,799 | | Customer relationship intangible, net | $210,000 | | Goodwill | $14,848 | | Total assets acquired | $663,423 | | Total liabilities assumed | $35,123 | | Fair value of net assets acquired | $628,300 | Note 3 - Related Party Transactions This note outlines the Partnership's commercial agreements, operational services, and financial arrangements with Delek Holdings, including a new revolving credit facility - The Partnership has long-term, fee-based commercial agreements with Delek Holdings for various logistics services, with fees subject to inflation-based adjustments and minimum volume commitments[39] - The Omnibus Agreement governs operational services and reimbursement obligations, including an annual fee of $4.3 million paid to Delek Holdings for centralized corporate services[41] - A new Related Party Revolving Credit Facility with Delek Holdings was entered into on November 6, 2023, providing $70.0 million in revolving borrowings for working capital and general corporate purposes, maturing June 30, 2028[45][63] Summary of Related Party Transactions (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues | $156,411 | $127,150 | $414,403 | $375,270 | | Purchases | $115,149 | $124,714 | $298,262 | $374,329 | | Operating and maintenance expenses | $15,944 | $16,478 | $47,742 | $39,741 | | General and administrative expenses | $3,233 | $4,556 | $11,112 | $10,708 | Note 4 - Revenues This note provides a breakdown of consolidated revenue by segment and details expected revenue from remaining performance obligations under commercial agreements Consolidated Revenue by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Gathering and Processing | $94,825 | $108,610 | $280,494 | $215,480 | | Wholesale Marketing and Terminalling | $147,110 | $147,865 | $378,246 | $444,181 | | Storage and Transportation | $33,889 | $37,550 | $107,520 | $107,695 | | Total Revenue | $275,824 | $294,025 | $766,260 | $767,356 | - As of September 30, 2023, the Partnership expects to recognize approximately $1.2 billion in lease revenues from unfulfilled performance obligations related to minimum volume commitments and capacity utilization under commercial agreements with Delek Holdings[52][53] Expected Revenue on Remaining Performance Obligations (in thousands, as of Sep 30, 2023) | Period | Amount | | :-------------------------- | :--------- | | Remainder of 2023 | $81,164 | | 2024 | $234,385 | | 2025 | $205,116 | | 2026 | $196,025 | | 2027 and thereafter | $464,925 | | Total expected revenue | $1,181,615 | Note 5 - Net Income Per Unit This note presents the basic and diluted net income per limited partner unit, along with weighted average units outstanding and cash distributions per unit Net Income Per Limited Partner Unit | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic Net Income Per Unit | $0.80 | $1.03 | $2.39 | $2.68 | | Diluted Net Income Per Unit | $0.80 | $1.03 | $2.39 | $2.67 | | Weighted average limited partner units outstanding (Basic) | 43,588,316 | 43,485,779 | 43,578,636 | 43,477,801 | | Cash distributions per common limited partner unit | $1.045 | $0.990 | $3.105 | $2.955 | Note 6 - Long-Term Obligations This note details the Partnership's outstanding borrowings under various debt instruments, including facility capacities, maturity dates, interest rates, and covenant compliance Outstanding Borrowings Under Debt Instruments (in thousands) | Debt Instrument | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | DKL Revolving Facility | $811,200 | $720,500 | | DKL Term Facility | $288,750 | $300,000 | | 2028 Notes (7.125%) | $400,000 | $400,000 | | 2025 Notes (6.75%) | $250,000 | $250,000 | | Principal amount of long-term debt | $1,749,950 | $1,670,500 | | Long-term debt, net of current portion | $1,726,429 | $1,646,567 | - The DKL Revolving Facility's total capacity was increased by $150.0 million to $1.050 billion on November 6, 2023, and its maturity date is October 13, 2027 (subject to acceleration)[59] - The DKL Term Facility's maturity was extended to April 15, 2025 (subject to acceleration), with a weighted average borrowing rate of approximately 8.92% as of September 30, 2023[58] - A new Related Party Revolving Credit Facility with Delek Holdings was entered into on November 6, 2023, providing $70.0 million in revolving borrowings, maturing June 30, 2028, and bearing interest at Term SOFR plus 3.00%[63][64] - The Partnership was in compliance with covenants on all debt instruments as of September 30, 2023[62] Note 7 - Equity This note provides details on the Partnership's limited partner units outstanding, including public and Delek Holdings ownership, and quarterly cash distributions Limited Partner Units Outstanding | Metric | Dec 31, 2022 | Sep 30, 2023 | | :----------------------------------- | :----------- | :----------- | | Common - Public | 9,257,305 | 9,284,741 | | Common - Delek Holdings | 34,311,278 | 34,311,278 | | Total | 43,568,583 | 43,596,019 | | Delek Holdings ownership | N/A | 78.7% | Quarterly Cash Distributions | Quarter Ended | Total Quarterly Distribution Per Limited Partner Unit | Total Cash Distribution (in thousands) | | :-------------------------- | :------------------------------------------ | :------------------------------------- | | Sep 30, 2022 | $0.990 | $43,057 | | Sep 30, 2023 | $1.045 | $45,558 | Note 8 - Equity Method Investments This note details the Partnership's equity method investments in pipeline joint ventures, including their operational scope and summarized financial information - The Partnership owns a 33% interest in Red River Pipeline Company LLC, which operates a 16-inch crude oil pipeline from Cushing, Oklahoma to Longview, Texas with a capacity of 235,000 bpd[71] Red River Pipeline Company LLC Summarized Financial Information (100% basis, in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $65,299 | $69,475 | | Net income | $41,441 | $44,386 | - The Partnership also holds interests in two other joint ventures (CP LLC and Andeavor Logistics) that operate crude oil pipeline systems in the Permian Basin and Gulf Coast regions, serving third parties and Delek Holdings subsidiaries[73] Combined Summarized Financial Information for CP LLC & Andeavor Logistics (100% basis, in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $39,501 | $32,402 | | Net Income | $22,637 | $16,501 | Partnership's Investment Balances in Joint Ventures (in thousands) | Joint Venture | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Red River | $140,939 | $149,635 | | CP LLC | $60,112 | $64,056 | | Andeavor Logistics | $40,886 | $43,331 | | Total Equity Method Investments | $241,937 | $257,022 | Note 9 - Segments This note outlines the Partnership's four reportable segments and the key performance measure used for evaluating segment performance - The Partnership aggregates its operating segments into four reportable segments: Gathering and Processing; Wholesale Marketing and Terminalling; Storage and Transportation; and Investments in Pipeline Joint Ventures, with unallocated costs in Corporate and Other[76] - Segment reporting was realigned in Q4 2022, with Segment EBITDA becoming the key performance measure for planning and forecasting (except for Investments in Pipeline Joint Ventures, which uses net income)[77][78] Segment EBITDA (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Gathering and Processing | $52,906 | $56,551 | $161,014 | $127,129 | | Wholesale Marketing and Terminalling | $28,135 | $20,272 | $78,071 | $59,813 | | Storage and Transportation | $17,914 | $14,575 | $46,316 | $40,212 | | Investments in Pipeline Joint Ventures | $9,288 | $8,567 | $22,889 | $22,666 | | Corporate and Other | $(10,002) | $(11,003) | $(24,111) | $(30,349) | | Consolidated EBITDA | $98,241 | $88,962 | $284,179 | $219,471 | Note 10 - Commitments and Contingencies This note addresses the Partnership's exposure to legal proceedings, environmental regulations, and potential liabilities from hydrocarbon releases - The Partnership is subject to lawsuits, investigations, and claims, including environmental and employee-related matters, but does not believe any currently pending legal proceedings will have a material adverse effect on its financial statements[82] - The company is subject to extensive federal, state, and local environmental and safety laws and regulations, anticipating continuing capital investments and changes in operating procedures for compliance[83][84] - Releases of hydrocarbons or hazardous substances could result in substantial expenses if not insured or reimbursed under the Omnibus Agreement[85] Note 11 - Subsequent Events This note discloses significant events that occurred after the reporting period, specifically a declared quarterly cash distribution - On October 25, 2023, the board of directors declared a quarterly cash distribution of $1.045 per unit, payable on November 13, 2023[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Partnership's financial performance, significant trends, and future outlook, covering business overview, strategic objectives, operational metrics, market trends, and non-GAAP financial measures Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements reflecting current estimates, expectations, and projections about future results, performance, prospects, and opportunities[91] - These statements are subject to risks and uncertainties that could cause actual performance or results to differ materially, including substantial dependence on Delek Holdings, industry dynamics, commodity price volatility, and regulatory changes[92] - Forward-looking statements are not guarantees of future performance, and past performance is not a reliable indicator of future results[95][96] Executive Summary: Management's View of Our Business and Strategic Overview This section provides an executive overview of the Partnership's business, strategic objectives, and key financial performance, emphasizing its diversified asset base and recessionary protections - The Partnership primarily owns and operates crude oil, intermediate, and refined products logistics and marketing assets, as well as crude oil and natural gas gathering and water processing assets[99] - The Delaware Gathering Acquisition in June 2022 expanded third-party revenue and diversified the customer base, providing comprehensive logistics services in the Delaware Basin[99] Key Financial Performance (9M 2023 vs. 9M 2022) | Metric | 9M 2023 | 9M 2022 | Change | | :----------------------------------- | :-------- | :-------- | :------- | | Net Income | Decreased by $12.3M | N/A | N/A | | EBITDA | Increased by $64.7M | N/A | N/A | | Gathering and Processing Segment EBITDA | $161.0M | $127.1M | +$33.9M | | Wholesale Marketing and Terminalling Segment EBITDA | Increased by $18.3M | N/A | N/A | - The Partnership is well-positioned to manage economic downturns due to built-in recessionary protections, including minimum volume commitments and dedicated acreage agreements[102] - Inflationary-linked rate increases effective July 1, 2023, included a 13.3% increase for FERC regulated pipelines, 17.6% for CPI-adjusted fees, and 18.9% for PPI-adjusted fees[104] Segment Overview This section describes the Partnership's four reportable segments, outlining their primary operations and exposure to commodity price risks - The Partnership operates through four reportable segments: Gathering and Processing; Wholesale Marketing and Terminalling; Storage and Transportation; and Investments in Pipeline Joint Ventures, with unallocated costs in Corporate and Other[106] - The Gathering and Processing segment includes Midland and Delaware Gathering Assets, providing crude oil and natural gas gathering, processing, and transportation, without direct exposure to commodity price changes for transported products[107] - The Wholesale Marketing and Terminalling segment is exposed to market risks related to the volatility of commodity and refined product prices in its West Texas operations[108] - The Storage and Transportation segment provides transportation and storage services without direct exposure to changes in commodity prices[109] Strategic Overview This section outlines the Partnership's long-term strategic objectives, focusing on stable cash flow, distribution growth, and business expansion through various initiatives - Long-term strategic objectives focus on maintaining stable cash flows and growing quarterly distributions through asset base expansion via acquisitions, project development, joint ventures, and system enhancements[112] - Key 2023 strategic focus areas include generating stable cash flow through long-term, fee-based contracts with minimum volume commitments, and growing the business via strategic acquisitions (with a focus on third-party business)[113][114] - Other strategic areas include leveraging joint ventures, pursuing mutually beneficial transactions with Delek Holdings (e.g., right of first offer), evaluating expansion opportunities, optimizing existing assets, expanding the customer base, and enhancing ESG consciousness to lower the carbon footprint[114] How We Evaluate Our Operations This section describes the key metrics and factors used by the Partnership to evaluate its operational performance, revenue generation, expense management, and capital funding - The Partnership evaluates segment performance using key metrics such as volumes (pipeline throughput, terminal volumes), operating and maintenance expenses, cost of materials and other, EBITDA, distributable cash flow, and net income of joint ventures[117] - Revenue generation is primarily dependent on the volumes of crude oil and refined products handled, influenced by supply/demand, Delek Holdings' minimum volume commitments, and the ability to execute acquisitions and organic expansion projects[118][120] - Operating and maintenance expenses are managed to maximize profitability, while cost of materials and other includes purchased refined products, trucking costs, leased pipeline capacity, and commodity hedging activities[119][122] - The Partnership anticipates funding future capital expenditures primarily from operating cash flows, borrowings under its revolving credit facility, and potential future issuances of equity and debt securities[123] Market Trends This section discusses how fluctuations in commodity prices and market demand impact the midstream energy sector and the Partnership's operations, highlighting risk mitigation strategies - Fluctuations in crude oil, natural gas, NGL, and refined product prices significantly impact the midstream energy sector, influencing drilling activity, capital spending, and refinery production decisions[125] - Most logistics services are under long-term fee-based contracts with minimum volume commitments or dedicated acreage agreements, which mitigate short-term financial risk to price and demand volatility[126] - Sustained depressed demand/prices could curb exploration and production expansion opportunities or impact customers' willingness/ability to renew commercial agreements[126] - Recent expansion of gas processing capabilities has improved customer and geographic diversification, lowering concentration risk and adding service offerings[126] Non-GAAP Measures This section defines and reconciles non-GAAP financial measures, including EBITDA and distributable cash flow, which management uses to evaluate performance and future prospects - Management uses non-GAAP measures, including EBITDA and distributable cash flow, to evaluate operating segment performance and future prospects[131] - EBITDA is defined as net income before net interest expense, income tax expense, depreciation, and amortization (including customer contract intangible assets)[131] - Distributable cash flow is calculated as net cash flow from operating activities, adjusted for changes in assets and liabilities, less maintenance capital expenditures and other non-cash adjustments[131] Reconciliation of Net Income to EBITDA (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $34,825 | $44,674 | $104,088 | $116,352 | | Add: Income tax expense | $127 | $387 | $685 | $793 | | Add: Depreciation and amortization | $24,585 | $19,540 | $69,417 | $43,297 | | Add: Amortization of customer contract intangible assets | $1,803 | $1,802 | $5,408 | $5,408 | | Add: Interest expense, net | $36,901 | $22,559 | $104,581 | $53,621 | | EBITDA | $98,241 | $88,962 | $284,179 | $219,471 | Reconciliation of Net Cash from Operating Activities to Distributable Cash Flow (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $46,828 | $164,425 | $110,630 | $297,482 | | Changes in assets and liabilities | $16,439 | $(94,450) | $81,368 | $(115,358) | | Distributions from equity method investments in investing activities | $3,037 | $— | $4,477 | $1,737 | | Non-cash lease expense | $(2,960) | $(2,100) | $(7,407) | $(13,584) | | Regulatory capital expenditures | $(2,069) | $(2,143) | $(5,924) | $(3,183) | | (Refund to) reimbursement from Delek Holdings for capital expenditures | $(69) | $19 | $942 | $5 | | Accretion of asset retirement obligations | $(177) | $(168) | $(529) | $(415) | | Deferred income taxes | $(124) | $(76) | $(753) | $(76) | | Gain on disposal of assets | $491 | $132 | $804 | $120 | | Distributable cash flow | $61,396 | $65,639 | $183,608 | $166,728 | Summary of Financial and Other Information This section provides a summary of key financial and operational data, highlighting net revenues, operating income, net income, EBITDA, and per-unit metrics Summary Statement of Operations Data (in thousands, except per unit amounts) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenues | $275,824 | $294,025 | $766,260 | $767,356 | | Operating income | $62,554 | $59,017 | $186,433 | $148,061 | | Net income attributable to partners | $34,825 | $44,674 | $104,088 | $116,352 | | EBITDA | $98,241 | $88,962 | $284,179 | $219,471 | | Basic Net income per limited partner unit | $0.80 | $1.03 | $2.39 | $2.68 | | Diluted Net income per limited partner unit | $0.80 | $1.03 | $2.39 | $2.67 | - The Partnership reports operating results in four reportable segments: Gathering and Processing; Wholesale Marketing and Terminalling; Storage and Transportation; and Investments in Pipeline Joint Ventures[141][143] - Management measures the operating performance of each reportable segment based on Segment EBITDA[141] Results of Operations This section analyzes the consolidated and segment-specific financial performance for the three and nine months ended September 30, 2023, compared to the prior year Consolidated Results of Operations — Comparison of the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 This section compares the consolidated financial results for the three and nine months ended September 30, 2023, against the same periods in 2022, detailing changes in revenues, expenses, and interest - Consolidated net revenues decreased by $1.1 million (-0.1%) for the nine months ended September 30, 2023, primarily due to a $66.7 million decrease in West Texas marketing revenue and a $17.2 million decrease in Delaware Gathering revenue (lower natural gas prices), partially offset by increased throughput from Delaware Gathering operations and Midland Gathering new connections[145][146] - Cost of materials and other decreased by $75.4 million (-15.7%) for the nine months ended September 30, 2023, mainly driven by a $78.4 million decrease in West Texas marketing costs and a $16.9 million decrease in Delaware Gathering costs (lower natural gas prices)[147][149] - Operating expenses increased by $21.7 million (+33.4%) for the nine months ended September 30, 2023, primarily due to incremental expenses associated with Delaware Gathering operations[151] - General and administrative expenses decreased by $11.2 million (-36.2%) for the nine months ended September 30, 2023, mainly due to higher outside services associated with the Delaware Gathering Acquisition in the prior year[153] - Depreciation and amortization increased by $26.1 million (+60.3%) for the nine months ended September 30, 2023, due to assets acquired in the Delaware Gathering Acquisition and new projects[153] - Interest expense increased significantly by $51.0 million (+95.0%) for the nine months ended September 30, 2023, driven by increased borrowings for the Delaware Gathering Acquisition and higher floating interest rates[155][158] Operating Segments This section provides a detailed analysis of the financial performance for each of the Partnership's operating segments Gathering and Processing Segment This section analyzes the financial performance of the Gathering and Processing segment, detailing changes in net revenues, costs, operating expenses, and Segment EBITDA Gathering and Processing Segment Performance (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Revenues | $94,825 | $108,610 | $280,494 | $215,480 | | Cost of materials and other | $20,676 | $36,606 | $65,557 | $53,087 | | Operating expenses | $20,733 | $14,775 | $55,586 | $34,484 | | Segment EBITDA | $52,906 | $56,551 | $161,014 | $127,129 | - Net revenues for the Gathering and Processing segment decreased by $13.8 million (-12.7%) in Q3 2023, primarily due to a $17.2 million decrease in Delaware Gathering operations revenue from lower natural gas prices[164][169] - Net revenues increased by $65.0 million (+30.2%) for the nine months ended September 30, 2023, driven by incremental revenues from Delaware Gathering operations and increased throughput from new connections in Midland Gathering operations[164][169] - Segment EBITDA increased by $33.9 million (+26.7%) for the nine months ended September 30, 2023, primarily due to additional EBITDA from Delaware Gathering operations and increased throughput from new connections in Midland Gathering[172] Delaware Gathering Assets Volumes (average per day) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Natural Gas Gathering and Processing (Mcfd) | 69,737 | 64,429 | 72,569 | 61,198 | | Crude Oil Gathering (bpd) | 111,973 | 86,483 | 110,935 | 84,497 | | Water Disposal and Recycling (bpd) | 99,158 | 69,411 | 104,920 | 66,043 | Wholesale Marketing and Terminalling Segment This section analyzes the financial performance of the Wholesale Marketing and Terminalling segment, detailing changes in net revenues, costs, operating expenses, and Segment EBITDA Wholesale Marketing and Terminalling Segment Performance (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Revenues | $147,110 | $147,865 | $378,246 | $444,181 | | Cost of materials and other | $115,702 | $122,612 | $292,094 | $372,629 | | Operating expenses | $4,990 | $5,750 | $13,447 | $15,136 | | Segment EBITDA | $28,135 | $20,272 | $78,071 | $59,813 | | West Texas marketing gross margin per barrel | $4.56 | $4.23 | $5.43 | $3.84 | - Net revenues decreased by $65.9 million (-14.8%) for the nine months ended September 30, 2023, primarily due to a $66.7 million decrease in West Texas marketing operations from lower average sales prices and diesel volumes[177] - Cost of materials and other decreased by $80.5 million (-21.6%) for the nine months ended September 30, 2023, mainly due to a $78.4 million decrease in West Texas marketing operations from lower average cost per gallon and diesel volumes[181] - Segment EBITDA increased by $18.3 million (+30.5%) for the nine months ended September 30, 2023, driven by increases in terminalling utilization and improved wholesale margins[186] Storage and Transportation Segment This section analyzes the financial performance of the Storage and Transportation segment, detailing changes in net revenues, costs, operating expenses, and Segment EBITDA Storage and Transportation Segment Performance (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenues | $33,889 | $37,550 | $107,520 | $107,695 | | Cost of materials and other | $14,245 | $18,521 | $50,182 | $54,082 | | Operating expenses | $3,098 | $4,174 | $12,763 | $13,116 | | Segment EBITDA | $17,914 | $14,575 | $46,316 | $40,212 | - Net revenues decreased by $3.7 million (-9.7%) in Q3 2023, primarily due to decreased trucking activity, partially offset by an increase in storage revenue from rate increases[190][194] - Cost of materials and other decreased by $3.9 million (-7.2%) for the nine months ended September 30, 2023, primarily due to decreased trucking activity[192] - Segment EBITDA increased by $6.1 million (+15.2%) for the nine months ended September 30, 2023, driven by an increase in storage and transportation rates[196] Investments in Pipeline Joint Ventures Segment This section describes the strategic focus and financial performance of the Investments in Pipeline Joint Ventures segment, highlighting its role in supporting Delek Holdings' operations and benefiting from minimum volume commitments - This segment focuses on strategic joint venture investments in crude oil pipeline systems that support Delek Holdings' operations by offering connections to takeaway pipelines, alternative crude supply sources, and flow of high-quality crude oil[198] - These joint ventures benefit from minimum volume commitment (MVC) agreements with major shippers, including related entities, which provide stability during periods of low activity[198] - Segment EBITDA for Investments in Pipeline Joint Ventures was $22.9 million for the nine months ended September 30, 2023, a slight increase from $22.7 million in the prior year[80][81] Liquidity and Capital Resources This section discusses the Partnership's sources of capital, cash distribution policies, cash flow activities, debt structure, and capital spending plans Sources of Capital This section outlines the Partnership's primary capital sources, current liquidity, and its ability to meet future funding requirements - The Partnership's primary sources of capital include cash generated from operations, borrowings under its revolving credit facility, and potential issuances of additional debt or equity securities[200] - As of September 30, 2023, total liquidity amounted to $93.2 million, comprising $89.0 million in unused credit commitments under the DKL Credit Facility and $4.2 million in cash and cash equivalents[200] - The Partnership believes it has sufficient financial resources to meet its funding requirements for the next 12 months, including working capital, quarterly cash distributions, and capital expenditures[201] Cash Distributions This section details the Partnership's recent cash distribution declaration and its policy regarding quarterly distributions to partners - On October 25, 2023, a quarterly cash distribution of $1.045 per common unit was declared for Q3 2023, payable on November 13, 2023, representing a 5.6% increase over the Q3 2022 distribution[205][206] - The annualized distribution rate is approximately $4.180 per unit[205] - The Partnership Agreement requires the distribution of all available cash quarterly, but there is no legal obligation to distribute any particular amount per common unit[206] Cash Flows This section summarizes the Partnership's consolidated cash flow activities, detailing changes in cash from operating, investing, and financing activities Summary of Consolidated Cash Flows (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :------- | | Net cash provided by operating activities | $110,630 | $297,482 | $(186,852) | | Net cash used in investing activities | $(55,634) | $(705,087) | $649,453 | | Net cash (used in) provided by financing activities | $(58,784) | $418,258 | $(477,042) | | Net (decrease) increase in cash and cash equivalents | $(3,788) | $10,653 | $(14,441) | - Net cash provided by operating activities decreased by $186.9 million for the nine months ended September 30, 2023, primarily due to increased cash payments to suppliers and for salaries, and higher interest paid[208] - Net cash used in investing activities decreased by $649.5 million, mainly due to the absence of the $625.4 million Delaware Gathering Acquisition in 2023[209] - Net cash provided by financing activities decreased by $477.0 million, primarily driven by a $458.2 million decrease in net borrowings under the revolving credit facility[210] Debt Overview This section provides an overview of the Partnership's total indebtedness, including details on debt instruments, interest rates, maturities, and recent amendments to credit facilities - As of September 30, 2023, total indebtedness was $1,750.0 million, an increase of $79.5 million from December 31, 2022, primarily due to borrowings under the DKL Credit Facility[211] Total Indebtedness (as of Sep 30, 2023) | Debt Instrument | Principal Amount (in millions) | Average/Effective Interest Rate | Maturity | | :----------------------------------- | :----------------------------- | :------------------------------ | :--------- | | DKL Revolving Facility | $811.2 | 8.45% | Oct 13, 2027 | | DKL Term Facility | $288.8 | 8.92% | Apr 15, 2025 | | 2025 Notes | $250.0 | 7.18% | 2025 | | 2028 Notes | $400.0 | 7.39% | 2028 | | Total Indebtedness | $1,750.0 | N/A | N/A | - On November 6, 2023, amendments to the DKL Credit Facility increased the revolving credit commitments to $1.050 billion and extended the DKL Term Loan maturity date to April 15, 2025[214] - A new $70.0 million Related Party Revolving Credit Facility with Delek Holdings was also entered into on November 6, 2023, maturing June 30, 2028[215] - The Partnership was in compliance with all debt covenants as of September 30, 2023[216] Capital Spending This section outlines the Partnership's capital expenditure program, categorizing projects into regulatory, sustaining, and growth, and detailing their funding sources - The capital expenditure program includes regulatory maintenance, sustaining capital expenditures, and growth projects, with regulatory and sustaining projects generally funded by cash from operations[218][219] Total Capital Spending (in thousands, Nine Months Ended Sep 30, 2023) | Segment | Regulatory | Sustaining | Growth | Total | | :----------------------------------- | :----------- | :----------- | :------- | :------- | | Gathering and Processing | $31 | $980 | $61,157 | $62,168 | | Wholesale Marketing and Terminalling | $371 | $754 | $1,402 | $2,527 | | Storage and Transportation | $1,670 | $2,263 | $— | $3,933 | | Total Capital Spending | $2,072 | $3,997 | $62,559 | $68,628 | - The capital expenditure 2023 full-year forecast is expected to be between $85.0 million to $90.0 million[220] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines the Partnership's exposure to market risks, including the sensitivity of revenues and cash flows to changes in commodity prices, interest rate risk from floating-rate debt, and the potential impact of inflation on operating results - The Partnership's revenues and cash flows are sensitive to changes in commodity prices (crude oil, natural gas, NGLs, refined products, ethanol), which can impact operating margins[223] - The Partnership is exposed to interest rate risk from floating-rate debt under the DKL Credit Facility, with approximately $1,100.0 million outstanding as of September 30, 2023. A hypothetical 1% change in interest rates would impact interest expense by approximately $11.0 million annually[224] - Inflationary factors may adversely affect operating results if increases in input costs, operating expenses, and interest rates are not offset by corresponding increases in product and service prices[225] Item 4. Controls and Procedures Management concluded that the Partnership's disclosure controls and procedures were effective as of September 30, 2023, and reported no material changes to internal control over financial reporting during the third quarter of 2023 - The Principal Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures were effective as of September 30, 2023[227] - There were no material changes in internal control over financial reporting during the third quarter of 2023[228] PART II. OTHER INFORMATION This part provides additional information beyond the financial statements, including legal proceedings, risk factors, other disclosures, and exhibits Item 1. Legal Proceedings The Partnership is involved in various lawsuits, investigations, and claims in the ordinary course of business, including environmental and employee-related matters, but management does not anticipate any currently pending legal proceedings will have a material adverse effect on the business, financial condition, or results of operations - The Partnership is subject to lawsuits, investigations, and claims, including environmental and employee-related matters, in the ordinary course of business[231] - Management does not believe that any currently pending legal proceedings will have a material adverse effect on the Partnership's business, financial condition, or results of operations[231] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously identified in the Partnership's fiscal 2022 Annual Report on Form 10-K - There have been no material changes to the risk factors identified in the Partnership's fiscal 2022 Annual Report on Form 10-K[232] Item 5. Other Information This section discloses a Rule 10b5-1 trading arrangement adopted by a director/CFO, details recent amendments to the DKL Credit Agreement which increased revolving credit commitments and extended the Term Loan maturity, and announces the establishment of a new Related Party Revolving Credit Facility with Delek Holdings - Reuven Spiegel, Director, Executive Vice President & Chief Financial Officer, adopted a Rule 10b5-1 trading arrangement on August 10, 2023, for the sale of up to 6,300 common limited partner units, expiring April 11, 2025[233] - On November 6, 2023, amendments to the DKL Credit Facility increased the Revolving Credit Commitments by $150.0 million to an aggregate of $1.050 billion and extended the Term Loan Maturity Date to April 15, 2025[234] - A new Promissory Note, the Related Party Revolving Credit Facility, was entered into with Delek Holdings on November 6, 2023, providing $70.0 million in revolving borrowings (senior and subordinated tranches) for working capital and general corporate purposes, maturing June 30, 2028[236] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including amendments to the DKL Credit Facility, a promissory note with Delek US Holdings, Inc., and various certifications - Key exhibits include the First, Second, and Third Amendments to the Fourth Amended and Restated Senior Secured Revolving Credit Facility, dated November 6, 2023[239] - Exhibit 10.4 is a Promissory Note dated November 6, 2023, by and among the Partnership and Delek US Holdings, Inc[239] - Certifications from the Principal Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14(a)/15(d)-14(a) and 18 U.S.C. Section 1350) are also filed[239] SIGNATURES The report is duly signed on behalf of Delek Logistics Partners, LP by its General Partner, Delek Logistics GP, LLC, through its Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer, dated November 8, 2023 - The report was signed on November 8, 2023[242] - Signatories include Avigal Soreq (Director and President, Principal Executive Officer), Reuven Spiegel (Director, Executive Vice President and Chief Financial Officer, Principal Financial Officer), and Robert Wright (Senior Vice President and Chief Accounting Officer, Principal Accounting Officer)[242]