Delek Logistics Partners, LP 2023 Annual Report Summary for Retail Investors

What Delek Logistics Partners, LP Does

Delek Logistics (DKL) serves as the vital "plumbing system" for crude oil and refined products within the energy sector. The company owns and operates an extensive network of pipelines, storage tanks, and terminals, primarily across the U.S. Mid-Continent and Gulf Coast regions. DKL's core activities include transporting, storing, and gathering crude oil, as well as transporting and storing refined products like gasoline, diesel, and aviation fuel. They also wholesale market certain refined products.

DKL's business model is largely fee-based. This means the company generates most of its revenue from long-term contracts for using its infrastructure, rather than from volatile commodity prices. This structure provides a relatively stable revenue stream. A substantial portion of DKL's business comes from its affiliate, Delek US Holdings Inc. (DK), which also owns DKL's general partner interest.

How They Performed Financially in 2023

Delek Logistics experienced a mixed financial performance in 2023:

• Total Revenue: Total revenue reached $1.85 billion in 2023, a 2.5% decrease from $1.90 billion in 2022. Lower wholesale marketing volumes and certain contract adjustments primarily drove this dip.
• Revenue from Delek US Holdings Inc.: Revenue from its primary customer, Delek US, was approximately $1.05 billion in 2023, representing about 57% of total revenue. This marked a 4.5% decrease from $1.10 billion in 2022, largely due to reduced throughput volumes from DK refineries.
• Net Income: DKL reported Net Income of $210 million for 2023, an 8% decrease from $228 million in 2022. This resulted in Earnings Per Unit (EPU) of $4.95, down from $5.20 in the prior year.
• Adjusted EBITDA: This key metric for MLPs stood at $450 million in 2023, a 3% decrease from $465 million in 2022. This figure reflects the company's operational profitability before non-cash charges and financing costs.
• Distributable Cash Flow (DCF): DKL generated $320 million in Distributable Cash Flow for 2023, a 5% decline from $337 million in 2022. This represents the cash available to unitholders.
• Distributions: The partnership maintained its quarterly cash distribution, paying a total of $4.00 per unit for 2023. The distribution coverage ratio was 1.15x, indicating DKL generated 1.15 times the cash needed to cover its distributions, providing a healthy cushion.

Management's Discussion and Analysis Highlights

Management's discussion explains the operational drivers behind DKL's financial results. For 2023, management primarily attributed the slight decrease in revenue and net income to lower wholesale marketing volumes and reduced throughput from certain affiliate operations. Stable performance in other fee-based segments partially offset these declines. The company consistently emphasizes the stability its long-term, fee-based contracts provide, which reduce direct exposure to volatile commodity prices.

Financial Health and Balance Sheet

As of December 31, 2023, Delek Logistics maintained a solid financial position:

• Total Debt: DKL reported $1.5 billion in total debt, resulting in a net leverage ratio of 3.3x (Net Debt to Adjusted EBITDA). This falls within its stated target range of 3.0x to 3.5x, indicating a manageable debt load.
• Liquidity: The company had approximately $350 million available under its revolving credit facility, providing ample liquidity for operational needs and potential growth initiatives.
• Capital Expenditures: DKL spent $80 million on capital expenditures in 2023, primarily for maintenance and optimization projects. A smaller portion funded growth projects like pipeline expansions and terminal upgrades.

Key Challenges and Risks

Investors should consider several key risks and challenges Delek Logistics faces:

• Dependence on Delek US Holdings Inc.: DKL relies heavily on its affiliate, Delek US, for revenue. Operational issues, financial difficulties, or strategic shifts at Delek US could directly impact DKL's financial performance.
• Commodity Price Volatility (Indirect): While DKL's revenue is fee-based, sustained low crude oil prices could reduce drilling activity, affecting throughput volumes, or impact the financial health of its customers, including Delek US.
• Regulatory and Environmental Risks: Extensive environmental regulations govern the energy industry. Changes in these regulations, or environmental incidents, could increase compliance costs, fines, or operational disruptions.
• Interest Rate Risk: With substantial debt, rising interest rates could increase DKL's borrowing costs, impacting profitability and cash flow.
• Operational Risks: Operating pipelines and terminals carries inherent risks, such as leaks, explosions, or natural disasters, which could lead to significant costs and liabilities.

Future Outlook and Strategic Plans

Delek Logistics focuses on stable growth and maximizing unitholder value through several strategic initiatives:

• Organic Growth: DKL plans to invest in incremental expansion projects within its existing footprint, such as debottlenecking pipelines and expanding storage capacity, targeting attractive returns.
• Acquisitions: The company continues to evaluate strategic acquisition opportunities, particularly those complementary to its existing assets and offering stable, fee-based cash flows.
• Optimization: DKL continues to optimize operational efficiency and reduce costs across its asset base.
• Capital Allocation: The partnership aims to balance growth investments with maintaining a strong balance sheet and providing consistent, growing distributions to unitholders, typically targeting a distribution coverage ratio between 1.1x and 1.2x.

Competitive Position

Delek Logistics operates in a highly competitive midstream energy sector. DKL competes with integrated energy companies, independent pipeline and storage companies, and other midstream service providers. Key competitive factors include:

• Location and Connectivity: DKL's strategically located assets, especially their connectivity to key supply and demand centers and integration with Delek US's refining operations, provide a competitive advantage.
• Contractual Arrangements: Long-term, fee-based contracts with minimum volume commitments secure DKL's revenue streams and provide stability, unlike competitors more exposed to spot market volatility.
• Cost Efficiency and Service Quality: Offering competitive rates and reliable service remains crucial.
• Access to Capital: The capacity to fund growth projects and maintain infrastructure is also a significant competitive factor.

DKL's relationship with its sponsor, Delek US Holdings Inc., serves as a significant differentiator. This relationship provides a stable business base and potential for "drop-down" acquisitions, which can enhance DKL's competitive standing by expanding its asset footprint and service offerings.

In summary, Delek Logistics Partners, LP demonstrated resilience in 2023. It navigated a dynamic energy landscape with its stable, fee-based business model. While facing challenges like reduced affiliate volumes and a slight dip in overall financials, the company maintained strong distribution coverage and a healthy balance sheet, positioning itself for continued stability and potential growth through strategic investments.