DKL

Delek Logistics Partners, LP - Q1 2025 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2025. Delek Logistics Partners, LP (DKL) operates midstream assets primarily in the Permian Basin and Gulf Coast, providing gathering, processing, transportation, storage, and wholesale marketing services. A significant portion of the business remains contracted to its sponsor, Delek US Holdings, Inc. ("Delek Holdings"), though the Partnership is actively pursuing third-party diversification through recent acquisitions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Mix Shift: Net revenues decreased slightly by 0.9% ($2.1 million). This was driven by a reclassification of certain throughput and storage fees from revenue to interest income under sales-type lease accounting, offset by incremental revenue from the Gravity and H2O Midstream acquisitions ($39.4 million combined).
• Profitability: Net income increased 19.6% ($6.4 million) despite lower EBITDA. The EBITDA decline of 15.8% ($16.0 million) was primarily due to the aforementioned accounting reclassification and lower wholesale marketing margins.
• Acquisitions: The Partnership closed the Gravity Acquisition on January 2, 2025, for $300.8 million (cash and units), adding water disposal and recycling operations. The H2O Midstream acquisition (closed Sept 2024) also contributed fully to Q1 2025 results.
• Capital Structure: Total debt increased by $269.7 million, primarily due to increased borrowings under the revolving credit facility to fund the Gravity Acquisition and capital projects. Interest expense rose slightly by 2.2%.
• Segment Performance:
  • Gathering & Processing: EBITDA increased $10.2 million, driven by new acquisitions.
  • Wholesale Marketing: EBITDA decreased $12.0 million due to lower margins and lease accounting changes.
  • Storage & Transportation: EBITDA decreased $13.7 million, largely due to lease accounting reclassifications.

Guidance, Outlook, and Risks

• Strategic Outlook: Management focuses on increasing third-party revenue to reduce dependence on Delek Holdings. The Partnership is commissioning a natural gas processing plant expansion in the Delaware Basin, expected to reach full capacity in late 2025.
• Distributions: A quarterly distribution of $1.110 per unit was declared on April 28, 2025, representing a 3.7% increase over Q1 2024. The annualized run rate is approximately $237.2 million.
• Capital Allocation: The Partnership has a $150 million unit repurchase program with Delek Holdings. In Q1 2025, it repurchased 243,075 units for $10.0 million, leaving $140 million remaining.
• Subsequent Events: On May 1, 2025, Delek Holdings transferred the Delek Permian Gathering purchasing and blending business to the Partnership ("DPG Dropdown") and entered into agreements to purchase the El Dorado rail facility assets from the Partnership for $25.0 million (closing Jan 1, 2026).
• Risks: Key risks include dependence on Delek Holdings, commodity price volatility affecting wholesale margins, regulatory changes (environmental/safety), and the ability to secure funding for growth projects.

Investor Verification Checklist

• Lease Accounting Impact: Verify the long-term impact of reclassifying throughput fees to interest income on reported revenue and EBITDA trends.
• Acquisition Integration: Monitor the integration progress and cash flow accretion of the Gravity and H2O Midstream acquisitions.
• Deleverage Strategy: Assess the trajectory of the debt-to-EBITDA ratio given the increased debt load from the Gravity Acquisition and the $235.3 million full-year 2025 capital spending forecast.
• Third-Party Diversification: Track the percentage of revenue derived from third-party customers versus Delek Holdings to gauge progress on economic separation.
• Subsequent Transaction Closing: Confirm the closing of the El Dorado rail facility sale to Delek Holdings in January 2026 and the impact on asset base.