Business Context and Reporting Period
This Form 8-K, dated November 1, 2012, reports the completion of an initial public offering (IPO) and related material agreements by Delek Logistics Partners, LP. The offering closed on November 7, 2012, establishing the Partnership as a publicly traded entity focused on crude oil and refined product logistics, including pipelines, storage, and terminalling.
Key Financial Metrics and Capital Structure
- Offering Proceeds: The Partnership sold 8,000,000 common units at $21.00 per unit, with underwriters exercising a full option for an additional 1,200,000 units. Gross proceeds totaled approximately $193.2 million, with net proceeds of approximately $176.2 million after discounts and expenses.
- Debt Financing: The Partnership entered into a $175.0 million senior revolving credit facility with Fifth Third Bank, maturing in five years. It includes a $50.0 million letter of credit sublimit and a $7.0 million swing line sublimit. An accordion feature allows for an additional $50.0 million in commitments.
- Debt Repayment: Approximately $63.0 million of the net proceeds was used to retire outstanding indebtedness under a predecessor revolving credit facility.
- Cash Distributions: Approximately $76.5 million was distributed to Delek US Holdings, Inc. (Delek), comprising a $50.0 million distribution to the General Partner and a $26.5 million distribution to Delek Marketing & Supply, LLC.
- Working Capital: Approximately $35.0 million was allocated to replenish working capital and replace accounts receivable distributed to Delek.
- Ownership Structure: Following the offering, Delek affiliates own approximately 60.4% of the limited partner interest (including subordinated units), while the General Partner holds a 2.0% general partner interest.
Material Changes and Agreements
The filing details the execution of several definitive agreements effective November 7, 2012:
- Omnibus Agreement: Establishes an annual administrative fee of $2.7 million payable to Delek, outlines non-compete provisions, and grants the Partnership a right of first offer on future logistics assets.
- Commercial Agreements: The Partnership secured long-term throughput commitments from Delek Refining and Lion Oil Company. Key terms include:
- East Texas Crude Logistics: 35,000 bpd minimum throughput at $0.40/barrel.
- Lion Pipeline System: Minimum commitments of 46,000 bpd for crude and 40,000 bpd for refined products.
- Terminalling: Exclusive use agreements for Big Sandy and Memphis terminals with minimum volume commitments and storage fees.
- Asset Contributions: Lion Oil contributed the Memphis and Nashville terminals and interests in SALA, El Dorado, and Magnolia pipelines in exchange for subordinated units and common units.
Outlook, Risks, and Contingencies
- Operational Contingency: The Big Sandy terminal, idle since 2008, cannot operate until a third-party pipeline returns to service. Repairs are expected by the end of 2012, but completion is not guaranteed as Delek does not control the repairs.
- Subordination Period: Subordinated units held by Lion Oil will not participate in distributions until the Partnership meets specific distribution thresholds ($1.50 or $2.25 per unit annually) for consecutive periods ending after 2015 or 2013, respectively.
- Credit Covenants: The new credit facility requires a minimum interest coverage ratio of 2.00 to 1.00 and a maximum leverage ratio of 3.50 to 1.00. It also mandates interest rate hedging for at least 50% of funded loans for three years.
- Related Party Transactions: Significant ongoing relationships with Delek and Lion Oil create dependency risks, though agreements include fee floors and adjustment mechanisms tied to the FERC oil pipeline index.
Investor Verification Checklist
- Verify the status of the third-party pipeline repairs required to resume operations at the Big Sandy terminal.
- Confirm the actual utilization of the $175.0 million revolving credit facility and compliance with the 2.00x interest coverage and 3.50x leverage covenants.
- Monitor the conversion timeline of the 11,999,258 subordinated units held by Lion Oil based on distribution performance.
- Review the specific terms of the "shortfall payments" in commercial agreements to understand revenue stability if minimum volume commitments are not met.
- Assess the impact of the $2.7 million annual administrative fee and other related-party costs on distributable cash flow.