Delek Logistics Partners LP

Thank you for standing by. My name is JL, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Delac Logistics Partners Q2 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to ask a question, simply press star one again. I would now like to turn the conference over to Robert Wright, Deputy CFO. You may begin.

Good morning, and welcome to the Dellick Logistics Partners Second Quarter Earnings Conference Call. Participants joining me on today's call will include Abigail Sorek, President, Joseph Israel, EVP Operations, Ruben Spiegel, EVP and Chief Financial Officer, and Odeli Sakazi, SVP, Dellick Logistics. As a reminder, this conference call will contain forward-looking statements as defined under the federal security laws, including statements regarding guidance and future business outlooks. These statements involve risks and uncertainties that may cause actual results to differ from our forecast. For more information, please refer to the risk factors discussed in the partnership's most recently filed annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC, along with the press release associated with this call. The partnership assumes no obligation to update any forward-looking statements or information. I will now turn the call over to Abigail for opening remarks. Abigail? Thank you, Robert.

The Electrologistics partner had another record quarter. We reported $102.4 million quarterly adjusted EBITDA. I am pleased with our continued performance. We have made several announcements today. DKL is the premier full-service crude, water, and natural gas provider in the prolific Permian Basin. And the transaction we have announced today will significantly enhance our position. First, let's talk about the contract between DKL, DK, and Winked Webster Pipeline. We announced an amendment extent of the contract between DKL and DK. The extensions remove an overhang on the DKL unit. It moves away from a month-to-month to contract terms of up to seven years. These amendments allow us to acquire DK's interest in the W2W pipeline without significant strain on our balance sheet. W2W is the premier crude oil pipeline backed by investment-grade counterparties. It increases the overall asset quality at DKL and enhance DKL permit position. Second DKL announcement today is the investment in a new gas processing plant. This plant is highly subscribed and is estimated to generate cash-on-cash returns of more than 20%. We are looking to complete the plant during the first half of 2025. The last transaction DKL announced today is the acquisition of H2O midstream for $160 million of cash and $70 million preferred. The transaction is immediately accretive to DKL on an EBITDA and free cash flow basis. The acquired asset fits very well within DKL existing footprint. further expand our capabilities to be comprehensive provider of midstream services in the permanent basin. Once these transactions are complete in the first half of 2025, a majority of DKL EBITDA will be from non-related parties, making DKL mostly independent midstream company. In July, The Board of Directors approved an increase in the quarterly distribution to $1.09 per unit. The logistics has shown a strong track record of delivering value to unit holders. We are excited about the announcement that we have made today and the opportunities ahead of us. I want to welcome the H2O team to the DKL family and wish them continued success and good luck. I will now hand it over to Ruben. Thank you, Abigail. As Abigail mentioned, we are growing DELEC logistics with the prudent management of liquidity and leverage. The liquidity we created in the beginning of the year has allowed us to carry out the transaction we have announced today. We are also managing our leverage, which has improved to 3.81 times at the end of the second quarter of 24, from its high point of 4.84 at the end of 22 and 4.34 at the end of 23. Moving on to our second quarter results. The second quarter adjusted EBITDA was 102.4 million compared to 92.8 million in the same period of 2023. The suitable cash flow was 68 million and the DCF coverage ratio was 1.32 times. For the gathering and processing segment, EBITDA for the quarter was $54.7 million compared to $52.6 million in the second quarter of 2023. The increase was primarily due to higher throughput from DELEC logistics premium base and assets. Wholesale marketing and terminaling EBITDA was $30.2 million compared to $28 million in the prior year. The increase was primarily from higher terminaling utilization. Storage and transportation EBITDA in the quarter was $16.8 million compared to 15 million in the second quarter of 23. The increase was mainly driven by higher storage and transportation rates. And lastly, the investment in pipeline joint venture segment contributed 7.9 million this quarter compared to 7.3 million in the second quarter of 23. Moving on to capital expenditures. The capital program for the second quarter of 24 was 10.2 million. Most of the spend in the quarter was for growth projects, namely, advancing new connections in the Midland and Delaware gathering system. Along with our previously announced capital budget for 24, we expect to spend 90 to 100 million in the second half of 24 on new processing plant. With that, we can open the call for questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you're called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking a question. Your first question comes from the line of Neil Dingman of Truist Securities. Your line is open.

Good afternoon, guys. Thanks for the time. My first question is just on the H2O midstream acquisition, which looks very attractive. Just wondering, maybe can you talk a little bit about, you mentioned here about the new full suite of services, how that improves sort of opportunities. I'm just wondering how that will improve, you know, as you have future customer opportunities. And then secondly, you all talked about the potential near-term cost and revenue synergies. I'd love to hear maybe more about that.

Yeah, absolutely, Neil. So there are three aspects to that. One, the same customer, you can have a more comprehensive view about these that you are doing with customers. The second point around it is that basically the operation are on the top of each other, so you can be very efficient on the way you run your operation. And the third is infrastructure can be relevant for both services. So this is a creative, very creative deal for us, and it is extremely synergistic.

No, I would agree. And then secondly, just on the new Delaware gas plant, what could the timing, I know maybe jumping the gun a little bit on this one, but I like that there's, I think there is some future additional gas processing opportunities you all could have around there, you know, beginning next year after you close. And I'm just wondering what, how soon could you see some of those future gas opportunities and, you know, what might that consist of?

Yeah, so our gas plant is a completely synergetic with the current gut sense we have. We said that we're going to complete the second – the first half of 2025, and we – it's already being nicely subscribed, so I don't know if you want to add into that.

Yeah, just a little bit, and to your comment, Neil, to be honest, right now we already have the associate need for additional capacity for what we're seeing. with our producer currently and also going forward. So this is why we feel very comfortable on the volume on that new plan that is already highly subscribed, as Abigail mentioned. So we see that timing pretty much as soon as possible from our standpoint.

Great, guys. Nice additions on both sides. Thank you. Thank you.

Your next question comes from line of Doug Irwin of Citi. Your line is open.

Hey, thanks for the question. I just wanted to touch on the $55 to $85 million EBITDA range you provided for the transactions this morning. I was wondering if you could talk about some of the assumptions for the high end versus the low end of that range. Is that mostly dependent on some of the H2O midstream synergies, or there may be some other factors under consideration there? And then should we expect that to kind of be a good run rate for 25, or is that ramping over time?

So the, so there are three main components around it, right, like we outlined. One is the decay contract amendment extent. Second is the W2W. And third is the H2O midstream. And fourth is the gas processing plan. What I think the majority of that is not coming from synergies. It's coming from the base business. And we, and I think that the good estimation is to take the midpoint out of that.

It's a good number to assume going forward.

Okay, great. That's helpful. And then I was just wondering if you could provide a little more detail around the funding expectations for the cash components of these transactions. And if I look at slide six in the presentation materials, it looks like maybe some units are changing hands here as part of the link to Webster and recontracting. Just wanted to clarify on interpreting that correctly, and if so, maybe get a little more detail around how that might play into the deconsolidation priorities of the DK.

Yeah, absolutely. So there are units that are changing hands, but the net amount is not big between the companies. So it's like we exchange value from one company to another, and we got it pretty tax efficient. So that's good news. So you don't need to pay a lot of attention into that part of the equation. What we basically did, and you can appreciate it, I'm sure, we put the right asset either under the right ownership put W2W where it naturally belongs and exchange it for a value that belongs to the refineries.

Yadav, that's all for me. Appreciate the questions. Thank you.

With no further questions, that concludes our Q&A session. We'll now turn the conference back over to CEO Avigal Sorak for closing remarks.

Thank you. So I would like to thank my leadership around this table, our employees, our board of directors, for you investors, and welcome the H2O team to the DKL family. Thank you, guys, and we'll talk next, next quarter.

This concludes today's conference call. You may notice