Delek Logistics Partners (DKL) Q1 2023 Earnings Call Transcript

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Delek Logistics Partners (DKL 1.10%)
Q1 2023 Earnings Call
May 08, 2023, 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Delek Logistics Partners first quarter 2023 conference call. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rosy Zuklic.

Please go ahead, ma'am.

Rosy Zuklic -- Vice President, Investor Relations and Market Intelligence

Good morning and welcome to the Delek Logistics Partners first quarter earnings conference call. Participants on today's call will include Avigal Soreq, president; Joseph Israel, EVP, operations; Reuven Spiegel, EVP and chief financial officer; and Odely Sakazi, SVP, Delek Logistics. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including, without limitation, statements regarding guidance and future business outlook. These statements involve risks and uncertainties that may cause actual results to differ from our forecasts.

For more information, please refer to the risk factors discussed in the company'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 company assumes no obligation to update any forward-looking statements or information, which speak of their respective dates. Before I turn the call over to Avigal, I just want to remind everyone of a reporting change we made last quarter. After the 3 Bear acquisition, we reorganized our business and changed the naming of Delek Permian Gathering to Midland Gathering.

The 3 Bear Gathering assets are now referred to as Delaware Gathering. Avigal.

Avigal Soreq -- President

Thank you, Rosy. Delek Logistics Partners started 2023 with another record quarter. Our logistics system end well, contributing to a record EBITDA of over $93 million. Delek Logistics continue to deliver a solid operation performance and generating strong cash flow.

This is due to investments we have made to develop our assets. As an example, compared with last year, we have more than doubled the volume in the Midland Gathering system. In addition, during the quarter, Delek Logistics continued its track record of a safe and reliable operation. As of the end of March, DKL employees and contractors have worked a combined of 4 million man-hours, with zero lost time injuries.

I'm extremely proud of our employees and contractors who continue to focus on safety and achieve milestones. On April 28th, our board of directors approved a 4.6% increase in the quarterly distribution to $1 and 2.5 cents per limited partner unit for the first quarter. This marks 41 consecutive quarterly distribution increases for the partnership, and we are committed to continuing this trend. This increase demonstrate our commitment to our unitholders and our confidence in our business.

We continue to be optimistic on the outlook for the midstream business and believe Delek Logistics is well-positioned to continue its strong track record of growth. I will now hand it over to Reuven.

Reuven Spiegel -- Chief Financial Officer

Thank you, Avigal. Total EBITDA for DKL was 93 million for the first quarter of '23, compared with 66 million in the same period in '22. For the first quarter of '23, distributable cash flow was 62 million and the DCF coverage ratio was 1.38 times. For the gathering and processing segment, EBITDA this quarter was 55 million, compared with 32 million in the first quarter of '22.

The increase was primarily driven by strong contribution by the Midland Gathering system, as well as Delaware Gathering, which was added in June of '22. Throughput of the Midland Gathering averaged approximately 222,000 barrels per day for the first quarter of '23. This was up from an average of about 100,000 barrels per day in the first quarter of '22. The wholesale marketing and terminalling segment EBITDA of 22 million for the quarter and was in line with our prior year.

The storage and transportation segment had EBITDA of 13 million this first quarter, compared with 11 million during the same period last year. The increase was primarily from higher utilization and fees. And lastly, the investment in pipeline joint venture segment contributed 6 million toward the first quarter of '23, compared with 7 million in the first quarter of '22. The decrease was from lower throughput due to the Delek-Tyler refinery turnaround in the first quarter of '23.

Going forward, we expect JV contribution to DKL to revert to normal levels of approximately 8 million a quarter. Moving to capital expenditure. First quarter of '23 capital spending was 36 million, of which 33 million was for growth project, namely advancing new connections in the Delaware and Midland Gathering system. For '23, we maintained with our capital outlook of 81 million.

With that, we can open the call for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] And the first question will come from Justin Jenkins with Raymond James. Please go ahead.

Justin Jenkins -- Raymond James -- Analyst

Great. Thanks. I think we covered a good bit already on the DK call, but just a couple of high-level questions, if I could, probably for Avigal. First, on Permian operations, just with the commodity price moves and rig count changes that we've seen, can we get an update on what you're seeing in the overall operating environment and what that means for the volume outlook for both of the systems?

Avigal Soreq -- President

Yeah. Absolutely, Justin. Thanks for taking the time joining us this call and thank you for the question. So, over the last year, we have seen the Midland total production going up, call it, 10%.

And in our area, we've seen that more than doubled. And that's a great trend. And we are extremely happy with the results we are seeing, and we are extremely happy with the relationship we have with the producer and the amount of rigs we see on site. So, it's really encouraging the results and the trend that we are seeing around the ROC and around the operation.

So, I think that on the area side of DPG, we got it right. Very happy with the performance that we see on what used to be 3 Bear, now the Delaware area, and that they went extremely well for us. That will present, Justin. And you know that a good opportunity and a good way to going forward and keep increasing the distribution, 41 quarters in a row, and we have a long way ahead of us to continue that trend.

Justin Jenkins -- Raymond James -- Analyst

Perfect. I guess, second one, even more broad than my first question, just how you see, Avigal, DKL evolving here in 2023 and maybe what the overall M&A backdrop looks like as well.

Avigal Soreq -- President

So, we have demonstrated in the 3 Bear area that there is a gap between the private market and the public market. We think that DKL as a unit is a great unit to hold because of distribution because of the -- how solid it is and because of the consistency we did over that. And I'm sure that we'll find a pathway forward to keep bridging those gaps and bring the investors greater distribution and great performance going forward. So, encouraging and good times.

Justin Jenkins -- Raymond James -- Analyst

Great. Thanks, Avigal. I'll leave it there.

Avigal Soreq -- President

Thank you.

Operator

The next question will come from Doug Irwin with Citi. Please go ahead.

Doug Irwin -- Citi -- Analyst

Hey. Thanks for the question. Just want to start with the balance sheet, maybe if we kind of look at leverage this quarter, it moved a little bit lower, but the absolute debt level actually increased a bit. Could you maybe just talk about where you see leverage trending throughout the year and maybe give a little context about kind of how much of that is driven by EBITDA growth versus maybe the ability to pay down some debt later this year?

Avigal Soreq -- President

Yeah. Thanks for the question, Doug. I will start and Reuben will continue. So, the only reasoning, we did draw some funds for capital project, which worked very nice for us with the improvement in EBITDA.

So, that was a good decision. Going forward, toward the year, Doug, we see the leverage ratio going down, and we have a good pathway for that. So, we're optimistic on that as well. I don't know, Reuven, if you want to add anything.

Reuven Spiegel -- Chief Financial Officer

Just a little bit of color. Thirty-six million of capex in the first quarter was 45% of our annual plan, and we say -- we expect to stay within that guideline of 81 million. So, that was one reason why the draw, especially that most of the draw was for growth capital projects. And we do expect the trend of the leverage ratio to continue to go down every quarter.

Doug Irwin -- Citi -- Analyst

OK. Great. That's helpful. Then just one maybe around costs.

I know you've outlined kind of a cost reduction initiative at the DK level. Just curious kind of where DKL might fit into that and if you're seeing any kind of potential opportunities for cost reductions at MLP level as well.

Avigal Soreq -- President

So, thanks, and that's a great question. We are looking on all area of the business, how we can make it more tight and focused and productive. Obviously, DKL is part of that. And I'm sure that we'll see some improvement over there as well.

Odely, you want to say anything on that? You are leading that spearhead.

Odely Sakazi -- Senior Vice President

No. No. For sure. Just to give a little bit of color, we do are looking on a couple of opportunities to be able to achieve later this year, specifically from efficiencies and also capabilities that we're doing.

That's obviously reflected both in the gross margin but also on the opex to make sure that we're doing everything right and safe. So, it's definitely will be applied. Most of the capital, as Reuven mentioned, was done primarily in Q1. So, as we're going to move forward, we're going to see that side will be lower.

So, that's going to be resolved with also improving opex as well.

Doug Irwin -- Citi -- Analyst

Got it. That's all I had. Thanks for the time.

Avigal Soreq -- President

Thank you.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Avigal Soreq for any closing remarks. Please go ahead.

Avigal Soreq -- President

Yes. I would like to thank our DKL employees, first of all, for the safe and reliable operation. The mark of 4 million hours without lost time injury is really remarkable, and we are looking forward to hit the five now. And so, first of all, our employees, our investors, board of directors, and everyone that took the time to join us today for the call, a really impressive time to have a best quarter after best quarter and really enjoying the ride.

Thank you so much, and we'll see you soon next quarter.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Rosy Zuklic -- Vice President, Investor Relations and Market Intelligence

Avigal Soreq -- President

Reuven Spiegel -- Chief Financial Officer

Justin Jenkins -- Raymond James -- Analyst

Doug Irwin -- Citi -- Analyst

Odely Sakazi -- Senior Vice President

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