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Delek US announces agreement to dropdown logistic assets

Published by , Editorial Assistant
World Pipelines,

Delek US Holdings, Inc. (Delek US) and Delek Logistics Partners, LP (Delek Logistics) have announced an agreement for the dropdown of the Big Spring gathering system to Delek Logistics for total consideration of US$100 million in cash and 5.0 million common units representing limited partnership interest in Delek Logistics. The transaction is effective 31 March 2020, and is expected to be immediately accretive to Delek Logistics' distributable cash flow per unit.

These assets and services are projected to generate incremental annual earnings before interest, taxes, depreciation and amortisation (EBITDA) of approximately US$30 - US$32 million. Delek Logistics will finance the cash component of this dropdown through a combination of cash on hand and borrowings on the revolving credit facility.

"This adds the next step in growth for Delek Logistics,” said Uzi Yemin, Chairman, President and Chief Executive Officer of Delek US and Delek Logistics. “The Big Spring Gathering System is an integral piece of our expanding midstream footprint, which positions us uniquely among refiners with access to crude, in excess of our refining capabilities. Additionally, getting closer to the wellhead allows us to control crude quality and cost, providing improvement in our refining performance and cost structure.”

Asset and other information to consider:

  • The Big Spring Gathering System is an approximately 200-mile crude oil gathering system with approximately 350 000 bpd throughput capacity located in Howard, Borden and Martin Counties, Texas and connecting to the Delek US terminal located near Big Spring, Texas and to a third party pipeline system.
  • Minimum Volume Commitments: 120 000 bpd for the Big Spring Gathering System in addition to 50 000 bpd connection to a third party pipeline system.
  • Limited IDR Waiver: Delek US will waive the incentive distribution rights (IDRs) associated with the equity consideration. This IDR waiver will automatically and permanently expire following the payment of distributions in respect of any period of four consecutive quarters ending on or after 31 March 2022, in which Delek Logistics has generated distributable cash flow resulting in total distribution coverage (on a pro forma basis without giving effect to the IDR wavier) of at least 1.1x over such period. In addition, in any sale or exchange of the IDRs to or with Delek Logistics (for example, an IDR simplification), the valuation of the IDRs in such transaction shall treat the IDR waiver as though it remained in effect in perpetuity even after the expiration.
  • Future Capital Expenditures: Delek Logistics agrees to make up to US$33.8 million of additional capital expenditures, if requested by Delek US. In connection with any such request by Delek US, upon completion of any such capital project, the minimum volume commitments in the Throughput and Deficiency Agreement (the T&D Agreement) will be increased in order to provide Delek Logistics a 12.5% return on the associated capital expenditures.

In connection with the closing of the transaction, Delek US, Delek Logistics and various of their subsidiaries entered into various long-term agreements for these assets. The transaction and related agreements were approved by the Conflicts Committee of Delek Logistics’ general partner, which is comprised solely of independent directors. The Conflicts Committee engaged Baird to act as its financial advisor and Gibson Dunn & Crutcher L.L.P. to act as its legal counsel. Delek US engaged Baker Botts L.L.P. to act as its legal counsel.

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