Notes to Condensed Consolidated Financial Statements (Unaudited)
1
. Organization and Basis of Presentation
As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole.
The Partnership is a Delaware limited partnership formed in April 2012 by Old Delek (as defined below) and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner").
In January 2017, Delek US Holdings, Inc. ("Old Delek") (and various related entities) entered into an Agreement and Plan of Merger with Alon USA Energy, Inc. (NYSE: ALJ) ("Alon USA"), as subsequently amended on February 27 and April 21, 2017 (as so amended, the "Merger Agreement"). The related Merger (the "Delek/Alon Merger") was effective July 1, 2017 (the “Effective Time”), resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc. (“New Delek”), with Alon USA and Old Delek surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon USA pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. Unless the context otherwise requires, references in this report to "Delek" refer collectively to Old Delek with respect to periods prior to July 1, 2017, or New Delek, with respect to periods on or after July 1, 2017, and any of Old Delek's or New Delek's, as applicable, subsidiaries, other than Delek Logistics Partners, LP and its subsidiaries and its general partner.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016
(our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on February 28, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended
December 31, 2016
included in our Annual Report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been included. All significant intercompany transactions and account balances have been eliminated in the consolidation. Such intercompany transactions do not include those with Delek or our general partner. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (the "FASB") issued guidance to refine and expand hedge accounting for both financial and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and can be early adopted for any interim or annual financial statements that have not yet been issued. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The modification accounting guidance applies if the value, vesting conditions or classification of the award changes. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and can be early adopted for any interim or annual financial statements that have not yet been issued. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In January 2017, the FASB issued guidance that eliminates Step 2 of the goodwill impairment test, which required a comparison of the implied fair value of goodwill of a reporting unit with the carrying amount of that goodwill for that reporting unit. It also eliminates the requirements
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative assessment, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We expect to adopt this guidance on or before the effective date and we do not anticipate that the adoption will have a material impact on our business, financial condition or results of operations.
In January 2017, the FASB issued guidance clarifying the definition of a business in order to assist entities with evaluating when a set of transferred assets and activities is considered a business. In general, we expect that the revised definition will result in fewer acquisitions being accounted for as business combinations than under the current guidance. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted under certain circumstances. We early adopted this guidance as of July 1, 2017 and the adoption did not have a material impact on our business, financial condition or results of operations.
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment award transactions, including the accounting for excess tax benefits and deficiencies, classification of awards as either equity or liabilities and classification of excess tax benefits on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and can be early adopted for any interim or annual financial statements that have not yet been issued. We prospectively adopted this guidance on January 1, 2017 and the adoption did not have a material impact on our business, financial condition or results of operations.
In July 2015, the FASB issued guidance requiring entities to measure FIFO or average cost inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not change the measurement of inventory measured using LIFO or the retail inventory method. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We adopted this guidance on January 1, 2017 and the adoption did not have a material impact on our business, financial condition or results of operations.
In May 2014, the FASB issued guidance regarding “Revenue from Contracts with Customers,” to clarify the principles for recognizing revenue. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and can be adopted retrospectively. We will adopt this guidance on January 1, 2018. As part of our efforts to prepare for adoption, beginning in 2016, we formed a project implementation team as well as a project time-line to evaluate this new standard. We reviewed and gained an understanding of the new revenue recognition accounting guidance, performed scoping to identify and evaluate revenue streams under the new standard and continue to review industry specific implementation guidance. We are continuing to evaluate the impact of the standard on our business processes, accounting systems, controls and financial statement disclosures, and expect to implement any changes to accommodate the new accounting and disclosure requirements prior to adoption on January 1, 2018. We will use the modified retrospective adoption method to apply this standard, under which the cumulative effect of initially applying the new guidance will be recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.
2
.
Acquisitions
On
September 15, 2017
, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP acquired from Plains Pipeline, L.P. an approximate
40
-mile pipeline and related ancillary assets (the "Big Spring Pipeline") (such transaction, the "Big Spring Acquisition") for approximately
$9.0 million
to complement our existing asset base. The Big Spring Pipeline originates in Big Spring, Texas and terminates in Midland, Texas. The Big Spring Acquisition was accounted for as an asset acquisition. The following table summarizes the allocation of the relative fair value assigned to the asset groups for the Big Spring Pipeline (in thousands):
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|
|
|
|
|
Property, plant and equipment
|
|
$
|
6,443
|
|
Intangible assets
(1)
|
|
2,560
|
|
Total
|
|
$
|
9,003
|
|
(1)
Intangible assets acquired represent rights-of-way assets with indefinite useful lives. Rights-of-way assets are not subject to amortization.
3
. Related Party Transactions
Commercial Agreements
The Partnership has a number of long-term, fee based commercial agreements with Delek under which we provide various services, including crude oil gathering and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek. Most of these agreements have an initial term ranging from five to ten years, which may be extended for various renewal terms at the option of Delek. The initial terms for agreements effective in November 2012 were to expire in November 2017. Delek has opted to renew these agreements for subsequent five-year terms. In the case of our marketing agreement with Delek, the initial term has been extended through 2026. The fees under each agreement are payable to us monthly by Delek or certain third parties to whom Delek has assigned certain of its rights and are generally subject to increase or decrease on July 1 of each year, by the amount of any change in various inflation-based indices, including the Federal Energy Regulatory Commission oil pipeline index or various iterations of the consumer price index and the producer price index; provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
See our Annual Report on Form 10-K for a more complete description of certain of our commercial agreements and other agreements with Delek.
Omnibus Agreement.
The Partnership entered into an omnibus agreement with Delek, our general partner, Delek Logistics Operating, LLC, Lion Oil Company and certain of the Partnership's and Delek's other subsidiaries on November 7, 2012, which was subsequently amended and restated on July 26, 2013, February 10, 2014 and March 31, 2015 in connection with our subsequent acquisitions of certain assets from Delek (collectively, as amended, the "Omnibus Agreement"). Additionally, the Partnership entered into an amendment to the Omnibus Agreement on August 3, 2015, with an effective date of April 1, 2015. This amendment eliminated a
$1.0 million
per event deductible that applied to certain asset failures before Delek was required to reimburse the Partnership.
Pursuant to the terms of the Omnibus Agreement, we were reimbursed for certain capital expenditures in the amount of
$0.4 million
and
$4.3 million
during the
three and nine
months ended
September 30, 2017
, respectively, and
$0.7 million
and
$1.5 million
during the
three and nine
months ended
September 30, 2016
, respectively. These amounts are recorded in other long-term liabilities and are amortized to revenue over the life of the underlying revenue agreement corresponding to the asset. Ad
ditionally, we were reimbursed or indemnified, as the case may be, for costs incurred in excess of certain amounts related to certain asset failures, pursuant to the terms of the Omnibus Agreeme
nt. We were reimbursed
$0.3 million
for these matters during the
nine
months ended
September 30, 2017
. During the three months ended
September 30, 2017
, we recorded an adjustment of
$(0.1) million
for these matters. We were reimbursed
$0.1 million
and
$1.2 million
during the
three and nine
months ended
September 30, 2016
, respectively, which are recorded as a reduction to operating expense.
Summary of Transactions
Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers, wholesale marketing, and products terminalling services provided primarily to Delek based on regulated tariff rates or contractually based fees and product sales to Alon USA. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek or our general partner, as the case may be, for the services provided to us under the First Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). These expenses could also include reimbursement and indemnification amounts from Delek, as provided under the Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek for direct or allocated costs and expenses incurred by Delek on behalf of the Partnership and for charges Delek incurred for the management and operation of our logistics assets, including an annual fee for various centralized corporate services, which are included in general and administrative services. In addition to these transactions, we purchase finished products and bulk biofuels from Delek, the costs of which are included in cost of goods sold.
A summary of revenue and expense transactions with Delek and its affiliates are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
|
$
|
40,131
|
|
|
$
|
36,360
|
|
|
$
|
116,574
|
|
|
$
|
111,814
|
|
Cost of goods sold
|
|
$
|
9,232
|
|
|
$
|
5,247
|
|
|
$
|
26,412
|
|
|
$
|
24,064
|
|
Operating and maintenance expenses
|
|
$
|
7,275
|
|
|
$
|
7,988
|
|
|
$
|
20,756
|
|
|
$
|
22,738
|
|
General and administrative expenses
|
|
$
|
2,073
|
|
|
$
|
1,641
|
|
|
$
|
5,327
|
|
|
$
|
4,595
|
|
Quarterly Cash Distributions
Our common and general partner unitholders and the holders of incentive distribution rights ("IDRs") are entitled to receive quarterly distributions of available cash as it is determined by the board of directors of our general partner in accordance with the terms and provisions of our Partnership Agreement. In February, May and August
2017
, we paid quarterly cash distributions of
$20.5 million
,
$21.0 million
and
$21.8 million
, respectively, of which
$14.2 million
,
$14.7 million
and
$15.4 million
, respectively, were paid to Delek and our general partner. In February, May and August
2016
, we paid quarterly cash distributions of
$16.1 million
,
$17.1 million
and
$18.1 million
, respectively, of which
$10.5 million
,
$11.3 million
and
$12.1 million
, respectively, were paid to Delek and our general partner. On
October 25, 2017
, our general partner's board of directors declared a quarterly cash distribution totaling
$22.3 million
, based on the available cash as of the date of determination for the end of the
third
quarter of
2017
, payable on
November 14, 2017
, of which
$15.8 million
is expected to be paid to Delek and our general partner, including the payment for the IDRs.
4
. Inventory
Inventories consisted of
$7.9 million
and
$8.9 million
of refined petroleum products as of
September 30, 2017
and
December 31, 2016
, respectively. Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We recognize lower of cost or net realizable value charges as a component of cost of goods sold in the consolidated statements of income and comprehensive income, which amounted to
$0.3 million
during both the
three and nine
months ended
September 30, 2017
. There were no lower of cost or net realizable value charges during the
three and nine
months ended
September 30, 2016
.
5
. Long-Term Obligations
Second Amended and Restated Credit Agreement
We entered into a senior secured revolving credit agreement on
November 7, 2012
, with Fifth Third Bank, as administrative agent, and a syndicate of lenders. The agreement was amended and restated on
July 9, 2013
(the "Amended and Restated Credit Agreement") and was most recently amended and restated on
December 30, 2014
(the “Second Amended and Restated Credit Agreement”). Under the terms of the Second Amended and Restated Credit Agreement, the lender commitments were increased from
$400.0 million
to
$700.0 million
. The Second Amended and Restated Credit Agreement also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of
$800.0 million
, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent. The Second Amended and Restated Credit Agreement contains an option for Canadian dollar denominated borrowings.
Borrowings denominated in U.S. dollars bear interest at either a
U.S. dollar prime rate
, plus an applicable margin, or the London Interbank Offered Rate ("
LIBOR
"), plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars bear interest at either a
Canadian dollar prime rate
, plus an applicable margin, or the
Canadian Dealer Offered Rate
, plus an applicable margin, at the election of the borrowers. The applicable margin in each case varies based upon the Partnership's most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the credit facility. At
September 30, 2017
, the weighted average interest rate for our borrowings under the facility was approximately
4.0%
. Additionally, the Second Amended and Restated Credit Agreement requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of
September 30, 2017
, this fee was
0.5%
per year.
The obligations under the Second Amended and Restated Credit Agreement remain secured by first priority liens on substantially all of the Partnership's and its subsidiaries' tangible and intangible assets. Additionally, Delek Marketing & Supply, LLC ("Delek Marketing"), a direct wholly owned subsidiary of Delek, continues to provide a limited guaranty of the Partnership's obligations under the Second Amended and Restated Credit Agreement. Delek Marketing's guaranty is (i) limited to an amount equal to the principal amount, plus unpaid and accrued interest, of a promissory note made by Delek US in favor of Delek Marketing (the "Holdings Note") and (ii) secured by Delek Marketing's pledge of the Holdings Note to our lenders under the Second Amended and Restated Credit Agreement. As of
September 30, 2017
, the principal amount of the Holdings Note was
$102.0 million
, plus unpaid interest accrued since the issuance date. The Second Amended and Restated Credit Agreement matures on
December 30, 2019
.
As of
September 30, 2017
, we had
$158.8 million
in outstanding borrowings under the Second Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling
$8.5 million
, primarily securing obligations with respect to gasoline and diesel purchases.
No
amounts were drawn under these letters of credit at
September 30, 2017
. Unused credit commitments under the Second Amended and Restated Credit Agreement as of
September 30, 2017
were
$532.7 million
.
6.75% Senior Notes Due 2025
On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued
$250.0 million
in aggregate principal amount of
6.750%
senior notes due 2025 (the “2025 Notes”) at a discount. The 2025 Notes are general unsecured senior obligations of the Issuers. The 2025
Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Finance Corp., the "Guarantors") and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2025 Notes rank equal in right of payme
nt with all existing and future senior indebtedness of the Issuers, and senior in right of payment to any
future subordinated indebtedness of the Issuers.
Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.
At any time prior to May 15, 2020, the Issuers may redeem up to
35%
of the aggregate principal amount of the 2025 Notes with the net cash proceeds of one or more equity offerings by the Partnership at a redemption price of
106.750%
of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to May 15, 2020, the Issuers may redeem all or part of the 2025 Notes, at a redemption price of the principal amount, plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on May 15, 2020,
th
e Issuers may, subject to certain conditions and limitations, redeem all or part of the 2025 Notes at a redemption price of
105.063%
for the twelve-month period beginning on May 15, 2020,
103.375%
for the twelve-month period beginning on May 15, 2021,
101.688%
for the twelve-month period beginning on May 15, 2022 and
100.00%
beginning on May 15, 2023 and thereafter, plus accrued and unpaid interest, if any. There are also certain redemption provisions in the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations.
In connection with the issuance of the 2025 Notes, the Issuers and the Guarantors entered into a registration rights agreement, whereby the Issuers and the Guarantors are required to exchange the 2025 Notes for new notes with terms substantially identical in all material respects with the 2025 Notes (except the new notes will not contain terms with respect to transfer restrictions). The Issuers and the Guarantors will use their commercially reasonable efforts to cause the exchange offer to be consummated not later than 365 days after May 23, 2017.
As of
September 30, 2017
, we had
$250.0 million
in outstanding principal amount of the 2025 Notes. Outstanding borrowings under the 2025 Notes are net of deferred financing costs and debt discount of
$5.7 million
and
$1.8 million
, respectively, as of
September 30, 2017
.
6
. Income Taxes
For tax purposes, each partner of the Partnership is required to take into account its share of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and fair market value of our assets, the acquisition price of such partner's units and the taxable income allocation requirements under our Partnership Agreement.
7
. Net Income Per Unit
We use the two-class method when calculating the net income per unit applicable to limited partners because we have more than one participating class of securities. Our participating securities consist of common units, subordinated units, general partner units and IDRs. The two-class method is based on the weighted-average number of common units outstanding during the period. Basic net income per unit applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’ interest in net income, after deducting our general partner’s
2%
interest and IDRs, by the weighted-average number of outstanding common and subordinated units. Our net income is allocated to our general partner and limited partners in accordance with their respective partnership percentages after giving effect to priority income allocations for IDRs, which are held by our general partner pursuant to our Partnership Agreement. The IDRs are paid following the close of each quarter.
Earnings in excess of distributions are allocated to our general partner and limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. At present, the only potentially dilutive units outstanding consist of unvested phantom units. Basic and diluted net income per unit applicable to subordinated limited partners are the same because there are no potentially dilutive subordinated units outstanding.
Following the February 12, 2016 payment of the cash distribution attributable to the fourth quarter of 2015 and confirmation by the board of directors of our general partner (based on the recommendation of the Conflicts Committee) on February 25, 2016 that the requirements under the Partnership Agreement for the conversion of all subordinated units into common units were satisfied, the subordination period ended. As a result, in the first quarter of 2016, all of the Partnership's
11,999,258
outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. The conversion did not impact the amount of the cash distribution paid or the total number of the Partnership's outstanding units representing limited partner interests. The Partnership's net income was allocated to the general partner and the limited partners, including the holders of the subordinated units through February 24, 2016, in accordance with our Partnership Agreement.
Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The expected date of distribution for the distributions earned during the period ended
September 30, 2017
is
November 14, 2017
. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income attributable to partners
|
|
$
|
16,923
|
|
|
$
|
13,151
|
|
|
$
|
50,495
|
|
|
$
|
47,492
|
|
Less: General partner's distribution (including IDRs)
(1)
|
|
4,852
|
|
|
3,382
|
|
|
13,697
|
|
|
8,443
|
|
Less: Limited partners' distribution
|
|
17,418
|
|
|
15,920
|
|
|
51,380
|
|
|
41,615
|
|
Less: Subordinated partner's distribution
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,424
|
|
Distributions (in excess of) less than earnings
|
|
$
|
(5,347
|
)
|
|
$
|
(6,151
|
)
|
|
$
|
(14,582
|
)
|
|
$
|
(6,990
|
)
|
|
|
|
|
|
|
|
|
|
General partner's earnings:
|
|
|
|
|
|
|
|
|
Distributions (including IDRs)
(1)
|
|
$
|
4,852
|
|
|
$
|
3,382
|
|
|
$
|
13,697
|
|
|
$
|
8,443
|
|
Allocation of distributions (in excess of) less than earnings
|
|
(107
|
)
|
|
(123
|
)
|
|
(291
|
)
|
|
(140
|
)
|
Total general partner's earnings
|
|
$
|
4,745
|
|
|
$
|
3,259
|
|
|
$
|
13,406
|
|
|
$
|
8,303
|
|
|
|
|
|
|
|
|
|
|
Limited partners' earnings on common units:
|
|
|
|
|
|
|
|
|
Distributions
|
|
$
|
17,418
|
|
|
$
|
15,920
|
|
|
$
|
51,380
|
|
|
$
|
41,615
|
|
Allocation of distributions (in excess of) less than earnings
|
|
(5,240
|
)
|
|
(6,028
|
)
|
|
(14,291
|
)
|
|
(6,368
|
)
|
Total limited partners' earnings on common units
|
|
$
|
12,178
|
|
|
$
|
9,892
|
|
|
$
|
37,089
|
|
|
$
|
35,247
|
|
|
|
|
|
|
|
|
|
|
Limited partners' earnings on subordinated units:
|
|
|
|
|
|
|
|
|
Distributions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,424
|
|
Allocation of distributions in excess of earnings
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(482
|
)
|
Total limited partners' earnings on subordinated units
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,942
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partner units outstanding
(2)
:
|
|
|
|
|
|
|
|
|
Common units - (basic)
|
|
24,361,457
|
|
|
24,303,740
|
|
|
24,341,921
|
|
|
21,878,935
|
|
Common units - (diluted)
|
|
24,389,582
|
|
|
24,380,334
|
|
|
24,382,426
|
|
|
21,962,733
|
|
Subordinated units - Delek (basic and diluted)
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,408,610
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
(2)
:
|
|
|
|
|
|
|
|
|
Common units - (basic)
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
$
|
1.52
|
|
|
$
|
1.61
|
|
Common units - (diluted)
(4)
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
$
|
1.52
|
|
|
$
|
1.60
|
|
Subordinated units - Delek (basic and diluted)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.64
|
|
(1)
General partner distributions (including IDRs) consist of the
2%
general partner interest and IDRs, which represent the right of the general partner to receive increasing percentages of quarterly distributions of available cash from operating surplus in excess of
$0.43125
per unit per quarter. See
Note 8
for further discussion related to IDRs.
(2)
We base our calculation of net income per unit on the weighted-average number of common and subordinated limited partner units outstanding during the period. The weighted-average number of common and subordinated units reflects the conversion of the subordinated units to common units on February 25, 2016.
(3)
On February 25, 2016, each of the Partnership's
11,999,258
outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. Distributions and the Partnership's net income were allocated to the subordinated units through February 24, 2016.
(4)
Outstanding common unit equivalents totaling
10,090
were excluded from the diluted earnings per unit calculation for the
nine
months ended
September 30, 2017
. There were
no
outstanding common unit equivalents excluded from the diluted earnings per unit calculation for the three months ended
September 30, 2017
. Outstanding common unit equivalents of
6,540
were excluded from the diluted earnings per unit calculation for both the
three and nine
months ended
September 30, 2016
, as these common unit equivalents did not have a dilutive effect under the treasury stock method.
8
. Equity
We had
9,067,411
common limited partner units held by the public outstanding as of
September 30, 2017
. Additionally, as of
September 30, 2017
, Delek owned a
61.5%
limited partner interest in us, consisting of
15,294,046
common limited partner units and a
94.6%
interest in our general partner, which owns the entire
2.0%
general partner interest consisting of
497,172
general partner units. Affiliates who are also members of our general partner's management and board of directors own the remaining
5.4%
interest in our general partner.
Equity Activity
The table below summarizes the changes in the number of units outstanding from
December 31, 2016
through
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common - Public
|
|
Common - Delek
|
|
General Partner
|
|
Total
|
Balance at December 31, 2016
|
|
9,263,415
|
|
|
15,065,192
|
|
|
496,502
|
|
|
24,825,109
|
|
General partner units issued to maintain 2% interest
|
|
—
|
|
|
—
|
|
|
670
|
|
|
670
|
|
Unit-based compensation awards
|
|
32,850
|
|
|
—
|
|
|
—
|
|
|
32,850
|
|
Delek unit repurchases from public
|
|
(228,854
|
)
|
|
228,854
|
|
|
—
|
|
|
—
|
|
Balance at September 30, 2017
|
|
9,067,411
|
|
|
15,294,046
|
|
|
497,172
|
|
|
24,858,629
|
|
The summarized changes in the carrying amount of our equity from
December 31, 2016
through
September 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common - Public
|
|
Common - Delek
|
|
General Partner
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
188,013
|
|
|
$
|
(195,076
|
)
|
|
$
|
(6,221
|
)
|
|
$
|
(13,284
|
)
|
Cash distributions
|
(19,208
|
)
|
|
(31,555
|
)
|
|
(12,839
|
)
|
|
(63,602
|
)
|
Sponsor contribution of fixed assets
|
—
|
|
|
65
|
|
|
2
|
|
|
67
|
|
Net income attributable to partners
|
13,837
|
|
|
23,252
|
|
|
13,406
|
|
|
50,495
|
|
Unit-based compensation
|
480
|
|
|
806
|
|
|
(741
|
)
|
|
545
|
|
Delek unit repurchases from public
|
(7,291
|
)
|
|
7,291
|
|
|
—
|
|
|
—
|
|
General partner units issued to maintain 2% interest
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
Balance at September 30, 2017
|
|
$
|
175,831
|
|
|
$
|
(195,217
|
)
|
|
$
|
(6,372
|
)
|
|
$
|
(25,758
|
)
|
Allocations of Net Income
Our Partnership Agreement contains provisions for the allocation of net income and loss to the unitholders and our general partner. For purposes of maintaining partner capital accounts, the Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our general partner.
The following table presents the allocation of the general partner's interest in net income (in thousands, except percentage of ownership interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income attributable to partners
|
|
$
|
16,923
|
|
|
$
|
13,151
|
|
|
$
|
50,495
|
|
|
$
|
47,492
|
|
Less: General partner's IDRs
|
|
(4,496
|
)
|
|
(3,057
|
)
|
|
(12,649
|
)
|
|
(7,503
|
)
|
Net income available to partners
|
|
$
|
12,427
|
|
|
$
|
10,094
|
|
|
$
|
37,846
|
|
|
$
|
39,989
|
|
General partner's ownership interest
|
|
2.0
|
%
|
|
2.0
|
%
|
|
2.0
|
%
|
|
2.0
|
%
|
General partner's allocated interest in net income
|
|
$
|
249
|
|
|
$
|
202
|
|
|
$
|
757
|
|
|
$
|
800
|
|
General partner's IDRs
|
|
4,496
|
|
|
3,057
|
|
|
12,649
|
|
|
7,503
|
|
Total general partner's interest in net income
|
|
$
|
4,745
|
|
|
$
|
3,259
|
|
|
$
|
13,406
|
|
|
$
|
8,303
|
|
Incentive Distribution Rights
The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and our unitholders in any available cash from operating surplus that we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its
2.0%
general partner interest and assume that (i) our general partner has contributed any additional capital necessary to maintain its
2.0%
general partner interest, (ii) our general partner has not transferred its IDRs, and (iii) there are no arrearages on common units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Quarterly Distribution per Unit
|
|
Marginal Percentage Interest in Distributions
|
|
|
|
Target Amount
|
|
Unitholders
|
|
General Partner
|
Minimum Quarterly Distribution
|
|
|
$
|
0.37500
|
|
|
98.0
|
%
|
|
2.0
|
%
|
First Target Distribution
|
|
above
|
$
|
0.37500
|
|
|
98.0
|
%
|
|
2.0
|
%
|
|
|
up to
|
$
|
0.43125
|
|
|
|
|
|
Second Target Distribution
|
|
above
|
$
|
0.43125
|
|
|
85.0
|
%
|
|
15.0
|
%
|
|
|
up to
|
$
|
0.46875
|
|
|
|
|
|
Third Target Distribution
|
|
above
|
$
|
0.46875
|
|
|
75.0
|
%
|
|
25.0
|
%
|
|
|
up to
|
$
|
0.56250
|
|
|
|
|
|
Thereafter
|
|
thereafter
|
$
|
0.56250
|
|
|
50.0
|
%
|
|
50.0
|
%
|
Cash Distributions
Our Partnership Agreement sets forth the calculation to be used to determine the amount and priority of available cash distributions that our limited partner unitholders and general partner will receive. Our distributions earned with respect to a given period are declared subsequent to quarter end. The table below summarizes the quarterly distributions related to our quarterly financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Total Quarterly Distribution Per Limited Partner Unit
|
|
Total Quarterly Distribution Per Limited Partner Unit, Annualized
|
|
Total Cash Distribution, including general partner interest and IDRs (in thousands)
|
|
Date of Distribution
|
|
Unitholders Record Date
|
September 30, 2016
|
|
$
|
0.655
|
|
|
$
|
2.62
|
|
|
$
|
19,302
|
|
|
November 14, 2016
|
|
November 7, 2016
|
December 31, 2016
|
|
$
|
0.680
|
|
|
$
|
2.72
|
|
|
$
|
20,537
|
|
|
February 14, 2017
|
|
February 3, 2017
|
March 31, 2017
|
|
$
|
0.690
|
|
|
$
|
2.76
|
|
|
$
|
21,024
|
|
|
May 12, 2017
|
|
May 5, 2017
|
June 30, 2017
|
|
$
|
0.705
|
|
|
$
|
2.82
|
|
|
$
|
21,783
|
|
|
August 11, 2017
|
|
August 4, 2017
|
September 30, 2017
|
|
$
|
0.715
|
|
|
$
|
2.86
|
|
|
$
|
22,270
|
|
|
November 14, 2017
(1)
|
|
November 7, 2017
|
(1)
Expected date of distribution.
The allocation of total quarterly cash distributions expected to be made on
November 14, 2017
to general and limited partners for the
three and nine
months ended
September 30, 2017
and the allocation of total quarterly cash distributions for the
three and nine
months ended
September 30, 2016
are set forth in the table below. Distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below presents total cash distributions applicable to the period in which the distributions are earned (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
General partner's distributions:
|
|
|
|
|
|
|
|
|
General partner's distributions
|
|
$
|
356
|
|
|
$
|
325
|
|
|
$
|
1,048
|
|
|
$
|
940
|
|
General partner's IDRs
|
|
4,496
|
|
|
3,057
|
|
|
12,649
|
|
|
7,503
|
|
Total general partner's distributions
|
|
4,852
|
|
|
3,382
|
|
|
13,697
|
|
|
8,443
|
|
|
|
|
|
|
|
|
|
|
Limited partners' distributions:
|
|
|
|
|
|
|
|
|
Common
|
|
17,418
|
|
|
15,920
|
|
|
51,380
|
|
|
41,615
|
|
Subordinated
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,424
|
|
Total limited partners' distributions
|
|
17,418
|
|
|
15,920
|
|
|
51,380
|
|
|
46,039
|
|
Total cash distributions
|
|
$
|
22,270
|
|
|
$
|
19,302
|
|
|
$
|
65,077
|
|
|
$
|
54,482
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per limited partner unit
|
|
$
|
0.715
|
|
|
$
|
0.655
|
|
|
$
|
2.110
|
|
|
$
|
1.895
|
|
9
. Equity Based Compensation
We incurred approximately
$0.2 million
and
$0.5 million
of unit-based compensation expense related to the Partnership during the
three and nine
months ended
September 30, 2017
, respectively, and
$0.2 million
and
$0.4 million
during the
three and nine
months ended
September 30, 2016
, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income. The fair value of phantom unit awards under the Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") is determined based on the closing price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized over the vesting period using the straight line method. Awards vest over
one
- to
five
-year service periods, unless such awards are amended in accordance with the LTIP. As of
September 30, 2017
, there was
$0.5 million
of total unrecognized compensation cost related to non-vested equity-based compensation arrangements, which is expected to be recognized over a weighted-average period of
1.2
years.
10
. Equity Method Investments
In March 2015, we entered into two joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek. We own a
50%
membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC") to operate one of these pipeline systems and a
33%
membership interest in the entity formed with Rangeland Energy II, LLC ("Rangeland RIO") to operate the other pipeline system. The pipeline system constructed by Rangeland RIO was completed and began operations in September 2016. The pipeline system constructed by CP LLC was completed and began operations in January 2017.
The Partnership's investments in these two entities were financed through a combination of cash from operations and borrowings under the Second Amended and Restated Credit Agreement. As of
September 30, 2017
, the Partnership's investment balance in these joint ventures was
$106.1 million
.
We do not consolidate any part of the assets or liabilities or operating results of our equity method investees. Our share of net income or loss of the investees will increase or decrease, as applicable, the carrying value of our investments in unconsolidated affiliates. With respect to CP LLC and Rangeland RIO, we determined that these entities do not represent variable interest entities and consolidation was not required. We have the ability to exercise significant influence over each of these joint ventures through our participation in the management committees, which make all significant decisions. However, since all significant decisions require the consent of the other investor(s) without regard to economic interest, we have determined that we have joint control and have applied the equity method of accounting. Our investment in these joint ventures is reflected in our pipelines and transportation segment.
Summarized Financial Information
Combined summarized financial information for our equity method investees is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Current assets
|
|
$
|
11,333
|
|
|
$
|
7,760
|
|
Noncurrent assets
|
|
$
|
244,615
|
|
|
$
|
237,516
|
|
Current liabilities
|
|
$
|
1,482
|
|
|
$
|
4,512
|
|
Noncurrent liabilities
|
|
$
|
165
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
|
$
|
7,026
|
|
|
$
|
226
|
|
|
$
|
19,719
|
|
|
$
|
229
|
|
Gross profit
|
|
$
|
7,026
|
|
|
$
|
226
|
|
|
$
|
19,719
|
|
|
$
|
229
|
|
Net income (loss)
|
|
$
|
2,282
|
|
|
$
|
(1,538
|
)
|
|
$
|
6,674
|
|
|
$
|
(2,857
|
)
|
|
|
|
|
|
|
|
|
|
11
. Segment Data
We aggregate our operating segments into
two
reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling:
|
|
•
|
The assets and investments reported in the pipelines and transportation segment provide crude oil gathering and crude oil, intermediate and finished products transportation and storage services to Delek's refining operations and independent third parties.
|
|
|
•
|
The wholesale marketing and terminalling segment provides wholesale marketing and terminalling services to Delek's refining operations and independent third parties.
|
Our operating segments adhere to the accounting policies used for our consolidated financial statements. Our operating segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on segment contribution margin. Segment contribution margin is defined as net sales less cost of goods sold and operating expenses.
The following is a summary of business segment operating performance as measured by contribution margin for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Pipelines and Transportation
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
27,805
|
|
|
$
|
25,238
|
|
|
$
|
81,972
|
|
|
$
|
77,680
|
|
Third party
|
|
3,177
|
|
|
3,388
|
|
|
7,910
|
|
|
15,739
|
|
Total pipelines and transportation
|
|
30,982
|
|
|
28,626
|
|
|
89,882
|
|
|
93,419
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
4,883
|
|
|
4,811
|
|
|
13,691
|
|
|
14,401
|
|
Operating expenses
|
|
8,573
|
|
|
7,678
|
|
|
24,661
|
|
|
22,317
|
|
Segment contribution margin
|
|
$
|
17,526
|
|
|
$
|
16,137
|
|
|
$
|
51,530
|
|
|
$
|
56,701
|
|
Capital spending (excluding business combinations)
|
|
$
|
2,918
|
|
|
$
|
2,613
|
|
|
$
|
6,715
|
|
|
$
|
4,037
|
|
|
|
|
|
|
|
|
|
|
Wholesale Marketing and Terminalling
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
12,326
|
|
|
$
|
11,122
|
|
|
$
|
34,602
|
|
|
$
|
34,134
|
|
Third party
|
|
87,318
|
|
|
67,722
|
|
|
262,384
|
|
|
195,826
|
|
Total wholesale marketing and terminalling
|
|
99,644
|
|
|
78,844
|
|
|
296,986
|
|
|
229,960
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
84,237
|
|
|
68,716
|
|
|
253,058
|
|
|
198,980
|
|
Operating expenses
|
|
2,089
|
|
|
1,573
|
|
|
6,325
|
|
|
6,128
|
|
Segment contribution margin
|
|
$
|
13,318
|
|
|
$
|
8,555
|
|
|
$
|
37,603
|
|
|
$
|
24,852
|
|
Capital spending (excluding business combinations)
|
|
$
|
868
|
|
|
$
|
464
|
|
|
$
|
1,981
|
|
|
$
|
972
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
40,131
|
|
|
$
|
36,360
|
|
|
$
|
116,574
|
|
|
$
|
111,814
|
|
Third party
|
|
90,495
|
|
|
71,110
|
|
|
270,294
|
|
|
211,565
|
|
Total consolidated
|
|
130,626
|
|
|
107,470
|
|
|
386,868
|
|
|
323,379
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
89,120
|
|
|
73,527
|
|
|
266,749
|
|
|
213,381
|
|
Operating expenses
|
|
10,662
|
|
|
9,251
|
|
|
30,986
|
|
|
28,445
|
|
Contribution margin
|
|
30,844
|
|
|
24,692
|
|
|
89,133
|
|
|
81,553
|
|
General and administrative expenses
|
|
2,751
|
|
|
2,307
|
|
|
8,255
|
|
|
7,918
|
|
Depreciation and amortization
|
|
5,462
|
|
|
5,356
|
|
|
16,397
|
|
|
15,164
|
|
(Gain) loss on asset disposals
|
|
(5
|
)
|
|
28
|
|
|
2
|
|
|
(16
|
)
|
Operating income
|
|
$
|
22,636
|
|
|
$
|
17,001
|
|
|
$
|
64,479
|
|
|
$
|
58,487
|
|
Capital spending (excluding business combinations)
|
|
$
|
3,786
|
|
|
$
|
3,077
|
|
|
$
|
8,696
|
|
|
$
|
5,009
|
|
The following table summarizes the total assets for each segment as of
September 30, 2017
and
December 31, 2016
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Pipelines and transportation
|
|
$
|
344,260
|
|
|
$
|
337,349
|
|
Wholesale marketing and terminalling
|
|
78,598
|
|
|
78,198
|
|
Total assets
|
|
$
|
422,858
|
|
|
$
|
415,547
|
|
Property, plant and equipment and accumulated depreciation as of
September 30, 2017
and depreciation expense by reporting segment for the
three and nine
months ended
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipelines and Transportation
|
|
Wholesale Marketing and Terminalling
|
|
Consolidated
|
Property, plant and equipment
|
|
$
|
292,116
|
|
|
$
|
65,416
|
|
|
$
|
357,532
|
|
Less: accumulated depreciation
|
|
(80,008
|
)
|
|
(26,872
|
)
|
|
(106,880
|
)
|
Property, plant and equipment, net
|
|
$
|
212,108
|
|
|
$
|
38,544
|
|
|
$
|
250,652
|
|
Depreciation expense for the three months ended September 30, 2017
|
|
$
|
4,257
|
|
|
$
|
940
|
|
|
$
|
5,197
|
|
Depreciation expense for the nine months ended September 30, 2017
|
|
$
|
12,821
|
|
|
$
|
2,779
|
|
|
$
|
15,600
|
|
In accordance with ASC 360,
Property, Plant & Equipment
, we evaluate the realizability of property, plant and equipment as events occur that might indicate potential impairment. There were no indicators of impairment of our property, plant and equipment as of
September 30, 2017
.
12
. Fair Value Measurements
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of our assets and liabilities that fall under the scope of ASC 825,
Financial Instruments
.
We apply the provisions of ASC 820, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to commodity and interest rate derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material as of
September 30, 2017
.
ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
Over the counter ("OTC") commodity swaps and any interest rate swaps and caps are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, spot prices, interest rates, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines the classification as Level 2 or 3. Our contracts are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at
September 30, 2017
and
December 31, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
OTC commodity swaps
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
88
|
|
Total assets
|
|
—
|
|
|
88
|
|
|
—
|
|
|
88
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
OTC commodity swaps
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net assets
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
OTC commodity swaps
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Total assets
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Liabilities
|
|
|
|
|
|
|
|
|
OTC commodity swaps
|
|
—
|
|
|
(82
|
)
|
|
—
|
|
|
(82
|
)
|
Net liabilities
|
|
$
|
—
|
|
|
$
|
(73
|
)
|
|
$
|
—
|
|
|
$
|
(73
|
)
|
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy under the guidance of ASC 815-10-45, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty where the legal right of offset exists.
As of
September 30, 2017
and
December 31, 2016
, we had a cash deficit of
$0.7 million
and
$0.6 million
, respectively, netted with the net derivative position of our counterparty. See
Note 13
for further information regarding derivative instruments.
13
. Derivative Instruments
From time to time, we enter into forward fuel contracts to limit the exposure to price fluctuations for physical purchases of finished products in the normal course of business. We use derivatives to reduce normal operating and market risks with a primary objective in derivative instrument use being the reduction of the impact of market price volatility on our results of operations.
Typically, we enter into forward fuel contracts with major financial institutions in which we fix the purchase price of finished grade fuel for a predetermined number of units with fulfillment terms of less than
90
days.
From time to time, we may also enter into interest rate hedging agreements to limit floating interest rate exposure under the Second Amended and Restated Credit Agreement. Our initial credit facility required us to maintain interest rate hedging arrangements on at least
50%
of the amount funded on
November 7, 2012
under the credit facility, which was required to be in place for at least a
three
-year period beginning no later than March 7, 2013.
Accordingly, effective
February 25, 2013
, we entered into an interest rate hedge in the form of a LIBOR interest rate cap for a term of
three
years for a total notional amount of
$45.0 million
, thereby meeting the requirements in effect at that time. These requirements were eliminated in connection with the Amended and Restated Credit Agreement in July 2013, but the interest rate hedge remained in place in accordance with its term through its maturity date in February 2016.
The following table presents the fair value of our derivative instruments as of
September 30, 2017
and
December 31, 2016
. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements, including any cash deficit or collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below may differ from the amounts presented in our accompanying consolidated balance sheets. During the
three and nine
months ended
September 30, 2017
and
2016
, we did not elect hedge accounting treatment for these derivative positions. As a result, all changes in fair value are marked to market in the accompanying condensed consolidated statements of income and comprehensive income. See
Note 12
for further information regarding the fair value of derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Derivative Type
|
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives:
|
|
|
|
|
|
|
|
|
OTC commodity swaps
(1)
|
|
Other current assets
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
(82
|
)
|
Total gross value of derivatives
|
|
88
|
|
|
—
|
|
|
9
|
|
|
(82
|
)
|
Less: Counterparty netting and cash collateral
(2)
|
|
88
|
|
|
585
|
|
|
9
|
|
|
621
|
|
Total net fair value of derivatives
|
|
$
|
—
|
|
|
$
|
(585
|
)
|
|
$
|
—
|
|
|
$
|
(703
|
)
|
(1)
As of
September 30, 2017
and
December 31, 2016
, we had open derivative contracts representing
96,000
barrels and
93,000
barrels, respectively, of refined petroleum products.
(2)
As of
September 30, 2017
and
December 31, 2016
, we had a cash deficit of
$0.7 million
and
$0.6 million
, respectively, netted with the net derivative position of our counterparty.
Recognized gains (losses) associated with our derivatives for the
three and nine
months ended
September 30, 2017
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Derivative Type
|
Income Statement Location
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest rate derivatives
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivatives
|
Cost of goods sold
|
|
$
|
(1,474
|
)
|
|
$
|
(255
|
)
|
|
$
|
(358
|
)
|
|
$
|
(1,714
|
)
|
|
Total
|
|
$
|
(1,474
|
)
|
|
$
|
(255
|
)
|
|
$
|
(358
|
)
|
|
$
|
(1,714
|
)
|
14
. Commitments and Contingencies
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations. See "Crude Oil Releases" below for a potential enforcement action.
Environmental, Health and Safety
We are subject to extensive and periodically changing federal, state and local laws and regulations relating to the protection of the environment, health and safety. Among other things, these laws and regulations govern the emission or discharge of pollutants into or onto the land, air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination and the protection of workers and the public. Compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to develop, maintain, operate and upgrade equipment and facilities. Numerous permits or other authorizations are required under these laws for the operation of our terminals, pipelines, and related operations, and may be subject to revocation, modification and renewal. These laws and permits may become the basis for future claims and lawsuits involving environmental and safety matters, which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured, handled, used, released or disposed of, or that relate to pre-existing conditions for which we have assumed or are assigned responsibility.
Releases of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured or a reimbursable event under the Omnibus Agreement, subject us to substantial expenses, including costs to respond to, contain and remediate a release, to comply with applicable laws and regulations and to resolve claims by third parties for personal injury, property damage, or natural resources damages. These impacts could directly and indirectly affect our business. We cannot currently determine the amounts of such future impacts; however, we accrue liabilities for such events when we are able to determine if an amount is probable and can be reasonably estimated.
Crude Oil Releases
We have experienced several crude oil releases involving our assets, including, but not limited to, the following releases:
|
|
•
|
In January 2016, a crude oil release of less than
30
barrels occurred from a gathering line at the Modisette pumping station near El Dorado, Arkansas;
|
|
|
•
|
In January 2016, a crude oil release of approximately
350
barrels occurred from the Paline Pipeline near Woodville, Texas (the "Paline Release"); and
|
|
|
•
|
In March 2013, a release of approximately
5,900
barrels of crude oil, the majority of which was contained on-site, occurred from a pumping facility at our Magnolia Station located west of the El Dorado Refinery (the "Magnolia Release").
|
Cleanup operations and site maintenance and remediation efforts on these and other releases have been substantially completed. We may incur additional expenses as a result of further scrutiny by regulatory authorities and continued compliance with laws and regulations to which our assets are subject. Expenses incurred for the remediation of these crude oil releases are included in operating expenses in our consolidated statements of income and comprehensive income and are subsequently reimbursed by Delek pursuant to the terms of the Omnibus Agreement. Reimbursements are recorded as a reduction to operating expense. We do not believe the total costs associated with these events, whether alone or in the aggregate, including any fines or penalties and net of partial insurance reimbursement, will have a material adverse effect upon our business, financial condition or results of operations as we are reimbursed by Delek for such costs.
In June 2015, the United States Department of Justice notified the Partnership that it was evaluating an enforcement action on behalf of the Environmental Protection Agency (the "EPA") with regard to potential Clean Water Act violations arising from the Magnolia Release. We are currently attempting to negotiate a resolution to this matter with the EPA and the State of Arkansas, which may include monetary penalties and/or other relief. As of
September 30, 2017
, we have accrued
$1.0 million
, which we have recorded in pipeline release liabilities in our condensed consolidated balance sheet, for the Magnolia Release in connection with these proceedings.
Contracts and Agreements
The majority of the petroleum products we sell in west Texas are purchased from Noble Petro, Inc. ("Noble Petro"). Under the terms of a supply contract (the "Abilene Contract") with Noble Petro, we have the right to purchase up to
20,350
bpd of petroleum products at the Abilene, Texas terminal, which we own, for sales and exchange with third parties at the Abilene and San Angelo terminals. We lease the Abilene and San Angelo, Texas terminals to Noble Petro, under a separate Terminal and Pipeline Lease and Operating Agreement, with a term that runs concurrently with that of the Abilene Contract. The Abilene Contract expires on
December 31, 2017
and does not include any options for renewal. We also purchase spot barrels from various third parties and from Delek for sale to wholesale customers in west Texas.
Letters of Credit
As of
September 30, 2017
, we had in place letters of credit totaling
$8.5 million
under the Second Amended and Restated Credit Agreement, primarily securing obligations with respect to gasoline and diesel purchases.
No
amounts were drawn under these letters of credit at
September 30, 2017
.
Operating Leases
We lease certain equipment and have surface leases under various operating lease arrangements, most of which provide the option, after the initial lease term, to renew the leases. None of these lease arrangements include fixed rental rate increases. Lease expense for all operating leases totaled
$1.4 million
and
$4.1 million
for the
three and nine
months ended
September 30, 2017
, respectively, and
$1.3 million
and
$4.4 million
for the
three and nine
months ended
September 30, 2016
, respectively.
15
. Subsequent Events
Distribution Declaration
On
October 25, 2017
, our general partner's board of directors declared a quarterly cash distribution of
$0.715
per limited partner unit, payable on
November 14, 2017
, to unitholders of record on
November 7, 2017
.