Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 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 Delek US Holdings, Inc. ("Delek Holdings") and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner").
Effective
March 1, 2018
, the Partnership, through its wholly-owned subsidiary DKL Big Spring, LLC, acquired from Delek Holdings certain logistics assets primarily located at or adjacent to Delek Holdings' refinery near Big Spring, Texas (the "Big Spring Refinery") and Delek Holdings' light products distribution terminal located in Stephens County, Oklahoma (collectively, the "Big Spring Logistic Assets" and such transaction the "Big Spring Logistic Assets Acquisition"). See
Note 2
for further information regarding the Big Spring Logistic Assets Acquisition.
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, 2018
(our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 1, 2019. 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, 2018
included in our Annual Report on Form 10-K.
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 intercompany accounts and transactions have been eliminated. Such intercompany transactions do not include those with Delek Holdings' or our general partner, which are presented as related parties in these accompanying condensed consolidated financial statements. 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.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the current period presentation. Additionally, certain changes to presentation of the prior period statements of income have been made in order to conform to the current period presentation, primarily relating to the addition of a subtotal entitled 'cost of sales' which includes all costs directly attributable to the generation of the related revenue, as defined by GAAP, and the retitling of what was previously referred to as 'cost of goods sold' to 'cost of materials and other'. In connection with this change in presentation, we have revised our related accounting policy for
'Cost of Materials and Other and Operating Expenses'
presented below.
Cost of Materials and Other and Operating Expenses
Cost of materials and other includes (i) all costs of purchased refined products, additives and related transportation of such products, (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance, (iii) the cost of pipeline capacity leased from a third-party, and (iv) gains and losses related to our commodity hedging activities.
Operating expenses include the costs associated with the operation of owned terminals and pipelines and terminalling expense at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business.
Depreciation and amortization is separately presented in our statement of income and disclosed by reportable segment in
Note 11
.
New Accounting Pronouncements Adopted During Q1 2019
Accounting Standard Update ("ASU") 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (the "FASB") issued guidance to better align financial reporting for hedging activities with the economic objectives of those activities for both financial (e.g., interest rate) and commodity risks. The guidance was intended to create more transparency in the presentation of financial results, both on the face of the financial statements and in the footnotes, and 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. Companies are required to apply the guidance on a modified retrospective transition method in which the cumulative effect of the change is recognized within equity in the consolidated balance sheet as of the date of adoption. We adopted this guidance on the effective date and the adoption did not have a material impact on our business, financial condition and results of operations.
Notes to Condensed Consolidated Financial Statements (Unaudited)
ASU 2016-02, Leases
In February 2016, the FASB issued guidance that requires the recognition of a lease liability and a right-of-use asset, initially measured at the present value of the lease payments, in the statement of financial condition for all leases with terms longer than one year. The guidance was subsequently amended to consider the impact of practical expedients and provide additional clarifications. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the new lease standard on January 1, 2019. We elected the package of practical expedients which, among other things, allows us to carry forward the historical lease classification. For certain lease classes, we have elected the practical expedient not to separate lease and non-lease components, which allows us to combine the components if certain criteria are met. Further, we elected the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings at the date of adoption and to not recast our comparative periods. We have not elected the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term. The adoption of the lease accounting guidance had no impact on January 1, 2019 retained earnings and resulted in the recognition of a
$20.2 million
lease liability and a corresponding right-of-use asset on our consolidated balance sheet. The adoption did not have a material impact on our consolidated income statement. See
Note 16
for further information.
Accounting Pronouncements Not Yet Adopted
ASU 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We expect to adopt this guidance on or before the effective date and do not expect adopting this new guidance will have a material impact on our business, financial condition or results of operations.
ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance requiring the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance is effective for interim and annual periods beginning after December 15, 2019. 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.
Note 2 -
Acquisitions
Big Spring Logistic Assets Acquisition
Effective
March 1, 2018
, the Partnership, through its wholly-owned subsidiary DKL Big Spring, LLC, acquired the Big Spring Logistic Assets from Delek Holdings, which are primarily located at or adjacent to the Big Spring Refinery. The total purchase price was
$170.8 million
, financed through borrowings under the Partnership’s revolving credit facility.
The Big Spring Logistic Assets include:
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•
|
Approximately
75
storage tanks and certain ancillary assets (such as tank pumps and piping) primarily located adjacent to the Big Spring Refinery;
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|
•
|
An asphalt terminal and a light products terminal;
|
|
|
•
|
Certain crude oil and refined product pipelines; and
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|
|
•
|
Other logistics assets, such as
four
underground saltwells used for natural gas liquids storage.
|
In connection with the closing of the transaction, Delek Holdings, the Partnership and various of their respective subsidiaries entered into new contracts and amended certain existing contracts, including entering into new pipelines, storage and throughput facilities and asphalt services agreements. The transaction and related agreements were approved by the Conflicts Committee of the board of the Partnership's general partner, which is comprised solely of independent directors. See
Note 3
for more detailed descriptions of these agreements.
The Big Spring Logistic Assets Acquisition was considered a transaction between entities under common control. Accordingly, the Big Spring Logistic Assets were recorded at amounts based on Delek Holdings' historical carrying value as of the acquisition date. The excess of the cash paid over the historical carrying value of the assets acquired from Delek Holdings amounted to
$98.8 million
and was recorded as a reduction in equity. The historical carrying value of the Big Spring Logistic Assets as of the acquisition date was
$72.0 million
, which is net of
$0.8 million
of assumed asset retirement obligations. Prior periods have not been recast, as these assets did not constitute a business in
Notes to Condensed Consolidated Financial Statements (Unaudited)
accordance with ASU 2017-01,
Clarifying the Definition of a Business.
We capitalized approximately
$0.4 million
of acquisition costs related to the Big Spring Logistic Assets Acquisition during the
three
months ended
March 31, 2018
.
Marketing Contract Intangible Acquisition
Additionally, concurrent with the Big Spring Logistic Assets Acquisition, Delek Holdings, the Partnership and various of their respective subsidiaries entered into a new marketing agreement, whereby the Partnership markets certain refined products produced at or sold from the Big Spring Refinery to various customers in return for a marketing fee (the "Marketing Contract Intangible Acquisition"). We recorded a related contract intangible asset in the amount of
$144.2 million
based on the amount paid to enter into the contract, which represents the fair value of the intangible asset. The contract intangible asset is amortized over a twenty year period as a component of net revenues from affiliates. The total consideration paid was financed through borrowings under the Partnership's revolving credit facility. This transaction and related marketing agreement were approved by the Conflicts Committee of the board of the Partnership's general partner, which is comprised solely of independent directors. See
Note 3
for a more detailed description of this marketing agreement.
Note 3 -
Related Party Transactions
Commercial Agreements
The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings 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 Holdings. 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 Holdings. In November 2017, Delek Holdings opted to renew certain of these agreements for subsequent five-year terms expiring in November 2022. In the case of our marketing agreement with Delek Holdings in respect to the Tyler Refinery, the initial term has been extended through 2026. The current term of certain of our agreements with Delek Holdings were required to be further extended pursuant to the amended and restated DKL Credit Facility (as defined in
Note 7
), which extensions were effective in the fourth quarter of 2018. The fees under each agreement are payable to us monthly by Delek Holdings or certain third parties to whom Delek Holdings 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 ("FERC") oil pipeline index or various iterations of the consumer price index ("CPI") and the producer price index ("PPI"); provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement. In most circumstances, if Delek Holdings or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek Holdings, and not any third party assignee, will be required to make a quarterly shortfall payment to us equal to the volume of the shortfall multiplied by the applicable fee, subject to certain exceptions as specified in the applicable agreement. Carry-over of any volumes or revenue in excess of such commitment to any subsequent quarter is not permitted.
Under each of these agreements, we are required to maintain the capabilities of our pipelines and terminals, such that Delek Holdings may throughput and/or store, as the case may be, specified volumes of crude oil, intermediate and refined products. To the extent that Delek Holdings is prevented by our failure to maintain such capacities from throughputting or storing such specified volumes for more than 30 days per year, Delek Holdings' minimum throughput commitment will be reduced proportionately and prorated for the portion of the quarter during which the specified throughput capacity was unavailable, and/or the storage fee will be reduced, prorated for the portion of the month during which the specified storage capacity was unavailable. Such reduction would occur even if actual throughput or storage amounts were below the minimum volume commitment levels.
See our Annual Report on Form 10-K for a more complete description of our material commercial agreements and other agreements with Delek Holdings.
Big Spring Pipeline, Storage and Throughput Facilities Agreement
In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP, a Texas limited partnership and an indirect, wholly-owned subsidiary of Delek Holdings (“Alon USA, LP”), and DKL Big Spring, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Partnership, entered into the Pipelines, Storage and Throughput Facilities Agreement (Big Spring Refinery Logistic Assets and Duncan Terminal) (the “Logistics Agreement”). Under the Logistics Agreement, the Partnership will provide storage and throughput services for crude oil and refined petroleum products owned by Alon USA, LP or its assignee, at certain of the Big Spring Logistic Assets owned and operated by the Partnership. The Partnership will charge fees to Alon USA, LP based on throughput volumes received or delivered ranging from
$0.05
to
$0.66
per barrel and related storage fees depending on the type of service or product. The fees under the Logistics Agreement may be adjusted annually for inflation. The initial term of the Logistics Agreement is
ten years
; the Partnership has a one-time option to extend the Logistics Agreement for up to five additional years; and the Logistics Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Big Spring Asphalt Services Agreement
In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Partnership entered into the Big Spring Asphalt Services Agreement (the “Asphalt Services Agreement”). Under the Asphalt Services Agreement, the Partnership will provide asphalt storage and handling services at certain of the Big Spring Logistic Assets (such assets, the “Asphalt Facilities”). The Partnership will provide services to Alon USA, LP at the Asphalt Facilities and serve as bailee of all raw materials, and other hydrocarbons, used to make asphalt products owned by Alon USA, LP or its assignee held in the Asphalt Facilities. The Partnership will charge fees to Alon USA, LP based on throughput volumes delivered of
$8.30
per barrel and related storage fees. The fees under the Asphalt Services Agreement may be adjusted annually for inflation. The initial term of the Asphalt Services Agreement is
ten years
; the Partnership has a one-time option to extend the Asphalt Services Agreement for up to five additional years; and the Asphalt Services Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.
Big Spring Marketing Agreement
Concurrent with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Partnership entered into the Marketing Agreement (the “Marketing Agreement”). Under the Marketing Agreement, the Partnership will provide Alon USA, LP with services for the marketing and selling of certain refined petroleum products that are produced or sold from the Big Spring Refinery. The Partnership will charge Alon USA, LP fees for such marketing and selling services of
$0.50
to
$0.71
per barrel depending on the type of product. The fees under the Marketing Agreement may be adjusted annually for inflation. The initial term of the Marketing Agreement is
ten years
; Alon USA, LP has a one-time option to extend the Marketing Agreement for up to five additional years; and the Marketing Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.
Other Agreements with Delek Holdings
In addition to the commercial agreements described above, the Partnership has entered into the following agreements with Delek Holdings:
Omnibus Agreement
The Partnership entered into an omnibus agreement with Delek Holdings, our general partner, Delek Logistics Operating, LLC, Lion Oil Company and certain of the Partnership's and Delek Holdings' other subsidiaries on November 7, 2012, which has been amended from time to time in connection with acquisitions from Delek (collectively, as amended, the "Omnibus Agreement"). The Omnibus Agreement governs the provision of certain operational services and reimbursement obligations, among other matters, between the Partnership and Delek Holdings, and obligates us to pay an annual fee of $
3.9 million
to Delek Holdings for its provision of centralized corporate services to the Partnership.
Pursuant to the terms of the Omnibus Agreement, we were reimbursed by Delek Holdings for certain capital expenditures in the amount of
$0.8 million
and
$2.3 million
during the
three
months ended
March 31, 2019
and
2018
, 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 are 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. As of
March 31, 2019
, we have recorded a receivable from related parties of
$1.5 million
for these matters for which we expect to be reimbursed. These reimbursements are recorded as reductions to operating expense. We were reimbursed
$3.5 million
for these matters during the
three
months ended
March 31, 2019
. We had no reimbursements for such matters during the
three
months ended
March 31, 2018
.
Other Transactions
Starting in 2018, the Partnership manages a long-term capital project on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of a 250-mile gathering system in the Permian Basin (the "Delek Permian Gathering Project"). The Partnership is also considered the operator for the project and is responsible for oversight of the project design, procurement and construction of project segments and provide other related services. Pursuant to the terms of the DPG Management Agreement, the Partnership receives a monthly operating services fee and a construction services fee, which includes the Partnership's direct costs of managing the project plus an additional percentage fee of the construction costs of each project segment. The agreement extends through December 2022. Total fees paid to the Partnership for the
three
months ended
March 31, 2019
were
$1.9 million
. Additionally, the Partnership incurs the costs in connection with the construction of the assets and is subsequently reimbursed by Delek Holdings. Amounts reimbursable by Delek Holdings are recorded in accounts receivable from related parties.
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 Holdings based on regulated tariff rates or contractually based fees and product sales. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek Holdings, or our general partner, as the case may be, for the services provided to us under the Partnership Agreement. These expenses could also
Notes to Condensed Consolidated Financial Statements (Unaudited)
include reimbursement and indemnification amounts from Delek Holdings, as provided under the Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek Holdings for direct or allocated costs and expenses incurred by Delek Holdings on behalf of the Partnership and for charges Delek Holdings 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 expenses. In addition to these transactions, we purchase refined products and bulk biofuels from Delek Holdings, the costs of which are included in cost of materials and other.
A summary of revenue, purchases from affiliates and expense transactions with Delek Holdings and its affiliates are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
62,965
|
|
|
$
|
61,644
|
|
Purchases from Affiliates
|
|
$
|
79,434
|
|
|
$
|
83,401
|
|
Operating and maintenance expenses
|
|
$
|
9,925
|
|
|
$
|
7,489
|
|
General and administrative expenses
|
|
$
|
1,370
|
|
|
$
|
957
|
|
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
2019
, we paid quarterly cash distributions of
$26.9 million
, of which
$19.6 million
were paid to Delek Holdings and our general partner. In February
2018
, we paid quarterly cash distributions of
$22.8 million
, of which
$16.2 million
were paid to Delek Holdings and our general partner. On
April 26, 2019
, our general partner's board of directors declared a quarterly cash distribution totaling
$27.4 million
, based on the available cash as of the date of determination for the end of the
first
quarter of
2019
, payable on
May 14, 2019
, of which
$20.0 million
is expected to be paid to Delek Holdings and our general partner, including the distribution as holder of the IDRs described in
Note 8
.
Note 4 -
Revenues
We generate revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate products and feed stocks; for distributing, transporting and storing refined products; for marketing refined products output of Delek Holdings' Tyler and Big Spring refineries; and for wholesale marketing in the west Texas area. A significant portion of our revenue is derived from long-term commercial agreements with Delek Holdings, which provide for annual fee adjustments for increases or decreases in the CPI, PPI or FERC index (refer to
Note 3
for a more detailed description of these agreements). In addition to the services we provide to Delek Holdings, we also generate substantial revenue from crude oil, intermediate and refined products transportation services for, and terminalling and marketing services to, third parties primarily in Texas, New Mexico, Tennessee and Arkansas. Certain of these services are provided pursuant to contractual agreements with third parties. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
The majority of our commercial agreements with Delek Holdings meet the definition of a lease because: (1) performance of the contracts is dependent on specified property, plant or equipment and (2) it is remote that one or more parties other than Delek Holdings will take more than a minor amount of the output associated with the specified property, plant or equipment. As part of our adoption of ASC 842,
Leases
("ASC 842"), we applied the permitted practical expedient to not separate lease and non-lease components under the predominance principle to designated asset classes associated with the provision of logistics services. We have determined that the predominant component of the related agreements currently in effect is the lease component. Therefore, the combined component is accounted for under the applicable lease accounting guidance. Of our
$306.9 million
net property, plant, and equipment balance as of
March 31, 2019
,
$257.7 million
is subject to operating leases under our commercial agreements. These agreements do not include options for the lessee to purchase our leasing equipment, nor do they include any material residual value guarantees or material restrictive covenants.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table represents a disaggregation of revenue for each reportable segment for the periods indicated (in thousands):
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|
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|
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Three Months Ended March 31, 2019
|
|
|
Pipelines and Transportation
|
|
Wholesale Marketing and Terminalling
|
|
Consolidated
|
Service Revenue - Third Party
|
|
$
|
3,974
|
|
|
$
|
120
|
|
|
$
|
4,094
|
|
Product Revenue - Third Party
|
|
—
|
|
|
85,424
|
|
|
85,424
|
|
Product Revenue - Affiliate
|
|
—
|
|
|
9,386
|
|
|
9,386
|
|
Lease Revenue - Affiliate
(1)
|
|
36,659
|
|
|
16,920
|
|
|
53,579
|
|
Total Revenue
|
|
$
|
40,633
|
|
|
$
|
111,850
|
|
|
$
|
152,483
|
|
(1)
Net of
$1.8 million
of amortization expense for the
three
months ended related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.
As of
March 31, 2019
, we expect to recognize
$1.1 billion
in service and lease revenues related to our unfulfilled performance obligations pertaining to the minimum volume commitments and capacity utilization under the non-cancelable terms of our commercial agreements with Delek Holdings. Most of these agreements have an initial term ranging from five to ten years, which may be extended for various renewal terms.
We disclose information about remaining performance obligations that have original expected durations of greater than one year.
Our unfulfilled performance obligations as of
March 31, 2019
were as follows (in thousands):
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|
|
|
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|
Remainder of 2019
|
|
$
|
126,236
|
|
2020
|
|
167,965
|
|
2021
|
|
167,714
|
|
2022
|
|
166,587
|
|
2023 and thereafter
|
|
474,200
|
|
Total expected revenue on remaining performance obligations
|
|
$
|
1,102,702
|
|
Note 5 -
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, 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 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 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. As of
March 31, 2019
, the only potentially dilutive units outstanding consist of unvested phantom units.
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
March 31, 2019
is
May 14, 2019
. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts):
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|
|
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|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Net income attributable to partners
|
|
$
|
19,696
|
|
|
$
|
19,995
|
|
Less: General partner's distribution (including IDRs)
(1)
|
|
7,424
|
|
|
5,710
|
|
Less: Limited partners' distribution
|
|
20,014
|
|
|
18,287
|
|
Distributions in excess of earnings
|
|
$
|
(7,742
|
)
|
|
$
|
(4,002
|
)
|
|
|
|
|
|
General partner's earnings:
|
|
|
|
|
Distributions (including IDRs)
(1)
|
|
$
|
7,424
|
|
|
$
|
5,710
|
|
Allocation of distributions in excess of earnings
|
|
(154
|
)
|
|
(80
|
)
|
Total general partner's earnings
|
|
$
|
7,270
|
|
|
$
|
5,630
|
|
|
|
|
|
|
Limited partners' earnings on common units:
|
|
|
|
|
Distributions
|
|
$
|
20,014
|
|
|
$
|
18,287
|
|
Allocation of distributions in excess of earnings
|
|
(7,588
|
)
|
|
(3,922
|
)
|
Total limited partners' earnings on common units
|
|
$
|
12,426
|
|
|
$
|
14,365
|
|
|
|
|
|
|
Weighted average limited partner units outstanding
(2)
:
|
|
|
|
|
Common units - (basic)
|
|
24,407,168
|
|
|
24,382,633
|
|
Common units - (diluted)
|
|
24,416,058
|
|
|
24,393,746
|
|
|
|
|
|
|
Net income per limited partner unit
(2)
:
|
|
|
|
|
Common units - (basic)
|
|
$
|
0.51
|
|
|
$
|
0.59
|
|
Common units - (diluted)
(3)
|
|
$
|
0.51
|
|
|
$
|
0.59
|
|
(1)
General partner distributions (including IDRs) consist of the
2.0%
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 limited partner units outstanding during the period.
(3)
There were no outstanding common units excluded from the diluted earnings per unit calculation for the
three
months ended
March 31, 2019
and
2018
.
Note 6 -
Inventory
Inventories consisted of
$6.7 million
and
$5.5 million
of refined petroleum products as of
March 31, 2019
and
December 31, 2018
, 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 materials and other in the consolidated statements of income and comprehensive income, which amounted to a nominal amount during the
three
months ended
March 31, 2019
and
2018
.
Note 7 -
Long-Term Obligations
DKL Credit Facility
Prior to September 28, 2018, the Partnership had a
$700.0 million
senior secured revolving credit agreement with Fifth Third Bank ("Fifth Third"), as administrative agent, and a syndicate of lenders (the "2014 Facility") bearing interest at (i) either a U.S. prime dollar rate or a LIBOR Rate for borrowings denominated in U.S. Dollars, or (ii) either a Canadian dollar prime rate, or a Canadian Dealer Offered Rate, for borrowings denominated in Canadian dollars (in each case plus applicable margins, at the election of the borrowers and as a function of draw down currency). The 2014 Facility had a maturity date of December 30, 2019. The obligations under the 2014 Facility were secured by a first priority lien on substantially all of the Partnership's tangible and intangible assets. Additionally, a subsidiary of Delek Holdings provided a limited guaranty of the Partnership's obligations under the 2014 Facility.
On September 28, 2018, the Partnership entered into a third amended and restated senior secured revolving credit agreement, which amended and restated the 2014 Facility (hereafter, the "DKL Credit Facility") with Fifth Third Bank, as administrative agent, and a syndicate of lenders. The DKL Credit Facility contains a dual currency borrowing tranche that permits draw downs in U.S. or Canadian dollars. Under the terms of the DKL Credit Facility, among other things, the lender commitments were increased from
$700.0 million
to
$850.0 million
. The DKL Credit Facility also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of
$1.0 billion
, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent.
The obligations under the DKL Credit Facility 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 subsidiary of Delek Holdings, continues to provide a limited guaranty of the Partnership's obligations under the DKL Credit Facility. 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 Holdings in favor of Delek Marketing (the "Holdings Note") and (ii) secured by Delek Marketing's pledge of the Holdings Note to the lenders under the DKL Credit Facility. As of
March 31, 2019
the principal amount of the Holdings Note was
$102.0 million
.
The DKL Credit Facility has a maturity date of
September 28, 2023
. 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 and the fee payable for the unused revolving commitments vary 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 DKL Credit Facility. At
March 31, 2019
, the weighted average interest rate for our borrowings under the facility was approximately
5.1%
. Additionally, the DKL Credit Facility requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of
March 31, 2019
, this fee was
0.40%
per year.
As of
March 31, 2019
, we had
$461.2 million
of outstanding borrowings under the DKL Credit Facility, with
no
letters of credit in place. Unused credit commitments under the DKL Credit Facility as of
March 31, 2019
, were
$388.8 million
.
6.750%
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
6.75%
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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%
of the redeemed principal 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.
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, the Issuers will be obligated to make an offer for the purchase of the 2025 Notes from holders at a price equal to
101%
of the principal amount thereof, plus accrued and unpaid interest.
In May 2018, the 2025 Notes were exchanged for new notes with terms substantially identical in all material respects with the 2025 Notes except that the new notes do not contain terms with respect to transfer restrictions.
As of
March 31, 2019
, 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
$4.6 million
and
$1.4 million
, respectively, as of
March 31, 2019
, and
$4.8 million
and
$1.5 million
, respectively, as of
December 31, 2018
.
Note 8 -
Equity
We had
9,113,359
common limited partner units held by the public outstanding as of
March 31, 2019
. Additionally, as of
March 31, 2019
, Delek Holdings owned a
61.4%
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
498,110
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, 2018
through
March 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common - Public
|
|
Common - Delek Holdings
|
|
General Partner
|
|
Total
|
Balance at December 31, 2018
|
|
9,109,807
|
|
|
15,294,046
|
|
|
498,038
|
|
|
24,901,891
|
|
General partner units issued to maintain 2% interest
|
|
—
|
|
|
—
|
|
|
72
|
|
|
72
|
|
Unit-based compensation awards
(1)
|
|
3,552
|
|
|
—
|
|
|
—
|
|
|
3,552
|
|
Balance at March 31, 2019
|
|
9,113,359
|
|
|
15,294,046
|
|
|
498,110
|
|
|
24,905,515
|
|
(1)
No
units were withheld for taxes during the
three
months ended
March 31, 2019
.
Issuance of Additional Securities
Our Partnership Agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders. Costs associated with the issuance of securities are allocated to all unitholders' capital accounts based on their ownership interest at the time of issuance.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 March 31, 2019
|
|
2019
|
|
2018
|
Net income attributable to partners
|
19,696
|
|
|
$
|
19,995
|
|
Less: General partner's IDRs
|
(7,016
|
)
|
|
(5,337
|
)
|
Net income available to partners
|
$
|
12,680
|
|
|
$
|
14,658
|
|
General partner's ownership interest
|
2.0
|
%
|
|
2.0
|
%
|
General partner's allocated interest in net income
|
254
|
|
|
$
|
293
|
|
General partner's IDRs
|
7,016
|
|
|
5,337
|
|
Total general partner's interest in net income
|
$
|
7,270
|
|
|
$
|
5,630
|
|
Incentive Distribution Rights
Our general partner is currently entitled to
2.0%
of all quarterly distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute up to a proportionate amount of capital to us to maintain its current general partner interest. The general partner's
2.0%
interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its
2.0%
general partner interest. Our general partner also currently holds IDRs that entitle it to receive increasing percentages, up to a maximum of
48.0%
, of the cash we distribute from operating surplus (as defined in our Partnership Agreement) in excess of
0.43125
per unit per quarter. The maximum distribution is
48.0%
and does not include any distributions that our general partner or its affiliates may receive on common or general partner units that it owns. The IDRs held by our general partner currently entitle it to receive the maximum distribution.
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
|
March 31, 2018
|
|
$
|
0.750
|
|
|
$
|
3.00
|
|
|
$
|
23,997
|
|
|
May 15, 2018
|
|
May 7, 2018
|
June 30, 2018
|
|
$
|
0.770
|
|
|
$
|
3.08
|
|
|
$
|
24,984
|
|
|
August 13, 2018
|
|
August 3, 2018
|
September 30, 2018
|
|
$
|
0.790
|
|
|
$
|
3.16
|
|
|
$
|
25,960
|
|
|
November 9, 2018
|
|
November 2, 2018
|
December 31, 2018
|
|
$
|
0.810
|
|
|
$
|
3.24
|
|
|
$
|
26,949
|
|
|
February 12, 2019
|
|
February 4, 2019
|
March 31, 2019
|
|
$
|
0.820
|
|
|
$
|
3.28
|
|
|
$
|
27,438
|
|
|
May 14, 2019
(1)
|
|
May 7, 2019
|
(1)
Expected date of distribution.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The allocations of total quarterly cash distributions made to general and limited partners for the
three months ended March 31, 2019
and
2018
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 March 31,
|
|
2019
|
|
2018
|
General partner's distributions:
|
|
|
|
General partner's distributions
|
$
|
408
|
|
|
$
|
373
|
|
General partner's IDRs
|
7,016
|
|
|
5,337
|
|
Total general partner's distributions
|
7,424
|
|
|
5,710
|
|
|
|
|
|
Limited partners' distributions:
|
|
|
|
Common limited partners' distributions
|
20,014
|
|
|
18,287
|
|
|
|
|
|
Total cash distributions
|
$
|
27,438
|
|
|
$
|
23,997
|
|
|
|
|
|
Cash distributions per limited partner unit
|
$
|
0.820
|
|
|
$
|
0.750
|
|
Note 9 -
Equity Based Compensation
We incurred approximately
$0.1 million
of unit-based compensation expense related to the Partnership during both the
three
months ended
March 31, 2019
and
2018
. 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 market 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
March 31, 2019
, there was
$0.1 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
0.2
years.
Note 10 -
Equity Method Investments
We have
two
joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek Holdings. 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 Energy") to operate the other pipeline system. During 2018, Rangeland Energy was acquired by Andeavor and the legal entity in which we have an equity investment became Andeavor Logistics RIO Pipeline LLC ("Andeavor Logistics").
The Partnership's investments in these
two
entities were financed through a combination of cash from operations and borrowings under our senior secured revolving credit agreement. As of
March 31, 2019
and
December 31, 2018
, the Partnership's investment balance in these joint ventures was
$107.8 million
and
$104.8 million
, respectively.
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 Andeavor Logistics, we determined that these entities do not represent variable interest entities and consolidation is 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 100% of our equity method investees is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Current assets
|
|
$
|
21,948
|
|
|
$
|
15,450
|
|
Non-current assets
|
|
$
|
250,977
|
|
|
$
|
240,852
|
|
Current liabilities
|
|
$
|
12,719
|
|
|
$
|
4,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
9,114
|
|
|
$
|
7,990
|
|
Gross profit
|
|
$
|
4,894
|
|
|
$
|
3,234
|
|
Net Income
|
|
$
|
4,417
|
|
|
$
|
2,712
|
|
Note 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 refined products transportation and storage services to Delek Holdings' refining operations and independent third parties.
|
|
|
•
|
The wholesale marketing and terminalling segment provides wholesale marketing and terminalling services to Delek Holdings' 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
operating performance of each of its reportable segments based on segment contribution margin. Segment contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization.
The following is a summary of business segment operating performance as measured by contribution margin for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Pipelines and Transportation
|
|
|
|
|
Net revenues:
|
|
|
|
|
Affiliate
|
|
$
|
36,659
|
|
|
$
|
29,462
|
|
Third party
|
|
3,974
|
|
|
4,251
|
|
Total pipelines and transportation
|
|
40,633
|
|
|
33,713
|
|
Cost of materials and other
|
|
5,567
|
|
|
4,441
|
|
Operating expenses (excluding depreciation and amortization)
|
|
10,834
|
|
|
9,622
|
|
Segment contribution margin
|
|
$
|
24,232
|
|
|
$
|
19,650
|
|
Capital spending
(1)
|
|
424
|
|
|
$
|
1,408
|
|
|
|
|
|
|
Wholesale Marketing and Terminalling
|
|
|
|
|
Net revenues:
|
|
|
|
|
Affiliate
(2)
|
|
$
|
26,306
|
|
|
$
|
32,182
|
|
Third party
|
|
85,544
|
|
|
102,026
|
|
Total wholesale marketing and terminalling
|
|
111,850
|
|
|
134,208
|
|
Cost of materials and other
|
|
90,698
|
|
|
114,591
|
|
Operating expenses (excluding depreciation and amortization)
|
|
5,224
|
|
|
2,955
|
|
Segment contribution margin
|
|
$
|
15,928
|
|
|
$
|
16,662
|
|
Capital spending
(1)
|
|
480
|
|
|
$
|
789
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Net revenues:
|
|
|
|
|
Affiliate
|
|
$
|
62,965
|
|
|
$
|
61,644
|
|
Third party
|
|
89,518
|
|
|
106,277
|
|
Total Consolidated
|
|
152,483
|
|
|
167,921
|
|
Cost of materials and other
|
|
96,265
|
|
|
119,032
|
|
Operating expenses (excluding depreciation and amortization presented below)
|
|
16,058
|
|
|
12,577
|
|
Contribution margin
|
|
40,160
|
|
|
36,312
|
|
General and administrative expenses
|
|
4,473
|
|
|
2,975
|
|
Depreciation and amortization
|
|
6,574
|
|
|
6,000
|
|
Loss (gain) on asset disposals
|
|
2
|
|
|
60
|
|
Operating income
|
|
$
|
29,111
|
|
|
$
|
27,277
|
|
Capital spending
(1)
|
|
904
|
|
|
$
|
2,197
|
|
(1)
Capital spending excludes transaction costs capitalized in the amount of
$0.4 million
that relate to the Big Spring Logistic Assets Acquisition for the
three
months ended
March 31, 2018
.
(2)
Affiliate revenue for the wholesale marketing and terminalling segment is presented net of amortization expense pertaining to the Marketing Contract Intangible Acquisition. See
Note 3
for additional information.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes the total assets for each segment as of
March 31, 2019
and
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Pipelines and transportation
|
|
$
|
401,833
|
|
|
$
|
387,333
|
|
Wholesale marketing and terminalling
|
|
238,375
|
|
|
237,260
|
|
Total assets
|
|
$
|
640,208
|
|
|
$
|
624,593
|
|
Property, plant and equipment and accumulated depreciation as of
March 31, 2019
and depreciation expense by reporting segment for the
three
months ended
March 31, 2019
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipelines and Transportation
|
|
Wholesale Marketing and Terminalling
|
|
Consolidated
|
Property, plant and equipment
|
|
$
|
359,213
|
|
|
$
|
94,378
|
|
|
$
|
453,591
|
|
Less: accumulated depreciation
|
|
(112,170
|
)
|
|
(34,542
|
)
|
|
(146,712
|
)
|
Property, plant and equipment, net
|
|
$
|
247,043
|
|
|
$
|
59,836
|
|
|
$
|
306,879
|
|
Depreciation expense for the three months ended March 31, 2019
|
|
$
|
5,241
|
|
|
$
|
1,333
|
|
|
$
|
6,574
|
|
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
March 31, 2019
.
Note 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,
Fair Value Measurements
("ASC 820"), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to commodity 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 to our financial statements at this time.
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.
Commodity swaps, exchange-traded futures, physical commodity forward purchase and sale contracts 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at
March 31, 2019
and
December 31, 2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
61
|
|
Total assets
|
|
—
|
|
|
61
|
|
|
—
|
|
|
61
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
—
|
|
|
(87
|
)
|
|
—
|
|
|
(87
|
)
|
Net liabilities
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
186
|
|
Total assets
|
|
—
|
|
|
186
|
|
|
—
|
|
|
186
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Net liabilities
|
|
$
|
—
|
|
|
$
|
184
|
|
|
$
|
—
|
|
|
$
|
184
|
|
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. In the table above, 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, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and where the legal right of offset exists.
As of
March 31, 2019
and
December 31, 2018
, we had a cash collateral of
$0.3 million
and
$0.4 million
, respectively, netted with the net derivative position of our counterparty. See
Note 13
for further information regarding derivative instruments.
Note 13 -
Derivative Instruments
From time to time, we enter into forward fuel contracts to limit the exposure to price fluctuations for physical purchases of refined products in the normal course of business. We use derivatives to reduce 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 refined grade fuel for a predetermined number of units with fulfillment terms of less than
90
days.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the fair value of our derivative instruments as of
March 31, 2019
and
December 31, 2018
. 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 differ from the amounts presented in our accompanying condensed consolidated balance sheets. During the
three
months ended
March 31, 2019
and
2018
, 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.
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|
|
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|
|
(in thousands)
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Derivative Type
|
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives:
|
|
|
|
|
|
|
|
|
Commodity derivatives
(1)
|
|
Other current assets
|
|
$
|
61
|
|
|
$
|
(87
|
)
|
|
$
|
186
|
|
|
$
|
(2
|
)
|
Total gross fair value of derivatives
|
|
61
|
|
|
(87
|
)
|
|
186
|
|
|
(2
|
)
|
Less: Counterparty netting and cash deficit (collateral)
(2)
|
|
(183
|
)
|
|
(87
|
)
|
|
(404
|
)
|
|
(2
|
)
|
Total net fair value of derivatives
|
|
$
|
244
|
|
|
$
|
—
|
|
|
$
|
590
|
|
|
$
|
—
|
|
(1)
As of
March 31, 2019
and
December 31, 2018
, we had open derivative contracts representing
68,000
barrels and
82,000
barrels, respectively, of refined petroleum products.
(2)
As of
March 31, 2019
and
December 31, 2018
, we had a cash collateral of
$0.3 million
and
$0.4 million
, respectively, netted with the net derivative position of our counterparty.
Recognized gains (losses) associated with our derivatives for the
three
months ended
March 31, 2019
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Derivative Type
|
Income Statement Location
|
|
2019
|
|
2018
|
Commodity derivatives
|
Cost of materials and other
|
|
$
|
(1,014
|
)
|
|
$
|
1,583
|
|
Note 14 -
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.
The Partnership is not a taxable entity for federal income tax purposes. While most states do not impose an entity level tax on partnership income, the Partnership is subject to entity level tax in both Tennessee and Texas.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 15 -
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 financial statements. See "Crude Oil Releases" below for discussion of an enforcement action.
Environmental, Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the Environmental Protection Agency (the "EPA"), the United States Department of Transportation, the Occupational Safety and Health Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices and pollution prevention measures, as well as the safe operation of our pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our terminals, pipelines, saltwells, trucks and related operations, and may be subject to revocation, modification and renewal. See "Crude Oil Releases" below for discussion of an enforcement action.
These laws and permits raise potential exposure to 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 handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and we expect that there will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.
Releases of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, or is not 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.
Crude Oil Releases
We have experienced several crude oil releases involving our assets, including four releases that occurred in the first quarter of 2019, three releases that occurred in the first quarter of 2018, and three releases that occurred in the fourth quarter of 2018. Cleanup operations and site maintenance and remediation efforts on these and other releases are at various stages of completion. Regulatory authorities could require additional remediation based on the results of our remediation efforts. 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. As of
March 31, 2019
, we have accrued
$1.1 million
for remediation and other such matters related to these releases, which excludes the Magnolia Release accrual discussed below. Expenses incurred for the remediation of these crude oil releases are included in operating expenses in our condensed consolidated statements of income and comprehensive income and the majority are subsequently reimbursed by Delek Holdings 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 available insurance reimbursement, will have a material adverse effect upon our business, financial condition or results of operations as we are reimbursed by Delek Holdings for such costs.
During the
three
months ended
March 31, 2019
and
2018
, we recorded approximately
$0.1 million
and a nominal amount of expense, respectively, which is net of total reimbursable costs from Delek Holdings pursuant to the terms of the Omnibus Agreement of
$3.4 million
and
$2.9 million
for the
three
months ended
March 31, 2019
and
2018
, respectively, to cover the costs of asset failures.
Many of the releases have occurred on our SALA Gathering System. Currently, we are in the process of decommissioning certain sections of the SALA Gathering System in an effort to improve the safety and integrity of the system. We do not expect for the decommissioning of certain gathering lines on the system to have a material effect on the operational capabilities of the system.
The United States Department of Justice (the "DOJ"), on behalf of the EPA, and the state of Arkansas, on behalf of the Arkansas Department of Environmental Quality, have been pursuing an enforcement action against the Partnership with regard to potential violations
Notes to Condensed Consolidated Financial Statements (Unaudited)
of the Clean Water Act and certain state laws arising from the Magnolia Release since June 2015. On July 13, 2018, the DOJ and the State of Arkansas filed a civil action against two of the Partnership's wholly-owned subsidiaries, Delek Logistics Operations, LLC and SALA Gathering Systems LLC, in the United States District Court for the Western District of Arkansas. On December 12, 2018, the claims against the Partnership were resolved and an additional demand for a compliance audit at the Magnolia terminal was abandoned in exchange for payment of monetary penalties and other relief. As of
March 31, 2019
, we accrued
$2.2 million
for the Magnolia Release. We believe this amount is adequate to cover our expected obligations related to these proceedings. The accrual is recorded in pipeline release liabilities in our condensed consolidated balance sheet. We expect to settle this accrual in the second half of 2019.
Letters of Credit
As of
March 31, 2019
, we had
no
letters of credit in place.
Note 16 -
Leases
We lease certain pipeline and transportation equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Our leases do not have any outstanding renewal options. Certain leases also include options to purchase the leased equipment.
Certain of our lease agreements include rates based on equipment usage and others include rate inflationary indices based increases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
|
|
|
|
|
|
|
|
Three months ended
|
(in thousands)
|
|
March 31, 2019
|
Lease Cost
|
|
|
Operating lease cost
|
|
$
|
1,427
|
|
Short-term lease cost
(1)
|
|
477
|
|
Total lease cost
|
|
$
|
1,904
|
|
|
|
|
Other Information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
(1,427
|
)
|
|
|
|
Weighted-average remaining lease term (years) for operating leases
|
|
4.2
|
|
|
|
|
Weighted-average discount rate
(2)
operating leases
|
|
8.0
|
%
|
(1)
Includes an immaterial amount of variable lease cost.
(2)
Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842.
The following is an estimate of the maturity of our lease liabilities for operating leases having remaining noncancelable terms in excess of one year as of
March 31, 2019
(in thousands) under ASC 842:
|
|
|
|
|
|
April 1 to December 31, 2019
|
|
$
|
4,328
|
|
2020
|
|
5,659
|
|
2021
|
|
5,337
|
|
2022
|
|
5,031
|
|
2023
|
|
2,429
|
|
Thereafter
|
|
8
|
|
Total lease payment
|
|
22,792
|
|
Less: Interest
|
|
3,606
|
|
Present value of lease liabilities
|
|
$
|
19,186
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is an estimate of our future minimum lease payments for operating leases having remaining noncancelable terms in excess of one year as of
December 31, 2018
(in thousands) under ASC 840:
|
|
|
|
|
|
2019
|
|
$
|
5,755
|
|
2020
|
|
5,659
|
|
2021
|
|
5,337
|
|
2022
|
|
5,031
|
|
2023
|
|
2,429
|
|
Thereafter
|
|
8
|
|
Total future minimum lease payments
|
|
$
|
24,219
|
|
Note 17 -
Subsequent Events
Distribution Declaration
On
April 26, 2019
, our general partner's board of directors declared a quarterly cash distribution of
$0.820
per unit, payable on
May 14, 2019
, to unitholders of record on
May 7, 2019
.