Our operations are subject to all of the risks and operational hazards inherent in gathering, transporting and storing crude oil and intermediate and refined and other products, including:
These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our assets and facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations.
Further, significant portions of our pipeline systems, including our gathering system, and storage and terminalling facilities have been in service for many decades, which could enhance the risks and operational hazards discussed above. The age and condition of our systems could also result in increased maintenance or repair expenditures, and any downtime associated with increased maintenance and repair activities could materially reduce our revenue. Any significant increase in maintenance and repair expenditures or loss of revenue due to the age or condition of our systems could adversely affect our business and results of operations and our ability to make cash distributions to our unitholders.
The energy industry is highly capital intensive, and the entire or partial loss of individual facilities or multiple facilities can result in significant costs to both energy industry companies, such as us, and their insurance carriers. Events which could result in such losses, and in some cases already have impacted our operations, include unplanned maintenance requirements, catastrophic events such as fire, mechanical breakdown, explosion, or contamination, natural disasters and orders issued by environmental authorities. Large energy industry claims could result in significant increases in the level of premium costs and deductibles for participants in the energy industry. Insurance companies that have historically participated in underwriting energy-related facilities may discontinue that practice, may reduce the insurance coverage they are willing to offer or demand significantly higher premiums or deductibles. If we experience significant claims, or if significant changes occur in the number or financial solvency of insurance underwriters for the energy industry, or if other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate insurance at a reasonable cost.
If we are unable to generate sufficient cash flow, our ability to pay quarterly distributions to our common unitholders at all or at current levels or in an amount equal to the minimum quarterly distribution or our ability to increase our quarterly distributions in the future could be impaired materially.
We may not have sufficient available cash each quarter to enable us to pay distributions at current levels or at the minimum quarterly distribution.all. In addition, even if we are able to make distributions, in excess of the minimum quarterly distribution, because the cash we generate will fluctuate from quarter to quarter, quarterly distributions, or any period over period growth in such distributions, may also
fluctuate, or even decrease, from quarter to quarter. Any failure to pay distributions at expected levels could result in a loss of investor confidence and a decrease in the trading price of our units.
Our assets and operations are subject to federal, state and local laws and regulations relating to environmental protection, pipeline integrity and safety that could require us to make substantial expenditures. In addition, our business involves the risks of spills, releases and emissions from our facilities, which could require us to make substantial expenditures and subject us to fines and penalties.
Our assets and operations involve the transportation and storage of crude oil and products, which are subject to increasingly stringent and extensive federal, state and local laws and regulations related to the discharge and remediation of materials in the environment, greenhouse gas emissions, waste management, species and habitat preservation, pollution prevention, pipeline integrity and other safety-related regulations, and characteristics and composition of fuels. These laws and regulations require us to comply with various safety requirements regarding the design, installation, testing, construction and operational management of certain of our assets. These requirements have raised operating costs, and compliance with such laws and regulations may cause us to incur potentially material capital expenditures associated with the construction, maintenance and upgrading of equipment and facilities. Environmental laws and regulations, in particular, are subject to frequent change, and many of them have become and may continue to become more stringent.
Transportation and storage of crude oil and products involves inherent risks of spills and releases and emissions into the air from our facilities, and can subject us to various federal and state laws governing spills and releases, including reporting and remediation obligations. We have historically experienced multiple releases and spills from our facilities and are subject to ongoing remediation and/or monitoring projects and enforcement actions. The costs associated with such obligations can be substantial, as can costs associated with related enforcement matters, including possible fines and penalties. Transportation of crude oil and products over water, or proximate to navigable bodies of water, involves inherent risks (including risks of spills) and could subject us to the provisions of the OPA, the Clean Water Act and similar state environmental
laws should a spill occur from our facilities. See Item 1. "Business—Items 1 and 2. "Business and Properties—Governmental Regulation and Environmental Matters—Water." Among other things, the OPA requires us to prepare a facility response plan identifying the personnel and equipment necessary to remove, to the maximum extent practicable, a “worst case discharge.” While our plans are designed to mitigate environmental impacts, such plans may not protect us from all liability associated with the discharge of crude oil or products into navigable waters.
With respect to the releases that have occurred, or for an event that occurs or is discovered in the future, whether in connection with any of our assets or any other facility to which we send or have sent waste or by-products for treatment or disposal, or a facility or assets that we may acquire from time to time as part of our ongoing growth strategy, we could be liable for all costs and penalties associated with the remediation of such facilities under federal, state and local environmental laws or common law. We may also be liable for personal injury, property damage and natural resource damage claims from third parties alleging contamination from spills or releases from our facilities or operations. In addition, even if we are insured against such risks, we may be responsible for costs or penalties to the extent our insurers do not fulfill their obligations to us or our insurance policies do not cover such items. Our failure to comply with these, or any other environmental, pipeline integrity or safety-related laws or regulations, could result in the assessment of administrative, civil or criminal penalties, the imposition of investigatory and remedial liabilities and the issuance of injunctions that may subject us to additional operational constraints. At present, the United States Department of Justice is pursuing an enforcement action on behalf of the Environmental Protection Agency with regard to potential Clean Water Act violations arising from the 2013 release at our Magnolia Station. See Item 3. Legal Proceedings. In addition, we could incur potentially significant additional expenses should we determine that any of our assets are not in compliance with such laws or regulations in order to bring our assets into compliance. Any such expenses, penalties or liabilities could have a material adverse effect on our business, financial condition or results of operations. While we are entitled to reimbursement or indemnification from Delek Holdings for certain environmental liabilities under the Omnibus Agreement for certain assets which we purchased from Delek Holdings, such reimbursement or indemnification may not fully cover any damages we may incur, or Delek Holdings may default on or otherwise fail to satisfy its obligations to us, which could have a material adverse effect on our business, financial condition or results of operations.
Further, certain of our pipeline facilities are subject to the pipeline safety regulations of the PHMSA at the DOT.PHMSA. The PHMSA regulates the design, construction, testing, operation, maintenance, reporting and emergency response of crude oil, petroleum products and other hazardous liquid pipeline facilities.
We may incur significant costs and liabilities associated with compliance with pipeline safety regulations, and any corresponding repair, remediation, preventive or mitigation measures required for our non-exempt pipeline facilities, including lost cash flows resulting from shutting down our pipelines during the pendency of such repairs. Moreover, changes to pipeline safety laws and regulations that result in more stringent or costly pipeline integrity management or safety standards could have a material adverse effect on us and similarly situated operators.
A material decrease in wholesale fuel margins or in the quantity of barrels sold to wholesale customers could adversely affect our financial condition, results of operations, cash flows, and ability to service our indebtedness.
Our contract counterparties may suspend, reduce or terminate their obligations under our various commercial agreements in certain circumstances, including events of force majeure, which could have a material adverse effect on our financial condition, results of operations, cash flows, ability to service our indebtedness and ability to make distributions to unitholders.
A material decrease in the supply of attractively priced crude oil could materially reduce the volumes of crude oil and refined products that we transport and store, which could materially and adversely affect our financial condition, results of operations, cash flows, ability to service our indebtedness and ability to make distributions to our unitholders.
The volumes of crude oil and refined products that we may transport on our pipelines will depend on the volumes of crude oil processed and refined products produced at Delek’sDelek Holdings’ refineries that we serve, as well as third parties' desire to transport crude on our systems, including our Paline Pipeline. The volumes of crude oil processed and refined products produced depend, in part, on the availability of attractively priced crude oil. For example, if a shipper on one of our pipeline systems is unable to locate or purchase attractively priced crude, which could happen due to a large number of market factors, and their shipments on our system are made in large part because of the pipeline's proximity to such attractively priced crude, then our pipeline may not be utilized. If the capacity of such pipeline is not under contract, or the pipeline is not utilized at all or to its capacity, then our results may be adversely affected. Our Paline Pipeline is such a pipeline. If we are unable to secure capacity agreements on our Paline Pipeline, our Paline Pipeline may go unused or underused for a period of time, which could affect our operating results if third parties are no longer interested in transporting crude oil along that route for economic reasons associated with the price of crude or other reasons.
If, as a result of any of these or other factors, the volumes of attractively priced crude oil available to Delek’sDelek Holdings’ refineries are materially reduced for a prolonged period of time, the volumes of crude oil and refined products that we transport and store, and the related fees for those services, could be materially reduced, which could materially and adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.
A portion of our operations are conducted through joint ventures, over which we do not have full control and which have unique risks.
A portion of our operations are conducted through joint ventures, in which we have been making investments since 2015. We are able to appoint members to the managing boards of each of the joint ventures and maintain certain rights of approval over certain actions of our partners and/or their affiliates. However, our partners in each of our joint ventures, or their affiliates, serve as, or are responsible for, the contractor and the operator of the joint ventures' assets, and we have limited control over the same. In addition, we have limited control over the cash distribution policies of each of the joint ventures.
We share ownership in the joint ventures with partners that may not always share our goals and objectives. Differences in views among the partners may result in delayed decisions or failures to agree on major matters, such as large expenditures or contractual commitments, the construction of assets or borrowing money, among others. Delay or failure to agree may prevent action with respect to such matters, even though such action may not serve our best interest or that of the joint venture. Accordingly, delayed decisions and disagreements could adversely affect the business and operations of the joint ventures and, in turn, our business and operations. From time to time, our joint ventures may be involved in disputes or legal proceedings which may negatively affect our investments. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.
We are exposed to direct commodity price risk and interest rate risk, both of which may increase in the future. We may incur losses as a result of our forward contract activities and derivative transactions.
We typically own and hold a certain amount of inventory of light products in our business with respect to our wholesale marketing business in westWest Texas. Depending on our ability to sell such inventory, and the timing in which we do so, we could be exposed to risks related to the volatility of commodity prices in westWest Texas. Such volatility depends on many factors, including general market conditions and prices, demand for refined products in the westWest Texas market, the timing of refined product deliveries and downtime at refineries in the surrounding area. In addition, our actual product acquisitions from suppliers versus the amount we nominated to acquire may result in us being effectively long or short with respect to a given product and thus subject to further commodity price risk. This exposure to the volatility
To partially mitigate the risk of various financial exposures inherent in our business, including commodity price risk and interest rate risk on our floating rate debt, we selectively use derivative financial instruments, such as fuel-related derivative transactions, and may use interest rate swaps and interest rate cap agreements. In connection with such derivative transactions, we may be required to make payments to maintain margin accounts and to settle the contracts at their value in accordance with their terms and upon termination. The maintenance of required margin accounts, and the settlement of derivative contracts, could cause us to suffer losses or limit gains. In particular, derivative transactions could expose us to the risk of financial loss upon unexpected or unusual variations in the sales pricesprice of wholesale gasoline and diesel relative to the derivative instrument. We cannot assure you that the strategies underlying these transactions will be successful. If any of the instrumentsstrategies we utilize to manage our exposure to various types of risk is not effective, we may incur losses.
We may not be able to significantly increase or retain our third-party revenue due to competition and other factors, which could limit our ability to grow and may increase our dependence on Delek.
We can provide no assurance that we will be able to retain or attract third-party revenues, which could limit our ability to grow and increase our dependence on Delek.Delek Holdings. Our ability to increase our third-party revenue is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when third-party shippers require it. Further, under certain of our commercial agreements with Delek Holdings, we may not provide service to third parties with respect to certain assets without Delek’sDelek Holdings’ consent, subject to limited exceptions. Furthermore, to the extent that we have capacity at our refined products terminals available for third-party volumes, competition from other existing or future refined products terminals owned by our competitors may limit our ability to utilize this available capacity.
The costs, scope, timelines and benefits of any construction projects we undertake may deviate significantly from our original plans and estimates.
One of our business strategies is to evaluate and make capital investments to expand our existing asset base through the development and construction of new or expanded logistics assets. At the same time, we also will need to devote significant resources to maintaining our asset base. However, in developing or maintaining such assets, we may experience unanticipated increases in the cost, scope and completion time for our construction or maintenance and repair projects. Equipment that we require to complete these projects may be unavailable to us at expected costs or within expected time periods. Additionally, labor expense may exceed our expectations. Moreover, pipeline construction projects requiring federal approvals are generally subject to environment review requirements under the National Environmental Policy Act and must also comply with other natural resources review requirements imposed pursuant to the Endangered Species Act, the National Historic Preservation Act and other federal and state laws and regulations and potential permitting requirements. Due to these or other factors beyond our control, we may be unable to complete these projects within anticipated cost parameters and timelines. In addition, the benefits we realize from completed projects may take longer to realize and/or be less than we anticipated. Our inability to complete and/or realize the benefits of construction and/or maintenance projects in a cost-efficient and timely manner could have a material adverse effect on our business, financial condition, results of operations, cash flows, ability to service our indebtedness and our ability to make distributions.distributions to our unitholders.
If we are unable to obtain needed capital or financing on satisfactory terms to fund expansions of our asset base, our ability to make quarterly cash distributions may be diminished or our financial leverage could increase.
If third-party pipelines, terminals or other facilities interconnected to our pipeline systems or terminals become partially or fully unavailable, or if we are unable to fulfill our contractual obligations, our financial condition, results of operations, cash flows, ability to service our indebtedness and ability to make distributions to our unitholders could be adversely affected.
Our pipelines and terminals connect to other pipelines, terminals and facilities owned and operated by unaffiliated third parties. Our shippers often need to use such pipelines, terminals and facilities; however, the continuing operation of such third-party pipelines, terminals and other facilities is not within our control.
These pipelines, terminals and other facilities may become unavailable because of testing, turnarounds, line repair, reduced operating pressure, lack of operating capacity, regulatory requirements, curtailments of receipt or deliveries due to insufficient capacity, corporate business decisions or because of damage from hurricanes or other operational hazards. In addition, we do not have interconnect agreements with all of these pipelines, terminals and other facilities, and the interconnect agreements we do have may be terminated in certain circumstances, including circumstances beyond our control, and on short notice. If any of these pipelines, terminals or other facilities becomes unable to receive or transport crude oil or refined products, we may be unable to perform our obligations under our commercial agreements with Delek Holdings and third parties, and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders could be adversely affected.
Similarly, if additional shippers begin transporting volumes of refined products or crude oil over interconnecting pipelines, the allocations to us and other existing shippers on these interconnecting pipelines could be reduced, which could also reduce volumes distributed through our terminals or transported through our crude oil pipelines. Allocation reductions of this nature are not infrequent and are beyond our control. Any significant reduction in volumes could adversely affect our revenuesfinancial condition, results of operations, cash flows, ability to service our indebtedness and cash flow and our ability to make distributions to our unitholders.
An interruption or reduction of supply and delivery of refined products to our wholesale marketing business could result in a decline in our sales and profitability.
We are exposed to the credit risks and certain other risks of our key customers and other contractual counterparties, including Delek Holdings and its assignees, and any material nonpayment or nonperformance by our key customers or other counterparties could adversely affect our business, which could have a material adverse effect on our financial condition, results of operations, cash flows, ability to service our indebtedness and our ability to make distributions to our unitholders.
For example, our revolving credit facility limits our ability to, among other things:
Our revolving credit facility contains covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. In addition, our revolving credit facility contains events of default customary for agreements of this nature, including the occurrence of acertain change of control (which will occur if, among other things, (i) Delek ceases to own and control legally and beneficially at least 51% of the equity interests of our general partner, (ii) Delek Logistics GP, LLC ceases to be our sole general partner, or (iii) we fail to own and control legally and beneficially 100% of the equity interests of any other borrower under our revolving credit facility, unless otherwise permitted thereunder).
Our debt levels may limit our flexibility to obtain financing and to pursue other business opportunities.
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, somemany of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, which is within our control, or such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital, which actions we may not be able to effect on satisfactory terms or at all.
Shippers may protest, and the FERC may investigate, the lawfulness of new or changed tariff rates. The FERC can suspend those tariff rates for up to seven months. It can also require refunds of amounts collected, based on rates that are ultimately found to be unlawful, and prescribe new rates prospectively. The FERC and interested parties can also challenge tariff rates that have become final and effective.
While the FERC regulates rates and terms and conditions of service for transportation of crude oil or refined products in interstate commerce by pipeline, state agencies may regulate rates and terms and conditions of service for petroleum pipeline transportation in intrastate commerce. Whether a pipeline provides service in interstate commerce or intrastate commerce is highly fact-dependent and determined on a case-by-case basis. We cannot provide assurance that the FERC will not, at some point, assert that some or all of the transportation service we provide that is not currently subject to our FERC tariffs is within its jurisdiction. If the FERC were successful with any such assertion, we may be required to pay refunds to customers and the FERC's rate-making methodologies may limit our ability to set rates based on our actual costs, delay the use of rates that reflect increased costs and subject us to potentially burdensome and expensive operational, reporting and other requirements. Service on the East Texas Crude Logistics System is currently subject to a temporary waiver issued by the FERC. If the conditions to the continued effectiveness of that East Texas Waiver Order are no longer true at any point, service on that system would become fully subject to the FERC tariff filing requirements and other regulatory requirements for the provision of transportation service. If we file tariffs, we may be required to provide a cost justification for the transportation charge. We would also be required to provide service to all prospective shippers making reasonable requests for service without undue discrimination and to operate in a manner that does not provide any undue preference to shippers. The rates under such tariffs may be insufficient to allow us to recover fully our cost of providing service on the affected pipelines, which could adversely affect our business, financial condition and results of operations.
commissions have generally not been aggressive in regulating common carrier pipelines, have generally not investigated the rates or practices of petroleum pipelines in the absence of shipper complaints and generally resolve complaints informally. If the regulatory commissions in the states in which we operate change their policies and aggressively regulate the rates or terms of service of pipelines operating in those states, it could adversely affect our business, financial condition and results of operations.
In addition, the fees we charge on certain of our other contracts not involving regulated or other pipelines are also subject to change based on inflation basedinflation-based indices, such as certain sub-indices of the producer price index or the consumer price index. If the index rises, we will be able to increase our rates. However, if the index falls, we will be required to reduce our rates.
Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.
Floating interest rates on our revolving credit facility, to the extent not hedged, and interest rates onunder future credit facilities and debt offerings, could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.
Risk Factors
The Omnibus Agreement provides us with a right of first offer on certain of Delek’s existing logistics assets and certain assets that it may acquire or construct in the future, subject to certain exceptions and time limitations. The consummation and timing of any future acquisitions pursuant to this right will depend on, among other things, Delek’s willingness to offer such assets for sale and obtain any necessary consents, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and Delek is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to exercise our right of first offer, if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by Delek at any time in the event that it no longer controls our general partner.
If we are unable to make investments in joint ventures or acquisitions on economically acceptable terms, from Delek or third parties, our future growth could be limited, and any investments or acquisitions we may make may reduce, rather than increase,negatively impact our financial condition, results of operations, cash flows, ability to service our indebtedness and ability to make distributions to unitholders.
A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions or invest in joint ventures that result in an increase in cash flow. If we are unable to make acquisitions from Delek Holdings or third parties or invest in joint ventures, because we are unable to identify attractive acquisition or project candidates or negotiate acceptable purchase contracts, or if we are unable to obtain financing for these acquisitions or investments on economically acceptable terms, or if we are outbid by competitors or if we or the seller are unable to obtain any necessary consents, our future growth and ability to increase distributions to unitholders may be limited. Furthermore, even if we do consummate acquisitions or investments in joint ventures that we believe will be accretive, they may in fact result in a decrease in cash flow. Any acquisition or investment involves potential risks, including, among other things:
•mistaken assumptions about revenues and costs, including synergies;
•the assumption of known or unknown liabilities;
•limitations on rights to indemnity from the seller;
•mistaken assumptions about the overall costs of equity or debt;
•the diversion of management’s attention from other business concerns;
•ineffective or poor integration of such acquisitions;
•unforeseen difficulties operating multi-customer and product assets in new product areas or new markets; and
•customer or key employee losses at the acquired businesses.
If we consummate any future acquisitions or investments in joint ventures, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.
We may be unsuccessful in integrating the operations of the assets we have acquired or of any future acquisitions with our existing operations and in realizing all or any part of the anticipated benefits of any such acquisitions.
From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of improper assumptions regarding the new assets, unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition, if at all. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.
The expansion of existing assets and construction of new assets, including through joint venture investments, may not result in revenue increases and will be subject to regulatory, environmental, political, legal, economic and other risks, which could adversely affect our financial condition, results of operations, cash flows, ability to service our indebtedness and financial condition.
ability to make distributions to unitholders.
A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets, including through investments in joint ventures. The construction of a new pipeline or terminal, or the expansion of an existing pipeline or terminal, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we, or joint ventures we invest in, undertake these types of projects, they may not be completed on schedule, or at all, or at the budgeted cost. Moreover, we, or the joint ventures we invest in, may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects. Even if such commitments are received, an increase in revenue may not be realized for an extended period of time. For instance, if we build, or invest in a joint venture that builds, a new pipeline, the construction will occur over an extended period of time, and we will not receive any material increases in revenues until after completion of the project, if at all. In addition, we, or the joint ventures we invest in, may construct facilities to capture anticipated future growth in production in a region or gain access to crude supplies at lower costs, and such growth or access may not materialize. As a result, new facilities may not be able to attract enough throughput to achieve the expected return on investment, which could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.
We do not own all of the land on which most of our pipelines and several of our facilities are located, which could result in disruptions to our operations.
We do not own all of the land on which most of our pipelines, tank farms and terminal facilities are located, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way or leases, if such rights-of-way or leases lapse or terminate or if our facilities are not properly located within the boundaries of such leases or rights-of-way. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies, and some of those agreements may grant us those rights for only a specific period of time. Our loss of such rights, through our inability to renew any rights-of-way contracts, or a significant increase in the costs of these rights, could have a material adverse effect on our business, financial condition, results of operations, ability to maintain our assets and cash flows and our ability to make distributions to our unitholders.
We could incur substantial costs or disruptions in our business if we cannot obtain or maintain, or otherwise fail to maintain, necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations.
Our operations require numerous permits and authorizations under various laws and regulations. These authorizations and permits are subject to revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions and/or facility shutdowns. In addition, material modifications of our operations or changes in applicable laws could require modifications to our existing permits or upgrades to our existing pollution control equipment. Any or all of these matters could have a negative effect on our business, results of operations and cash flows.
We have not obtained independent evaluations of all of the reserves connected to our gathering systems; therefore, in the future, customer volumes on our systems could be less than we anticipate.
We do not routinely obtain or update independent evaluations of the reserves connected to our systems. Moreover, even if we did obtain independent evaluations of all of the reserves connected to our systems, such evaluations may prove to be incorrect. Crude oil and natural gas reserve engineering requires subjective estimates of underground accumulations of crude oil and natural gas and assumptions concerning future crude oil and natural gas prices, future production levels and operating and development costs.
Accordingly, we may not have accurate estimates of total reserves dedicated to our systems of the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to our gathering system is less than we anticipate and we are unable to secure additional volumes, it could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.
Certain of our gathering agreements contain provisions that can reduce that cash flow stability that the agreements were designed to achieve.
We designed those gathering agreements that contain MVC provisions to generate stable cash flows for us over the life of the MVC contract term. Under certain of these agreements, Delek Holdings agreed to ship a minimum volume on our gathering systems or over certain periods during the term of the agreement. If Delek Holdings' actual throughput volumes are less than its MVC for the contracted measurement period, it must make a shortfall payment to us at the end of the applicable measurement period. The amount of the shortfall payment is based on the difference between the actual throughput volume shipped or processed for the applicable period and the MVC for the applicable period, multiplied by the applicable fee. To the extent that Delek Holdings' actual throughput volumes are above or below its MVC for the applicable contracted measurement period, certain of our gathering agreements contain provisions that allow Delek Holdings to use the excess volumes or the shortfall payment to credit against future excess volumes or future shortfall payments, which could have a material adverse effect on our results of operations, financial condition and cash flows and our ability to make cash distributions to our unitholders.
Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating and capital costs and reduced demand for our products and services.
In December 2009,The threat of climate change continues to attract considerable attention in the EPA published its findings thatUnited States and in foreign countries. Numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of greenhouse gases, or GHGs, present“GHGs” as well as to restrict or eliminate such future emissions. As a dangerresult, our operations are subject to public healtha series of regulatory, political, litigation, and financial risks associated with the environment because emissionsproduction and processing of such gases are, according tofossil fuels and emission of GHGs.
In the EPA, contributing to the warming of the Earth’s atmosphere and other climatic conditions. Based on these findings, the EPA adopted two sets of regulations that restrict emissions of GHGs under existing provisions ofUnited States, no comprehensive climate change legislation has been implemented at the federal level. However, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the Clean Air Act, including onethe EPA has adopted regulations that, requires a reduction in emissions of GHGs from motor vehiclesamong other things, establish construction and another that regulatesoperating permit reviews for GHG emissions from certain large stationary sources, underrequire the Clean Air Act Preventionmonitoring and annual reporting of Significant Deterioration (“PSD”) and Title V permitting programs. In addition, the EPA expanded its existing GHG emissions reporting rule to include onshorefrom certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of methane from certain new, modified, or reconstructed facilities in the oil and natural gas processing, transmission, storage,sector, and distribution activities, beginning in 2012together with the DOT, implement GHG emissions limits on vehicles manufactured for emissions occurring in 2011. Congress has also from time to time considered legislation to reduce emissions of GHGs. Efforts have been made, and continue to be made,operation in the United States.
Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of GHG emissions. At the international community toward the adoption of international treaties or protocols that would address global climate change issues. Inlevel, in April 2016, the United StatesU.S. became a signatory to the 2015 United Nations Conference on Climate Change, which led to the creation of the Paris Agreement. The Paris Agreement, which became effective by its terms on November 4, 2016, will require countries to review and "represent a progression" in their intended nationally determined contributions, which set GHG emission reduction goals, every five years,After beginning in 2020. On August 4, 2017, the United States formally communicated to the United Nations its intentprocess to withdraw from participatingparticipation in the Paris Agreement in 2017, in 2021 the U.S. rejoined the Paris Agreement. The adoption and implementation of new or more stringent legislation or regulations could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which entails a four year process. In responsecould reduce demand for our services and products.
Concern over the threat of climate change may also result in political action deleterious to our interests. Separately, increased attention to climate change risks has increased the announced withdrawal plan, a numberpossibility of claims brought by public and private entities against oil and gas companies in connection with their GHG emissions. While courts have generally declined to assign direct liability for climate change to large sources of GHG emissions, new claims for damages and increased government scrutiny, especially from state and local governments, will likely continue. Moreover, to the extent societal pressures or political or other factors are involved, it is possible that such liability could be imposed without regard to the company’s causation of or contribution to the asserted damage, or to other mitigating factors.
There are also increasing financial risks for fossil fuel producers as shareholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change may elect in the United Statesfuture to shift some or all of their investments into non-energy related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have expressed intentionsbecome more attentive to take GHG-related actions. Although it issustainable lending practices and some of them may elect not possible to predictprovide funding for fossil fuel energy companies. Additionally, the requirementslending practices of any GHG legislationinstitutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate change. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or regulations that may be enactedcancellation of drilling programs or promulgated, any lawsdevelopment or regulations that may be adopted to restrictproduction activities. One or reduce GHG emissions may require us to incur increased operating costs. If we are unable to maintain salesmore of our refined products at a price that reflects such increased costs, therethese developments could behave a material adverse effect on our business, financial condition and results of operations. Further,operation.
any increase in the prices of refined products resulting from such increased costs could have a material adverse effect on our business, financial condition or results of operations. Moreover, GHG regulation could also impact the consumption of refined products, thereby affecting the demand for our services. Finally, someit should be noted that many scientists have concluded that increasing concentrations of GHGGHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climate events thatclimatic events; if any such effects were to occur, they could have an adverse effect on our assets.
operations or our customers’ exploration and production operations, which in turn could affect demand for our services.
In 2010, the EPA and the National Highway Transportation Safety Administration ("NHTSA") finalized new standards, raising the required Corporate Average Fuel Economy, or CAFE, standard of the nation’s passenger fleet by 40% to approximately 35 miles per gallon by 2016 and imposing the first ever federal GHG emissions standards on cars and light trucks. In September 2011, the EPA and the DOT finalized first-time standards for fuel economy of medium and heavy duty trucks. On August 28, 2012, the EPA and NHTSA announced final regulations that mandated further decreases in passenger vehicle GHG emissions and increases in fuel economy beginning with 2017 model year vehicles and increasing to the equivalent of 54.5 miles per gallon by 2025. During 2016, the EPA conducted a mid-term evaluation of progress in meeting vehicle GHG standards and in January 2017 the EPA issued a determination to maintain the current GHG emissions standards for model year (MY) 2022-2025 vehicles.vehicles, but that action was subsequently withdrawn on April 13, 2018. In March 2017, EPA announced its decision to reopen the mid-term evaluation process and reconsider the January 2017 determination. As a result, GHG emissions standards for MY 2022-2025 vehicles remain uncertain. In August 2016, the EPA and the NHTSA jointly finalized standards for medium- and heavy-duty vehicles regulating fuel efficiency and carbon pollution. On August 10, 2021, the NHTSA proposed to amend the CAFE standards previously published in 2020 (for model years 2024-2026) to increase the stringency at a rate of 8% a year, rather than the 1.5% set previously. Such increases in fuel economy standards and potential electrification of the vehicle fleet, along with mandated increases in use of renewable fuels discussed above, could result in decreasing demand for petroleum fuels. Decreasing demand for petroleum fuels could materially affect profitability at Delek’sDelek Holdings’ refineries, which could adversely impact our business, results of operations and cash flows.
Our operations are subject to federal and state laws and regulations relating to product quality specifications, and we could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of products we distribute to meet certain quality specifications.
Various federal and state agencies prescribe specific product quality specifications for refined products, including vapor pressure, sulfur content, benzene content, ethanol content and biodiesel content. Changes in product quality specifications or blending requirements could reduce our throughput volume, require us to incur additional handling costs or require capital expenditures. For example, mandated increases in use of renewable fuels could require the construction of additional storage and blending equipment. If we are unable to recover these costs through increased revenues, our cash flows and ability to pay cash distributions to our unitholders could be adversely affected. Violations of product quality laws attributable to our operations could subject us to significant fines and penalties as well as negative publicity. In addition, changes in the product quality of the products we receive on our pipeline system could reduce or eliminate our ability to blend products.
Increased regulation of hydraulic fracturing could result in reductions or delays in customer production, which could materially adversely impact our revenues.
Hydraulic fracturing is an important and increasingly common practice that is used to stimulate production of natural gas and/or crude oil from dense subsurface rock formations and is primarily regulated by state agencies. However, Congress has in the past, and may in the future consider legislation to regulate hydraulic fracturing by federal agencies. Many states have already adopted laws and/or regulations that require disclosure of the chemicals used in hydraulic fracturing. States also could elect to prohibit hydraulic fracturing altogether, as New York, Maryland, and Vermont have done. In addition, certain local governments have adopted, and additional local governments may adopt, ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular. These initiatives and similar efforts elsewhere could restrict oil and gas development in the future.
The EPA has also moved forward with various regulatory actions, including a proposal to issue new regulations under the New Source Performance Standards (NSPS) to expand and strengthen emissions reduction requirements under NSPS OOOOa for new, modified and reconstructed oil and natural gas sources, and require states to reduce methane emissions from existing sources nationwide. The BLM has also asserted regulatory authority over aspects of the hydraulic fracturing process and issued a final rule in March 2015 that established more stringent standards for performing hydraulic fracturing on federal and Indian lands, including requirements relating to well construction and integrity, handling of wastewater and chemical disclosure. However, in December 2017, the BLM published a final rule rescinding the 2015 rule. The U.S. District Court for the Northern District of California upheld the December 2017 rescission rule in a March 2020 decision, and the State of California and environmental plaintiffs appealed. Litigation is currently ongoing.
Further, several federal governmental agencies have conducted reviews and studies on the environmental aspects of hydraulic fracturing, including the EPA. The results of such reviews or studies could spur initiatives to further regulate hydraulic fracturing.
State and federal regulatory agencies recently have focused on a possible connection between the hydraulic fracturing related activities and the increased occurrence of seismic activity. When caused by human activity, such events are called induced seismicity. Some state regulatory agencies, including those in Colorado, Ohio, and Texas, have modified their regulations or guidance to account for induced seismicity. These developments could result in additional regulation and restrictions on the use of injection disposal wells and hydraulic fracturing. Such regulations and restrictions could cause delays and impose additional costs and restrictions on our customers.
Additionally, certain of our customers produce oil and gas on federal lands. On January 20, 2021, the Acting Secretary for the Department of the Interior signed an order effectively suspending new fossil fuel leasing and permitting on federal lands for 60 days. Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. Several states filed lawsuits challenging the suspension, and on June 15, 2021, a judge in the U.S. District Court for the Western District of Louisiana issued a nationwide temporary injunction blocking the suspension. The Department of the Interior appealed the U.S. District Court’s ruling, but resumed oil and gas leasing pending resolution of the appeal. In November 2021, the Department of the Interior completed its review and issued a report on the federal oil and gas leasing program. The Department of the Interior’s report recommends several changes to federal leasing practices, including changes to royalty payments, bidding, and bonding requirements.
If new or more stringent federal, state or local legal restrictions relating to drilling activities or to the hydraulic fracturing process are adopted, this could result in a reduction in the supply of natural gas and/or crude oil that our customers produce and could thereby adversely affect our revenues and results of operations. Compliance with such rules could also generally result in additional costs, including increased capital expenditures and operating costs, for our customers, which could ultimately decrease end-user demand for our services and could have a material adverse effect on our business.
Increasing attention on environmental, social and governance matters may impact our business, financial results or stock price.
In recent years, increasing attention has been given to corporate activities related to environmental, social and governance (“ESG”) matters in public discourse and the investment community. A terrorist attacknumber of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities and other members of the investing community.
These activities include increasing attention and demands for action related to climate change, promoting the use of substitutes to fossil fuel products, and encouraging the divestment of companies in the fossil fuel industry. For example, in recent years, private litigation has been increasingly initiated against oil and gas companies by local and state agencies and private parties alleging climate change impacts arising from their operations and seeking damages and equitable relief. We have not had any climate change litigation initiated against us to date and we cannot reasonably predict whether any such litigation will be initiated against us or, if initiated, what the outcome would be. If any such litigation were to be initiated against us, at a minimum, we would incur legal and other expenses to defend such lawsuits, which amounts may be significant. If we failed to prevail in any such litigation and were required to pay significant damages and/or materially alter the manner in which we conduct our business, there could be a material adverse impact on our operations, financial condition or results of operations. The increasing attention to ESG activities and a shift by consumers to more fuel-efficient or alternative fuel vehicles could reduce demand for our products, reduce our profits, increase the potential for investigations and litigation, impair our brand and have negative impacts on our common limited partner unit price and access to capital markets. Additionally, increased attention may increase opposition to the development, permitting, construction or operation of our pipelines and facilities from environmental groups, landowners, local groups and other advocates. In addition to litigation such opposition may take the form of organized protests, attempts to block or sabotage our operations, intervention in regulatory or administrative proceedings involving our assets or other actions designed to prevent, disrupt or delay the development, operation, or maintenance of our assets and business.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital.
Acts of terror or sabotage, threats of war, armed conflict or actual war may hinder or prevent us from conducting our business.
TerroristActs of sabotage or terrorist attacks (including cyber-attacks) in the United States,U.S., as well as events occurring in response or similar to or in connection with such attacks,them, including political instability in varioussignificant oil producing regions such as the Middle Eastern countries,East, Africa, the former Soviet Union and South America, may harm our business. Energy-related assets (which could include refineries, pipelines and terminals such as ours)terminals) may be at greater risk of future terrorist attacks than other possible targets in the United States.U.S. In addition, the State of Israel, where Delek Holdings Group, the former parent company of Delek Holdings, is based, has suffered armed conflicts and political instability in recent years.years, including the Israel-Hamas War. We may be more susceptible to terrorista direct attack as a result of our connection to Israel. In the future, certain of the directors of our general partner may reside in Israel.
A direct attack on our assets (including cyber attacks), Delek’s assets, or the assets of others used by us, could have a material adverse effect on our business, financial condition and results of operations.
Uncertainty surrounding new or continued global hostilities or other sustained military campaigns, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror, armed conflict or war, may affect our operations in unpredictable ways, including disruptions of crude oil supplies and markets for refined products. In addition, any terrorist attack, armed conflict, war or continued political instability in the significant oil producing regions such as the Middle East, Africa, the former Soviet Union and South America could have an adverse impact on energy prices, including prices for the crude oil, and other feedstocks we transport and refined petroleum products, and an adverse impact on the margins from our petroleum product marketing operations. DisruptionThe long-term impacts of terrorist attacks and the threat of future terrorist on energy transportation infrastructure or vandalism could result in increased costs to our business. In addition, disruption or significant increases in energy prices could also result in government-imposed price controls.
Any one of, or a combination of, these occurrences could have a material adverse effect on our business, financial condition and results of operations.
Further, changes in the insurance markets attributable to terrorist attacks or acts of sabotage could make certain types of insurance more difficult for us to obtain. Moreover, the insurance that may be available to us may be significantly more expensive than our existing insurance coverage. Instability in the financial markets as a result of terrorism, sabotage or war could also affect our ability to raise capital, including our ability to repay or refinance debt.
Our customers’ operating results are seasonal and generally lower in the first and fourth quarters of the year. Our customers depend on favorable weather conditions in the spring and summer months.
The volume and throughput of crude oil and refined products transported through our pipelines and sold through our terminals and to third parties is directly affected by the level of supply and demand for all of such products in the markets served directly or indirectly by our assets. Supply and demand for such products fluctuatefluctuates during the calendar year. Demand for gasoline, for example, is generally higher
during the summer months than during the winter months due to seasonal increases in motor vehicle traffic whileand demand for asphalt products, which is a substantial product of Delek'sDelek Holdings' El Dorado Refinery, is lower in the winter months. In addition, our refining customers, such as Delek Holdings, occasionally slow or shut down operations to perform planned maintenance during the winter, when demand for their products is lower. Accordingly, these factors can affect the need for crude oil or finishedrefined products by our customers, and therefore limit our volumes or throughput during these periods, and could adversely affect our customers’ business, financial condition and results of operations, which may adversely affect our business, financial condition and results of operations.
Regulations adopted by the Commodity Futures Trading CommissionLegislative and regulatory measures could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business.
The U.S. Congress has adoptedProvisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is comprehensive financial reform legislation that, among other things, establishes new federal oversight and regulation of over-the-counter derivativescertain rules and many ofregulations promulgated by the entities that participate in that market. The Dodd-Frank Act was enacted in 2010, and the Commodity Futures Trading Commission (“CFTC”), andCFTC, the SEC, along with certainand other regulators, have promulgated final rules to implement many of the Dodd-Frank Act’s provisions relating to over-the-counter derivatives. Most of these rules have been finalized, while others have not; as a result, the final form and timing of the implementation of certain parts of the regulatory regime affecting commodity derivatives remains uncertain. Among other consequences of the new regulations, entities that enter into derivatives (including futures and exchange-traded and over-the-counter swaps) are expected to be subject to aggregate position limits for certain futures, options and swaps (under regulations re-proposed in December 2016 that have not been finalized and the ultimate form, timing and implementation of which remains uncertain), and are currently subject to recordkeeping and reporting requirements. There can be no assurance that, when fully implemented, this regulatory regime will notgovernmental bodies may have a material adverse effect on our ability to hedge our exposure to commodity prices, interest rates and other risks to the extent that we use derivatives to do so.
We rely on information technology in our operations, and any material failure, inadequacy, interruption, cyber-attack or security failure of that technology could harm our business.
We are heavily dependentrely on information technology infrastructure and rely upon certain critical information systems foracross our operations, including in the effective operationmonitoring of our business. These information systems include data network and telecommunications, internet access and our websites, and various computer hardware equipment and software applications, including those that are critical to the safe operationmovement of petroleum through our pipelines and terminals. Theseterminals and in various other processes and transactions. We also utilize information technology systems are subjectand controls throughout our operations to damagecapture accounting, technical and regulatory data for subsequent archiving, analysis and reporting. Disruption, failure, or interruption from a number of potential sources, including natural disasters, software virusescyber security breaches affecting or other malware, power failures, cyber-attacks and other events totargeting our computer or telecommunications systems, our infrastructure, or the extent that these information systems are under our or Delek’s control. Delek has implemented measures, such as virus protection software, intrusion detection systems, advanced monitoring and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe. Any compromiseinfrastructure of our data security, or our inability to use or access these information systems at critical points in time, could unfavorablycloud-based IT service providers may materially impact the timely and efficient operation of our business and operations. A failure of these systems, whether due to power loss, unsuccessful transition to upgraded or replacement systems, unauthorized access or other cyber breach or attack could result in disruption to our business operations, access to or disclosure or loss of data and/or proprietary information, personal injuries and environmental damage, any of which could have an adverse effect on our business, reputation, and effectiveness. We could also be subject us to resulting investigation and remediation costs, as well as regulatory enforcement, private litigation and related costs, any of which could have a material adverse impact on our cash flow and results of operations. Furthermore, public disclosure of any such event could result in negative publicity and a loss of investor confidence, which could have a negative impact on the trading price of our common units.
We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal credit information. Despite our security measures, we experience attempts by external parties to penetrate and attack our networks and systems. Although such attempts to date have not, to our knowledge, resulted in any material breaches, disruptions, or loss of business-critical information, our systems and procedures for protecting against such attacks and mitigating such risks may prove to be insufficient in the future and such attacks could have an adverse impact on our business and operations, including damage to our reputation and competitiveness, remediation costs, litigation or regulatory actions. In addition, as technologies evolve, work trends change such as the increase in remote work in the wake of the COVID-19 Pandemic, and cyber-attacks become more sophisticated, we may incur significant costs to upgrade or enhance our security measures to protect against such attacks and we may face difficulties in fully anticipating or implementing adequate preventive measures or mitigating potential harm. We could also be liable under laws that protect the privacy of personal information, subject to regulatory penalties, experience damage to our reputation or a loss of consumer confidence, or incur additional costs for remediation and liabilities,modification or enhancement of our information systems to prevent future occurrences, all of which could adversely affect our reputation, business, operations or financial results.
We may be adversely affected by the effects of inflation.
Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has the potential to result in higher interest rates and capital costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred.
Our business could be adversely impacted as a result of Delek Holdings’ and our general partner’s failure to retain or attract key talent.
We are dependent on the services of Delek Holdings’ and our general partner’s employees. Their failure to retain or attract key talent with specific capabilities could interfere with our ability to execute our business strategy, and could diminish our ability to execute and integrate strategic transactions. As a result, our ability to remain competitive in our industry sector and/or to operate effectively could be adversely impacted.
Evolving employee preferences and values, inflationary pressures, shortages in the labor market, increased employee turnover, and changes in the availability of workers could make it more difficult for Delek Holdings and our general partner to retain or attract key talent and could increase their labor costs, which could have a material adverse effect on our liquidity, business, financial condition and results of operations. Furthermore, the continuing
Inflation, and other factors, could increase Delek Holdings’ and our general partner’s costs of providing employee benefits. Their failure, or any perceived failure to provide such benefits, could impact our competitive position, which could in turn negatively affect our liquidity, business, financial condition and results of operations.
Our business is subject to complex and evolving threatlaws, regulations and security standards regarding privacy, cybersecurity and data protection (“data protection laws”). Many of cyber-attacks has resultedthese data protection laws are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations or other harm to our business.
The constantly evolving regulatory focus on prevention. Toand legislative environment surrounding data privacy and protection poses increasingly complex compliance challenges, and complying with such data protection laws could increase the extentcosts and complexity of compliance. While we face increased regulatory requirements,do not collect significant amounts of personal information from consumers, we do have personal information from our employees, job applicants and some business partners, such as contractors and distributors.
Any failure, whether real or perceived, by us to comply with applicable data protection laws could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments, and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. Our compliance with emerging privacy/security laws, as well as any associated inquiries or investigations or any other government actions related to these laws, may increase our operating costs.
In the second quarter of 2021, the Department of Homeland Security’s Transportation Security Administration (“TSA”) announced two new security directives. These directives require critical pipeline owners to comply with mandatory reporting measures, including, among other things, to appoint personnel, report confirmed and potential cybersecurity incidents to the DHS Cybersecurity and Infrastructure Security Agency (“CISA”) and provide vulnerability assessments. As legislation continues to develop and cyber incidents continue to evolve, we may be required to expend significant additional resources to meetrespond to cyberattacks, to continue to modify or enhance our protective measures, or to detect, assess, investigate and remediate any critical infrastructure security vulnerabilities and report any cyber incidents to the applicable regulatory authorities. Any failure to remain in compliance with these government regulations may result in enforcement actions which may have a material adverse effect on our business and operations.
An impairment of our long-lived assets or goodwill could reduce our earnings or negatively impact our financial condition and results of operations.
An impairment of our long-lived assets or goodwill could reduce our earnings or negatively impact our results of operations and financial condition. We continually monitor our business, the business environment and the performance of our operations to determine if an event has occurred that indicates that a long lived asset or goodwill may be impaired. If a triggering event occurs, which is a determination that involves judgment, we may be required to utilize cash flow projections to assess our ability to recover the carrying value based on the ability to generate future cash flows. We may also conduct impairment testing based on both the guideline public company and guideline transaction methods. Our long-lived assets and goodwill impairment analyses are sensitive to changes in key assumptions used in our analysis, estimates of future tariff rates, forecasted throughput levels, operating costs and capital expenditures. If the assumptions used in our analysis are not realized, it is possible a material impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any additional impairments of long-lived assets or goodwill in the future.
The Partnership's ongoing study of strategic options could materially impact our strategic direction, business and results of operations.
Delek Holdings’ board of directors, with the assistance of outside advisors, is evaluating a wide range of strategies for Delek Holdings to unlock and enhance stockholder value. This process, including any uncertainty created by this process, involves a number of risks which could impact our business and our unitholders, including the following: significant fluctuations in our unit price could occur in response to developments or actions relating to the process or market speculation regarding any such requirements.developments or actions; we may encounter difficulties in hiring, retaining and motivating key personnel who provide services to us during this process or as a result of uncertainties generated by this process or any developments or actions relating to it; we may incur substantial increases in general and administrative expense associated with increased legal fees and the need to retain and compensate third-party advisors; and we may experience difficulties in preserving the commercially sensitive information that may need to be disclosed to third parties during this process or in connection with an assessment of our strategic alternatives. The review process also requires significant time and attention from management, which could distract them from other tasks in operating our business or otherwise disrupt our business. Such disruptions could cause concern to our customers, strategic partners, or other constituencies and may have material impact on our business and operating results and volatility in our unit price. There can be no assurance that this process will result in the pursuit or consummation of any potential transaction or strategy, or that any such potential transactions or strategy, if implemented, will provide greater value to our unitholders than that reflected in the price of our units representing limited partner interest. Any outcome of this process would be dependent upon a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, regulatory approvals, and the availability of financing on reasonable terms. The occurrence of any one or more of the above risks could have a material adverse impact on our business, financial condition, results of operations and cash flows.
If our cost efficiency measures are not successful, we may become less competitive.
We continue to focus on minimizing operating expenses through cost improvements and simplification of our corporate structure. We may experience delays or unanticipated costs in implementing our cost efficiency plans, which could prevent the timely or full achievement of expected cost efficiencies and adversely affect our competitive position.
Risks Relating to Our Partnership Structure
Our general partner and its affiliates, including Delek and the Individual GP Owners,Holdings, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.
Delek Holdings controls our general partner and appoints all of the officers and directors of our general partner. In addition, three members of the board of directors of our general partner, all of whom also serve as executive officers of Delek, own a small percentage of our general partner (the "Individual GP Owners"). See Item 10. Directors, Executive Officers and Corporate Governance. All of the officers and three of the directors of our general partner (who are also the Individual GP Owners) are also officers and/or directors of Delek.Delek Holdings. See Item 10. Directors, Executive Officers and Corporate Governance. Although our general partner has a contractual obligation to manage us in a manner that is beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner that is beneficial to Delek.Delek Holdings. Conflicts of interest will arise from time to time between Delek the Individual GP Owners,Holdings, and our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of Delek and the Individual GP OwnersHoldings over our interests and the interests of our unitholders. These conflicts include the following situations, among others:
•Our Partnership Agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty.
•Neither our Partnership Agreement nor any other agreement requires Delek Holdings to pursue a business strategy that favors us or utilizes our assets, including whether to increase or decrease refinery production, whether to shut down or reconfigure a refinery or what markets to pursue or grow. The directors and officers of Delek Holdings have a fiduciary duty to make these decisions in the best interests of the stockholders of Delek Holdings, which may be contrary to our interests. Delek Holdings may choose to shift the focus of its investment and growth to areas not served by our assets.
•Delek Holdings, as our primary customer, has an economic incentive to cause us not to seek higher service fees, even if such higher fees could be obtained in arm’s-length, third-party transactions. Furthermore, under many of our commercial agreements with them, Delek’sDelek Holdings' consent is required before we may enter into an agreement with any third party with respect to certain of our assets, including those that serve the El Dorado, Tyler and TylerBig Spring Refineries, and Delek Holdings has an incentive to cause us not to pursue such third-party contracts in certain circumstances.
•Our general partner is allowed to take into account the interests of parties other than us, such as Delek Holdings, in resolving conflicts of interest.
•All of the officers and three of the directors of our general partner (who are also the three Individual GP Owners) are also officers and/or directors of Delek Holdings and owe fiduciary duties to Delek.Delek Holdings. These officers will also devote significant time to the business of Delek Holdings and will be compensated by Delek Holdings accordingly.
•Delek Holdings may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests.
•Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.
•Disputes may arise under our commercial agreements with Delek.Delek Holdings.
•Our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership units and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash available for distribution to our unitholders.
•Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion or investment capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders.
•Our general partner determines which costs incurred by it are reimbursable by us.
•Our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on their common units or to make incentive distributions.units.
Our Partnership Agreement permits us to classify up to $25.0 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our general partner units or to our general partner in respect of the incentive distribution rights.
•Our Partnership Agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.
•Our general partner intends to limit its liability regarding our contractual and other obligations.
Our•If at any time our general partner and its affiliates together own 85% or more of our outstanding common units, then our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliatesaffiliates. This 85% threshold will automatically decrease to 80% if they own more than 80% of the common units.
Ourat any time our general partner controls the enforcement of the obligations that it and its affiliates owe to us, including Delek’s obligations under the Omnibus Agreement and its commercial agreements with us.together own less than 77% of our outstanding common units.
•Our general partner decides whether to retain separate counsel, accountants or other advisers to perform services for us.
Our general partner may transfer its incentive distribution rights without unitholder approval.
Our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.
Our Partnership Agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties.
Our Partnership Agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our Partnership Agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the partners where the language in the Partnership Agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:
•how to allocate corporate opportunities among us and its other affiliates;
•whether to exercise its limited call right;
•whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner;
•how to exercise its voting rights with respect to the units it owns;
•whether to exercise its registration rights;
•whether to elect to reset target distribution levels; and
whether to transfer the incentive distribution rights to a third party; and
•whether or not to consent to any merger or consolidation of the Partnership or amendment to the Partnership Agreement.
Delek Holdings may compete with us.
Delek Holdings may compete with us. Under the Omnibus Agreement, Delek Holdings and its affiliates have agreed not to engage in, whether by acquisition or otherwise, the business of owning or operating crude oil or refined products pipelines, terminals or storage facilities in the United States that are not within, directly connected to, substantially dedicated to, or otherwise an integral part of, any refinery owned, acquired or constructed by Delek.Delek Holdings. This restriction, however, does not apply to:
•any assets that were owned by Delek Holdings upon the completion of the Offeringour initial public offering (including replacements or expansions of those assets);
•any asset or business that Delek Holdings acquires or constructs that has a fair market value of less than $5.0 million; and
•any asset or business that Delek Holdings acquires or constructs that has a fair market value of $5.0 million or more if we have been offered the opportunity to purchase the asset or business for fair market value not later than six months after completion of such acquisition or construction, and we decline to do so.
As a result, Delek Holdings has the ability to construct assets which directly compete with our assets. The limitations on the ability of Delek Holdings to compete with us are terminable by either party if Delek Holdings ceases to control our general partner.
Pursuant to the terms of our Partnership Agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and Delek.Delek Holdings. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our common unitholders.
If unitholders are not eligible holders, their common limited partner units may be subject to redemption.
We have adopted certain requirements regarding those investors who may own our common units. Eligible holders are limited partners whose (i) federal income tax status is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that provide services that are subject to regulation by the FERC or an analogous regulatory body and (ii) nationality, citizenship or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as determined by our general partner with the advice of counsel. If you are not an eligible holder, in certain circumstances as set forth in our Partnership Agreement, your units may be redeemed by us at the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.
Our Partnership Agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.
We expect that we will distribute all of our available cash quarterly to our unitholders and, to the extent not otherwise reserved for, will rely primarily upon cash flows from operations, borrowings under the Second Amended and Restated Credit Agreement (as defined below)our revolving credit facility and potential future issuances of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth, externally, our cash distribution policy could significantly impair our ability to grow.
In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest some of their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion of capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per-unit distribution level. There are no limitations in our Partnership Agreement, and we do not anticipate there being limitations in any of our credit facilities, on our ability to issue additional units, including units ranking senior to the common limited partner units. The incurrence of additional borrowings, or other debt, to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.
Our Partnership Agreement restricts the remedies available to holders of our common limited partner units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our Partnership Agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our Partnership Agreement provides that:
•whenever our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) makes a determination or takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was in the best interests of the Partnership, and, except as specifically provided by our Partnership Agreement, will not be subject to any other or different standard imposed by our Partnership Agreement, Delaware law, or any other law, rule or regulation, or at equity;
•our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;
•our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission, unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
•our general partner will not be in breach of its obligations under the Partnership Agreement (including any duties to us or our unitholders) if a transaction with an affiliate or the resolution of a conflict of interest is:
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◦ | approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; |
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◦ | approved by the vote of a majority of the outstanding common limited partner units, excluding any common units owned by our general partner and its affiliates; |
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◦ | determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or |
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◦ | determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us. |
◦approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;
◦approved by the vote of a majority of the outstanding common limited partner units, excluding any common units owned by our general partner and its affiliates;
◦determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
◦determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or its conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the third and fourth sub bullets above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the Partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. The general partner may still take action with respect to any affiliate transactions or the resolution of a conflict of interest without satisfying any of the sub bullets above. In such case, it is not entitled to the presumption of good faith discussed above.
Our Partnership Agreement designates the Court of Chancery of the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our unitholders, which limits our unitholders’ ability to choose the judicial forum for disputes with us or our general partner’s directors, officers or other employees.
Our Partnership Agreement provides that, with certain limited exceptions, the Court of Chancery of the State of Delaware is the exclusive forum for any claims, suits, actions or proceedings (1) arising out of or relating in any way to our Partnership Agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of our Partnership Agreement of the duties, obligations or liabilities among our partners, or obligations or liabilities of our partners to us, of the rights of powers of, or restrictions on, our partners or us), (2) brought in a derivative manner on our behalf, (3) asserting a claim of breach of a duty (including a fiduciary duty) owed by any of our, or general partner's, directors, officers, or other employees, or owed by our general partner, to us or our partners, (4) asserting a claim against us arising pursuant to any provision of the Delaware Revised Uniform Limited Partnership Act or (5) asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in our common units is deemed to have received notice of and consented to the foregoing provisions. This exclusive forum provision does not apply to a cause of action brought under federal or state securities laws. Although management believes this choice of forum provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against us and our general partner's directors and officers. The enforceability of similar choice of forum provisions in other companies' certificates of incorporation or similar governing documents has been challenged in legal proceedings and it is possible that in connection with any action a court could find the choice of forum provision contained in our Partnership Agreement to be inapplicable or unenforceable in such action. If a court where to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our financial position, results of operations and ability to make cash distributions to our unitholders.
The administrative services fee and reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce our cash available for distribution to our common unitholders. The amount and timing of such reimbursements will be determined by our general partner.
Prior to making any distribution on our common limited partner units, we will reimburse our general partner and its affiliates, including Delek Holdings, for costs and expenses they incur and payments they make on our behalf. Under the Omnibus Agreement, we will pay Delek Holdings an annual fee and reimburse Delek Holdings and its subsidiaries for Delek’sDelek Holdings’ provision of various centralized corporate services. Additionally, we will reimburse Delek Holdings for direct or allocated costs and expenses incurred on our behalf, including administrative costs, such as compensation expense for those persons who provide services necessary to run our business, and insurance expenses. We also expect to incur incremental annual general and administrative expense as a result of being a publicly traded partnership. Our Partnership Agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our common unitholders.
Holders of our common limited partner units have limited voting rights and are not entitled to elect our general partner or its directors.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. Rather, the board of directors of our general partner will be appointed by the memberssole member of the general partner, which currently consist of Delek and Messrs. Yemin, Ginzburg and Green.Logistics Services Company. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the common limited partner units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price. Our Partnership Agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Even if holders of our common limited partner units are dissatisfied, they cannot remove our general partner without its consent.
Unitholders are unable to remove our general partner without its consent, because our general partner and its affiliates, including Delek Holdings, own sufficient units to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common limited partner units is required to remove our general partner. As of February 26, 2018,21, 2024, Delek Holdings owned 62.7%78.7% of our outstanding common limited partner units.
Our Partnership Agreement restricts the voting rights of unitholders owning 20% or more of our common limited partner units.
Unitholders’ voting rights are further restricted by a provision of our Partnership Agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.
Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.
Our Partnership Agreement does not restrict the ability of Delek Holdings to transfer all or a portion of its general partner interest or its ownership interest in our general partner to a third party. Our general partner, or the new owner of our general partner, would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers of our general partner.
The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of Delek selling or contributing additional assets to us, as Delek would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.
We may issue additional units without unitholder approval, which would dilute unitholder interests.
Our Partnership Agreement does not limit the number of additional limited partner interests, including limited partner interests that rank senior to the common limited partner units that we may issue at any time without the approval of our unitholders. The issuance by us of additional common limited partner units or other equity securities of equal or senior rank will have the following effects:
•our existing unitholders’ proportionate ownership interest in us will decrease;
•the amount of cash available for distribution on each unit may decrease;
because the amount payable to holders of incentive distribution rights is based on a percentage of the total cash available for distribution, the distributions to holders of incentive distribution rights will increase even if the per-unit distribution on common limited partner units remains the same;
•the ratio of taxable income to distributions may increase;
•the relative voting strength of each previously outstanding unit may be diminished; and
•the market price of the common limited partner units may decline.
Delek Holdings may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.
As of February 24, 2023, Delek holds 15,294,046Holdings held 34,311,278 common limited partner units. In addition, we have agreed to provide Delek Holdings with certain registration rights.rights on a portion of these units. We have filed a shelf registration statement with the SEC for the re-sale or other disposition from time to time by Delek Holdings of up to 14.0 million common limited partner units. We will not receive any proceeds from the sale of these units by Delek Holdings. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual arrangements, so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our Partnership Agreement permits our general partner to limit its liability, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
Our general partner has a limited call right that may require our unitholders to sell their units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 80%85% of our common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their then-current market price, as calculated pursuant to the terms of our Partnership Agreement. The ownership threshold will drop to 80% automatically if the ownership of common units by our general partner and its affiliates falls below 77% of the outstanding common units. As a result, our unitholders may be required to sell their common units at an undesirable time or price and may not receive any positive return on their investment. Our unitholders may also incur a tax liability upon any such sale of their units to Delek.Delek Holdings. At February 26, 2018,21, 2024, Delek Holdings owned 15,294,04634,311,278 common limited partner units, or 62.7%78.7% of our total outstanding common limited partner units.
Our general partner, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common limited partner units to it in connection with a resetting of the minimum quarterly distribution and the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.
The holder or holders of a majority of the incentive distribution rights, which is currently our general partner, have the right, at any time when there are no subordinated units outstanding and such holders have received incentive distributions at the highest level to which they are entitled (48.0%) for each of the prior four consecutive fiscal quarters (and the amount of each such distribution did not exceed adjusted operating surplus for each such quarter), to reset the minimum quarterly distribution and the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Our general partner has the right to transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as our general partner with respect to resetting target distributions.
In the event of a reset of the minimum quarterly distribution and the target distribution levels, the holders of the incentive distribution rights will be entitled to receive, in the aggregate, the number of common limited partner units equal to that number of common limited partner units which would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain its general partner interest in us that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not otherwise be sufficiently accretive to cash distributions per common unit. It is possible, however, that our general partner or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights, and may therefore desire to be issued common limited partner units rather than retain the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then-current business environment. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued common limited partner units to our general partner or its transferee in connection with resetting the target distribution levels.
Our unitholders' liability may not be limited if a court finds that unitholder action constitutes control of our business.
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. The Partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. Our unitholders could be held liable for any and all of our obligations as if they were general partners if a court or government agency were to determine that:
•we were conducting business in a state but had not complied with that particular state’s partnership statute; or
•our unitholders' right to act with other unitholders to remove or replace our general partner, to approve some amendments to our Partnership Agreement or to take other actions under our Partnership Agreement constitute “control” of our business.
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common limited partner units are liable both for the obligations of the transferor to make contributions to the Partnership that were known to the transferee at the time of transfer and for those obligations that were unknown if the liabilities could have been determined from the Partnership Agreement. Neither liabilities to partners on account of their partnership interest nor liabilities that are non-recourse to the partnership are counted for purposes of determining whether a distribution is permitted.
The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
Our common limited partner units are listed on the New York Stock Exchange ("NYSE"(the "NYSE"). Because we are a publicly traded limited partnership, the NYSE does not require us to have and we do not intend to have, a majority of independent directors on our general partner’s board of directors or to establish and maintain a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders willmay not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.
Tax Risks to Common Unitholders
The tax treatment of publicly traded partnerships or an investment in our common limited partner units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common limited partner units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. From time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. If successful, such a proposal could eliminate the qualifying income exception to the treatment of publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for federal income tax purposes. We are unable to predict whether any changes or proposals will ultimately be enacted, but it is possible that a change in law could affect us and may, if enacted, be applied retroactively. Any such changes could negatively impact the value of an investment in our common limited partner units.
Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common limited partner units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service (the "IRS") on this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 21.0%, and would likely pay state and local income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions or credits would flow through to such unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution would be substantially reduced. Therefore, if we were treated as a corporation for federal income tax purposes, there would be material reductions in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common limited partner units.
Our Partnership Agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.
If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.
Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income or franchise taxes, and other forms of taxation. Imposition of such additional tax on us by a state will reduce the cash available for distribution to our unitholders. Our Partnership Agreement provides that, if a law is enacted or an existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.
The tax treatment of publicly traded partnerships or an investment in our common limited partner units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
Risk Factors
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common limited partner units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. From time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. If successful, such a proposal could eliminate the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for federal income tax purposes. We are unable to predict whether any changes or proposals will ultimately be enacted, but it is possible that a change in law could affect us and may, if enacted, be applied retroactively. Any such changes could negatively impact the value of an investment in our common limited partner units.
Our unitholders are required to pay income taxes on their share of our taxable income even if they do not receive any cash distributions from us. A unitholder's share of our taxable income, and its relationship to any distributions we make, may be affected by a variety of factors, including our economic performance, transactions in which we engage or changes in law and may be substantially different from any estimate we make in connection with a unit offering.
A unitholder’s allocable share of our taxable income will be taxable to it, which may require it to pay federal income taxes and, in some cases, state and local income taxes, even if it receives cash distributions from us that are less than the actual tax liability that results from that income or no cash distributions at all.
A unitholder's share of our taxable income, and its relationship to any distributions we make, may be affected by a variety of factors, including our economic performance and certain transactions in which we might engage, which may be affected by numerous business, economic, regulatory, legislative, competitive and political uncertainties beyond our control, and certain transactions in which we might engage.control. For example, we may engage in transactions that produce substantial taxable income allocations to some or all of our unitholders without a corresponding increase in cash distributions to our unitholders, such as a sale or exchange of assets, the proceeds of which are reinvested in our business or used to reduce our debt, or an actual or deemed satisfaction of our indebtedness for an amount less than the adjusted issue price of the debt. A unitholder's ratio of its share of taxable income to the cash received by it may also be affected by changes in law. For instance, under the recently enacted tax reform law known as the Tax Cuts and Jobs Act (the "Tax Reform Act"), the net interest expense deductions of certain business entities, including us, are limited to 30% of such entity's "adjusted taxable income", which is generally taxable income with certain modifications. If the limit applies, a unitholder's taxable income allocations will be more (or its net loss allocations will be less) than would have been the case absent the limitation.
From time to time, in connection with an offering of our units, we may state an estimate of the ratio of federal taxable income to cash distributions that a purchaser of units in that offering may receive in a given period. These estimates depend in part on factors that are unique to the offering with respect to which the estimate is stated, so the expected ratio applicable to other units will be different, and in many cases less favorable, than these estimates. Moreover, even in the case of units purchased in the offering to which the estimate relates, the estimate may be incorrect, due to the uncertainties described above, challenges by the IRS to tax reporting positions which we adopt, or other factors. The actual ratio of taxable income to cash distributions could be higher or lower than expected, and any differences could be material and could materially affect the value of the common units.
If the IRS contests the federal income tax positions we take, the market for our common limited partner units may be adversely impacted and the cost of any IRS contest would likely reduce our cash available for distribution to unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. The IRS may adopt positions that differ from the conclusions of our counsel or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a material adverse effect on the market
for our common limited partner units and the price at which they trade. In addition, our costs of any contest with the IRS would be borne indirectly by our unitholders and our general partner, because the costs would likely reduce our cash available for distribution.
Tax gain or loss on the disposition of our common limited partner units could be more or less than expected.
If any of our unitholders sellssell their common limited partner units, such unitholders must recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and such unitholder's tax basis in those common limited partner units. Because distributions in excess of such unitholder's allocable share of our net taxable income decrease such unitholder's tax basis in such unitholder's common limited partner units, the amount, if any, of such prior excess distributions with respect to the common limited partner units such unitholder sells will, in effect, become taxable income to such unitholder if it sells such common limited partner units at a price greater than its tax basis in those common limited partner units, even if the price such unitholder receives is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale or other disposition of such unitholder's common limited partner units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if a unitholder sells their common limited partner units, they may incur a tax liability in excess of the amount of cash they receive from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common limited partner units that may result in adverse tax consequences to them.
Investment in our common limited partner units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income ("UBTI")and will be taxable to them. Under the recently enacted tax reform act known as the Tax Cuts and Jobs Act, an exempt organization will be required to independently compute its UBTI from each separate unrelated trade or business which may prevent an exempt organization from utilizing losses we allocate to the organization against the organization’s UBTI from other sources and vice versa. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share of our taxable income. Upon the sale, exchange or other disposition of a common limited partner unit by a non-U.S. person, the transferee is generally required to withhold 10% of the amount realized on the sale, exchange or disposition of such unit if any portion of the gain would be treated as effectively connected with a trade or business within the United States. The Department of the Treasury and the IRS have recently issued final regulations providing guidance on the application of these rules for transfers of publicly traded partnership interests, including transfers of our common limited partner units.
Under these regulations, the “amount realized” on a transfer of an interest in a publicly traded partnership, such as our common limited partner units, will generally be the amount of gross proceeds paid to the broker effecting the applicable transfer on behalf of the transferor, and such broker will generally be responsible for the relevant withholding obligations. Distributions to non-U.S. persons may also be subject to additional withholding under these rules to the extent a portion of a distribution is attributable to an amount in excess of our cumulative net income that has not previously been distributed.
If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common limited partner units.
Under the Tax Cuts and Jobs Act, if a unitholder sells or otherwise disposes of a common unit, the transferee is required to withhold 10.0% of the amount realized by the transferor unless the transferor certifies that it is not a foreign person, and we are required to deduct and withhold from the transferee amounts that should have been withheld by the transferee but were not withheld. However, the Department of the Treasury and the IRS have determined that this withholding requirement should not apply to any disposition of a publicly traded interests in a publicly traded partnership (such as us) until regulations or other guidance have been issued clarifying the application of this withholding requirement to dispositions of interests in publicly traded partnerships. Accordingly, while this new withholding requirement does not currently apply to interests in the Partnership, there can be no assurance that such requirement will not apply in the future.
We treat each holder of common limited partner units as having the same tax benefits without regard to the actual common limited partner units held. The IRS may challenge this treatment, which could adversely affect the value of the common limited partner units.
Because we cannot match transferors and transferees of common limited partner units, and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from a unitholder's sale of common limited partner units and could have a negative impact on the value of our common limited partner units or result in audit adjustments to such unitholder's tax returns.
We prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The U.S. Department of the Treasury adopted final Treasury Regulations allowing a similar monthly simplifying convention for taxable years beginning on or after August 3, 2015. However, such final regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Our counsel has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations.
If the IRS makes audit adjustments to our income tax returns for tax years beginning after 2017, it (and some states) may collect any resulting taxes (including any applicable penalties and interest) directly from us, in which case our cash available for distribution to our unitholders might be substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, if the IRS makes audit adjustments to our income tax returns for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from us. We will generally have the ability to shift any such tax liability to our general partner and our unitholders in accordance with their interests in us during the year under audit, but there can be no assurance that we will be able to do so (and will choose to do so) under all circumstances, or that we will be able to (or choose to) effect corresponding shifts in state income or similar tax liability resulting from the IRS adjustment in states in which we do business in the year under audit or in the adjustment year. If we make payments of taxes, penalties and interest resulting from audit adjustments, our cash available for distribution to our unitholders would be reduced, perhaps substantially.
In the event the IRS makes an audit adjustment to our income tax returns and we do not or cannot shift the liability to our unitholders in accordance with their interests in us during the year under audit, we will generally have the ability to request that the IRS reduce the determined underpayment by reducing the suspended passive loss carryovers of our unitholders (without any compensation from us to such unitholders), to the extent such underpayment is attributable to a net decrease in passive activity losses allocable to certain partners. Such reduction, if approved by the IRS, will be binding on any affected unitholders.
A unitholder whose common limited partner units are loaned to a “short seller” to cover a short sale of common limited partner units may be considered as having disposed of those common limited partner units. If so, such unitholder would no longer be treated for federal income tax purposes as a partner with respect to those common limited partner units during the period of the loan and may recognize gain or loss from the disposition.
Because a unitholder whose common limited partner units are loaned to a “short seller” to cover a short sale of common limited partner units may be considered as having disposed of the loaned common limited partner units, such unitholder may no longer be treated for federal income tax purposes as a partner with respect to those common limited partner units during the period of the loan to the short seller and may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common limited partner units may not be reportable by the unitholder, and any cash distributions received by the unitholder as to those common limited partner units could be fully taxable as ordinary income. Therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common limited partner units.
We have adopted certain valuation methodologies and monthly conventions for U.S. federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common limited partner units.
When we issue additional units or engage in certain other transactions, we determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common limited partner units may have a greater portion of their Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common limited partner units and could have a negative impact on the value of the common limited partner units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
As a result of investing in our common limited partner units, our unitholders may be subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.
In addition to federal income taxes, our unitholders may be subject to other taxes, including state and local income, franchise, unincorporated business, estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if such unitholders do not live or otherwise do business in any of those jurisdictions. Our unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We currently own property and conduct
business in Arkansas, Louisiana, Oklahoma, Tennessee and Texas. Many of these states impose a personal income tax on individuals, and each state imposes an income or similar tax on corporations and certain other entities. As we make acquisitions or expand our business, we may own property or conduct business in additional states that may impose personal income taxes or other state or local taxes on our unitholders.
Compliance with and changes in tax laws could adversely affect our performance.
We are subject to extensive tax laws and regulations, including federal, state and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future. Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes, as well as interest and penalties.
Unitholders may be subject to limitation on their ability to deduct interest expense incurred by us.
In general, we are entitled to a deduction for interest paid or accrued on indebtedness properly allocable to our trade or business during our taxable year. However, under the Tax Reform Act, for taxable years beginning after December 31, 2017, our deduction for “business interest” is limited to the sum of our business interest income and 30% of our “adjusted taxable income.” For purposes of this limitation, our adjusted taxable income is computed without regard to any business interest expense or business interest income.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES1C. CYBERSECURITY
Cybersecurity Related Matters
Risk Management and Strategy
We depend on information technology ("IT") and operational technology (“OT”) for various operations, including refinery processes, petroleum movement monitoring in pipelines and terminals, point-of-sale processing at our retail sites, and other critical processes and transactions. We utilize IT and OT systems across our operations to capture accounting, technical and regulatory data for archiving, analysis, and reporting. Our primary business systems mostly consist of purchased and licensed software programs that integrate with our internal solutions. Additionally, our technology encompasses a company-wide network through which employees have access to key business applications.
We established a thorough, risk-based cybersecurity program aimed at safeguarding our data, along with the data of our customers and partners. The identification, assessment, and management of cyber risks fall under our Enterprise Risk Management (“ERM”) program, overseen by the board of directors of our general partner. Our Chief Technology Officer & Digital Officer/Chief Information Officer holds overall
Unresolved Staff Comments & Properties
responsibility for IT, OT, and cybersecurity. The Partnership follows well-organized cybersecurity frameworks with a Chief Information Security Officer dedicated to overseeing cybersecurity initiatives throughout the entire enterprise.
Our principal assets,risk assessment process related to cybersecurity includes identifying threats and conducting vulnerability assessments, likelihood and impact assessments related to our own information and OT systems as well as our third-party service providers. The Partnership collaborates with third-party vendors to leverage managed security services, enhancing the Partnership’s cybersecurity capabilities. The Partnership possesses monitoring capabilities for both its IT and OT infrastructure. To identify material cybersecurity risks, we use a combination of technical assessments, risk analysis, vulnerability scanning, incident and event monitoring, threat intelligence and third-party assessments along with ongoing monitoring and management.
We manage our material cybersecurity risks through a combination of security measures, audits, training, planning, and testing. The Partnership has established processes for regular disaster recovery planning and response readiness testing. Our security approach also includes multiple layers of defense and testing of controls. We have implemented security measures, including segmentation, firewalls, intrusion detection systems, encryption, multi-factor authentication and data loss prevention to safeguard our systems and data. Furthermore, we have reinforced our data protection capabilities by investing in both hardware and software.
Recognizing that humans are often the most vulnerable element of even the most secure computer architectures, The Partnership has increased the frequency and sophistication of the mandatory training and phishing campaign program for our employees. The Partnership also conducts monthly reviews of global cybersecurity incidents to ensure that appropriate mitigation measures are in place to guard against similar threats. The Partnership is committed to enhancing its organizational resilience through a multiyear, comprehensive incident response tabletop drill program. Building upon the success of the two drills conducted in 2023, we are dedicated to continuous improvement and proactive readiness in addressing potential challenges and ensuring the effective management of incidents.
The Partnership has not experienced a significant cybersecurity breach or associated expenses, penalties, or settlements for years ended December 31, 2017, have been described in Item 1. "Business—Pipelines2023, 2022 and Transportation Segment"2021. The Partnership continuously assesses and Item 1. "Business—Wholesale Marketingenhances the confidentiality, integrity, and Terminalling Segment." We believe that our assets are adequate for our operations and adequately maintained.
Title to Properties and Permits
While we own the physical improvements consistingavailability of our pipelines, substantially allIT and OT assets.
Board of Directors Oversight
The board of directors of our general partner and executive leadership team at the Partnership are committed to investing the attention and resources necessary to maintain the privacy, security and integrity of our information, systems and networks and enhance the Partnership’s resiliency against cyber threats.To assist in these pipelines are constructed on rights-of-way grantedefforts, the board of directors of our general partner has assigned a number of cybersecurity related responsibilities to its standing committees while retaining overall responsibility for the oversight of Delek's cybersecurity activities.
Unresolved Staff Comments & Properties
In overseeing cybersecurity risks, the Board of Directors follows the principles identified by the apparent record ownersNational Association of Corporate Directors in the oversight of cybersecurity risks. Cybersecurity risks and Partnership programs are discussed with the Board of Directors by the Chief Technology & Digital Officer Chief Information Officer and others. Third parties are periodically engaged in the assessment of cybersecurity, including evaluating maturity under the National Institute for Security and Technology’s and the International Society of Automation/ International Electrotechnical Commission’s cybersecurity frameworks, testing informational and operational cyber defenses, controls, and reviews of policies and procedures.
In 2021 the Board of Directors established the standing Technology Committee. One of the property,Technology Committee’s responsibilities is to review, assess, manage, and in some instances these rights-of-way are revocable at the electionmitigate risks related to technological developments, digitalization, and information security. The Technology Committee also reviews assessments of the grantor. In many instances, lands over which rights-of-way have been obtained are subject to prior liens that have not been subordinatedeffectiveness of the Partnership’s information security and technology programs, procedures, and initiatives. The Technology Committee regularly receives reports from management regarding information security and cyber risk matters, including the Partnership’s contingency planning and information security training and compliance, and reports its activities to the right-of-way grants. We have obtained permits from public authorities to cross over or under, or to lay facilities in or along, watercourses, county roads, municipal streets and state highways, and, in some instances,Board. The Technology Committee’s designated focus on these permits are revocable at the electionareas of the grantor. We have also obtained permits from railroad companies to cross over or under lands or rights-of-way, manyPartnership’s digitalization, information and operational security policies help ensure strategic alignment of which are also revocable at the grantor’s election. In some statesPartnership’s strategies with information security and under some circumstances, we haverisk management.
Unresolved Staff Comments & Properties
Management Oversight
Our senior leadership team is actively involved in cybersecurity governance, ensuring the righthighest level of eminent domain to acquire rights-of-wayoversight of cybersecurity risks. Establishing clear lines of ownership and lands necessaryaccountability, along with regular and transparent communication among our standing Board committees, the Board of Directors and executives, is crucial for our common carrier pipelines.
We believe that we are the owner of valid easement rightseffectively handling cybersecurity risks and rights-of-way or fee ownership or leasehold interestsopportunities. Our Chief Technology & Digital Officer/Chief Information Officer reports to the landsPresident, dedicating a substantial amount of their efforts to ensure the safety and security of our networks and systems. Our Chief Technology & Digital Officer/Chief Information Officer has nearly 20 years of IT experience including areas of technology, cybersecurity, data, analytics, and digital transformation as well as being an Adjunct Lecturer at Tel-Aviv University and the Technion for Big Data Technologies, Data Science and Data Visualization. Representing the state of Israel at MIT’s CDOIQ forum. Our Chief Technology & Digital Officer oversees a team of security professionals and regularly updates the Board of Directors on which our assets are located. Under the Omnibus Agreement, Delek has agreed to indemnify us for certain title defectsany potential risks and for failures to obtain certain consents and permits necessary to conduct our business, in each case, that are identified priorthreats to the relevant date in the Omnibus Agreement, subject to an annual deductible. Although title to these properties is subject to encumbrances in some cases, such as customary interests generally retained in connection with acquisition of real property, liens that can be imposed in some jurisdictions for government-initiated action to clean up environmental contamination, liens for current taxes and other burdens, and easements, restrictions, and other encumbrances to which the underlying properties were subject at the time of acquisition byPartnership. Senior leadership including our predecessor or us, we believe that none of these burdens should materially detract from the value of these properties or from our interest in these properties or should materially interfere with their use in the operation of our business.
Facilities
Our Nettleton Station and our Bradford Station are located on properties that are owned by third parties in which we have leasehold interests. Our North Little Rock Terminal, our El Dorado Terminal and tank farm, our Tyler Terminal and tank farm, the El Dorado Rail Offloading RacksChief Technology & Digital Officer/Chief Information Officer and the Tyler Crude Tank are locatedChief Information Security Officer brief the Board on property leased by third parties and Delek.information security matters multiple times throughout the year.
Liens and Encumbrances
Substantially all of the assets described above are pledged under and encumbered by our credit agreement. See Note 11 of the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.
Corporate Headquarters
Delek leases its corporate headquarters at 7102 Commerce Way, Brentwood, Tennessee. The lease is for 54,000 square feet and expires in April 2022. We pay Delek a proportionate share of the costs to operate the building pursuant to the Omnibus Agreement. Please read Item 1. "Business—Commercial Agreements—Other Agreements with Delek."
ITEM 3. LEGAL PROCEEDINGS
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 Note 14 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, which is incorporated by reference in this Item 3, for additional information.
We are reporting the following proceeding to comply with SEC regulations which require disclosure of proceedings arising under federal, state or local provisions regulating the discharge of materials into the environment or protecting the environment, if we reasonably believe that such proceedings may result in monetary sanctions of $100,000 or more.
In June 2015, the United States Department of Justice notified us that they were pursuing an enforcement action on behalf of the EPA with regard to potential Clean Water Act violations arising from a release in March 2013 at our Magnolia Station located west of the El Dorado Refinery. We are currently attempting to negotiate a resolution to this matter with the EPA and the Arkansas Department of Environmental Quality, which may include monetary penalties and/or other relief.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Market for Registrant's Common Equity, Stockholder Matters and Issuer Purchases
PART II
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ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Unit Price and Cash Distributions
General
Our common units represent limited partner interests in us that entitle the holders to the rights and privileges specified in our Partnership Agreement. Our common units trade on the NYSE under the symbol "DKL." There were fourtwo holders of record of our common units held by the public as of February 26, 2018.21, 2024. In addition, as of February 26, 2018,21, 2024, Delek Holdings and its affiliates owned 15,294,04634,311,278 of our common unitsunits. See Note 11 to the consolidated financial statements in Item 8, Financial Statements and 497,604Supplementary Data, of our general partner units (a 2.0% general partner interest), which together constitutethis Annual Report on Form 10-K, for a 63.5% ownership interest in us.
The following table sets forth the rangediscussion of the daily high and low sales prices per common unit for each quarterly period and thehistoric cash distributions to common unitholders with respect to each quarterly period during the years ended December 31, 2017 and December 31, 2016.
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| Quarter Ended | | High Sales Price | | Low Sales Price | | Quarterly Cash Distribution per Limited Partner Unit (1) | | Distribution Date | | Record Date |
| December 31, 2017 | | $32.80 | | $26.80 | | $0.725 | | February 12, 2018 | | February 2, 2018 |
| September 30, 2017 | | $35.54 | | $28.25 | | $0.715 | | November 14, 2017 | | November 7, 2017 |
| June 30, 2017 | | $33.85 | | $28.35 | | $0.705 | | August 11, 2017 | | August 4, 2017 |
| March 31, 2017 | | $36.05 | | $28.50 | | $0.690 | | May 12, 2017 | | May 5, 2017 |
| December 31, 2016 | | $30.60 | | $21.30 | | $0.680 | | February 14, 2017 | | February 3, 2017 |
| September 30, 2016 | | $29.59 | | $25.20 | | $0.655 | | November 14, 2016 | | November 7, 2016 |
| June 30, 2016 | | $33.92 | | $24.16 | | $0.630 | | August 12, 2016 | | August 5, 2016 |
| March 31, 2016 | | $35.25 | | $21.84 | | $0.610 | | May 13, 2016 | | May 5, 2016 |
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(1)
| Represents cash distributions attributable to the quarter and declared and paid within 45 days of quarter end in accordance with our Partnership Agreement. |
distributions.
Distributions of Available Cash
Our Partnership Agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date.
Definition of Available Cash
Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:
•less the amount of cash reserves established by our general partner to:
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◦ | ◦provide for the proper conduct of our business (including cash reserves for our future capital expenditures and anticipated future debt service requirements and refunds of collected rates reasonably likely to be refunded as a result of a settlement or hearing related to FERC rate proceedings or rate proceedings under applicable law subsequent to that quarter); |
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◦ | comply with applicable law, any of our debt instruments or other agreements; or |
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◦ | provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the effect of the establishment of |
such reserves will prevent us from distributing the minimum quarterly distribution on all common units for the currentproper conduct of our business (including cash reserves for our future capital expenditures and anticipated future debt service requirements and refunds of collected rates reasonably likely to be refunded as a result of a settlement or hearing related to the FERC rate proceedings or rate proceedings under applicable law subsequent to that quarter);
◦comply with applicable law, any of our debt instruments or other agreements; or
◦provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;
•plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter. Under our Partnership Agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners, and with the intent of the borrower to repay such borrowings within 12 months with funds other than from additional working capital borrowings.
Intent to Distribute the Minimum Quarterly Distribution
ITEM 6. [RESERVED]
We intend to pay a quarterly distribution of at least $0.375 per unit per quarter, or $1.50 per unit on an annualized basis, to the extent we have sufficient available cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, we do not have a legal obligation to pay this distribution. The amount of distributions paid under our policy, and the decision to make any distribution, is determined by our general partner, taking into consideration the terms of our Partnership Agreement.
General Partner Interest and Incentive Distribution Rights
Our general partner is currently entitled to 2.0% of all quarterly distributions that we make prior to our liquidation. This general partner interest is represented by 497,604 general partner units. 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 incentive distribution rights 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 of 48.0% does not include any distributions that our general partner or its affiliates may receive on common or general partner units that it owns.
Percentage Allocations of Available Cash
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 the unitholders in any available cash from operating surplus 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 our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest and that our general partner has not transferred its incentive distribution rights.
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| | | Total Quarterly | | Marginal Percentage |
| | | Distribution per Unit | | 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 | | above $0.56250 | | 50.0 | % | | 50.0 | % |
Expiration of Subordination Period
Following theFebruary 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 cash distributions paid or the total number of the Partnership's outstanding units representing limited partner interests.
Unregistered Sales of Equity Securities
Pursuant to the terms of our Partnership Agreement, our general partner has the right to maintain its proportionate 2.0% general partner interest in the Partnership. The following table provides information regarding the exercise of such right by our general partner during the year ended December 31, 2017. Each sale listed below was exempt from registration under Section 4(a)(2) of the Securities Act.
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| Date of Sale | | Number of General Partner Units Sold | | Price per General Partner Unit | | Consideration Paid to the Partnership |
| June 14, 2017 | | 670 | | $31.90 | | $21,386 |
| December 11, 2017 | | 432 | | $30.05 | | $12,987 |
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain selected consolidated financial data as of and for each of the five years in the period ended December 31, 2017. All financial results have been adjusted for subsequent transactions with our Predecessors as noted below.
During the years ended December 31, 2015, 2014 and 2013, the Partnership entered into various transactions with Delek and our general partner pursuant to which we acquired the following assets from Delek:
two crude oil rail offloading racks, which are designed to receive up to 25,000 barrels per day (“bpd”) of light crude oil or 12,000 bpd of heavy crude oil, or any combination of the two, delivered by rail to Delek's El Dorado Refinery (the "El Dorado Refinery")and related ancillary assets (the “El Dorado Assets”) effective March 31, 2015 (such transaction, the "El Dorado Rail Offloading Racks Acquisition");
a crude oil storage tank (the "Tyler Crude Tank") with a shell capacity of approximately 350,000 barrels located adjacent to Delek's Tyler Refinery (the "Tyler Refinery") and certain ancillary assets (collectively, with the Tyler Crude Tank, the "Tyler Assets") effective March 31, 2015 (such transaction, the "Tyler Crude Tank Acquisition"); the Tyler Assets, together with the El Dorado Assets, are hereinafter collectively referred to as the "Logistics Assets";
a refined products terminal (the “El Dorado Terminal”) located at the El Dorado Refinery and 158 storage tanks and certain ancillary assets (the "El Dorado Tank Assets" and, together with the El Dorado Terminal, the “El Dorado Terminal and Tank Assets”) at and adjacent to the El Dorado Refinery effective February 4, 2014 (such transaction, the “El Dorado Acquisition”);
and;
a refined products terminal (the “Tyler Terminal”) located at the Tyler Refinery and 96 storage tanks and certain ancillary assets (the "Tyler Tank Assets" and, together with the Tyler Terminal, the “Tyler Terminal and Tank Assets”) adjacent to the Tyler Refinery, effective July 26, 2013 (such transaction, the “Tyler Acquisition”).
The El Dorado Rail Offloading Racks Acquisition, the Tyler Crude Tank Acquisition, the El Dorado Acquisition and the Tyler Acquisition were accounted for as transfers between entities under common control; such acquisitions hereinafter collectively referred to as the "Acquisitions from Delek." As entities under common control with Delek, transfers between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years have been retrospectively adjusted to include the historical results of the assets acquired in the Acquisitions from Delek prior to the effective date of each acquisition for all periods presented. Prior to each acquisition date, we refer to the Acquisitions from Delek collectively as our “Predecessors.”
Our financial results may not be comparable, as our Predecessors recorded revenues, general and administrative expenses and financed operations differently than the Partnership. See "Factors Affecting the Comparability of Our Financial Results" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
The following tables should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements in Item 8.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | | |
| Statements of Income and Other Comprehensive Income Data: | | | | (In thousands, except units and per unit data) | | |
| Net sales | | $ | 538,075 |
| | $ | 448,059 |
|
| $ | 589,669 |
|
| $ | 841,253 |
|
| $ | 907,428 |
|
| Operating costs and expenses | | 449,898 |
| | 370,409 |
| | 512,407 |
|
| 762,407 |
|
| 868,697 |
|
| Operating income | | 88,177 |
| | 77,650 |
| | 77,262 |
|
| 78,846 |
|
| 38,731 |
|
| Non-operating costs and expenses | | 18,990 |
| | 14,765 |
| | 11,246 |
| | 8,656 |
| | 4,570 |
|
| Income (loss) before income tax (benefit) expense | | 69,187 |
| | 62,885 |
| | 66,016 |
| | 70,190 |
| | 34,161 |
|
| Income tax (benefit) expense | | (222 | ) | | 81 |
| | (195 | ) | | 132 |
| | 757 |
|
| Net income |
| 69,409 |
| | 62,804 |
| | 66,211 |
| | 70,058 |
| | 33,404 |
|
| Less: (Loss) income attributable to Predecessors | | — |
| | — |
| | (637 | ) | | (1,939 | ) | | (14,426 | ) |
| Net income attributable to partners | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
| | $ | 71,997 |
| | $ | 47,830 |
|
| | | | | | | | | | | |
| Less: General partners' interest in net income, including incentive distribution rights |
| 18,429 |
| | 12,193 |
| | 5,163 |
| | 2,366 |
| | 957 |
|
| Limited partners' interest in net income |
| $ | 50,980 |
| | $ | 50,611 |
| | $ | 61,685 |
| | $ | 69,631 |
| | $ | 46,873 |
|
| Net income per limited partner unit: | | | | | | | | | | |
| Common - (basic) |
| $ | 2.09 |
| | $ | 2.08 |
| | $ | 2.55 |
| | $ | 2.88 |
| | $ | 1.95 |
|
| Common - (diluted) | | $ | 2.09 |
| | $ | 2.07 |
| | $ | 2.52 |
| | $ | 2.85 |
| | $ | 1.93 |
|
| Subordinated - Delek (basic and diluted) | | $ | — |
| | $ | 2.19 |
| | $ | 2.54 |
| | $ | 2.88 |
| | $ | 1.95 |
|
| Weighted average limited partner units outstanding: | | |
| | |
| | | | | | |
| Common units - (basic) | | 24,348,063 |
| | 22,490,264 |
| | 12,237,154 |
| | 12,171,548 |
| | 12,025,249 |
|
| Common units - (diluted) | | 24,376,972 |
| | 22,558,717 |
| | 12,356,914 |
| | 12,302,629 |
| | 12,148,774 |
|
| Subordinated units - Delek (basic and diluted) | | — |
| | 1,803,167 |
| | 11,999,258 |
| | 11,999,258 |
| | 11,999,258 |
|
| Cash distributions per limited partner unit | | $ | 2.835 |
| | $ | 2.575 |
| | $ | 2.240 |
| | $ | 1.900 |
| | $ | 1.600 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | | |
| Balance Sheet Data: | | | | (In thousands) | | |
| Property, plant and equipment, net | | $ | 255,068 |
| | $ | 251,029 |
| | $ | 253,848 |
| | $ | 254,779 |
| | $ | 242,512 |
|
| Total assets | | 443,530 |
| | 415,547 |
| | 375,288 |
| | 331,286 |
| | 319,350 |
|
| Total debt, including current maturities | | 422,649 |
| | 392,600 |
| | 351,600 |
| | 251,750 |
| | 164,800 |
|
| Total liabilities | | 472,755 |
| | 428,831 |
| | 386,306 |
| | 291,505 |
| | 214,142 |
|
| Total (deficit) equity | | (29,225 | ) | | (13,284 | ) | | (11,018 | ) | | 39,781 |
| | 105,208 |
|
ITEM 7.MANAGEMENT’S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (the "Annual''Annual Report on Form 10-K"10-K''). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are
inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.
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 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, as amended (the "Exchange Act").
Unless otherwise noted or the context requires otherwise, requires, references in this report to "Delek Logistics Partners, LP," the "Partnership," "we," "us," "our,"“we,” “us,” or “our” or like terms, may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless otherwise noted or the context requires otherwise, requires, references in this report to "Delek""Delek Holdings" 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,US Holdings, Inc. and any of Old Delek's or New Delek's, as applicable,its subsidiaries, other than the Partnership and its subsidiaries and its general partner.
On March 31, 2015,The Partnership announces material information to the public about the Partnership, its products and services and other matters through its wholly owned subsidiary Delek Logistics Operating, LLC, acquired from Delek two crude oil rail offloading racks, which racks are designed to receive up to 25,000 barrels per day (“bpd”)a variety of light crude oil or 12,000 bpd of heavy crude oil, or some combinationmeans, including filings with the Securities and Exchange Commission, press releases, public conference calls, the Partnership's website (www.deleklogistics.com), the investor relations section of the two, delivered by rail towebsite (ir.deleklogistics.com), the El Dorado Refinery and related ancillary assets (the “El Dorado Assets”) (such transaction, the "El Dorado Rail Offloading Racks Acquisition").
On March 31, 2015, the Partnership, throughnews section of its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Delek a crude oil storage tank (the "Tyler Crude Tank") located adjacent to Delek's Tyler, Texas refinery, (the "Tyler Refinery") and certain ancillary assets (collectively, with the Tyler Crude Tank, the "Tyler Assets") (such transaction, the "Tyler Crude Tank Acquisition")website (www.deleklogistics.com/news), and/or social media, including its X (formerly known as Twitter) account (@DelekLogistics). The Tyler Crude Tank has approximately 350,000 barrels of shell capacityPartnership encourages investors and primarily supportsothers to review the Tyler Refinery. The Tyler Assets, together with the El Dorado Assets, are hereinafter collectively referredinformation it makes public in these locations, as such information could be deemed to as the "Logistics Assets."
The El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition are hereinafter collectively referredbe material information. Please note that this list may be updated from time to as the "Acquisitions from Delek." The Acquisitions from Delek were accounted for as transfers between entities under common control. As an entity under common control with Delek, we record the assets that Delek has contributed to us on our balance sheet at Delek's historical basis instead of fair value. Transfers between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes of the Partnership have been retrospectively adjusted to include: (i) the historical results of the El Dorado Assets, as owned and operated by Delek, for all periods presented through March 31, 2015 (the "El Dorado Assets Predecessor") and (ii) the historical results of the Tyler Assets, as owned and operated by Delek, for all periods presented through March 31, 2015 (the "Tyler Assets Predecessor"). The El Dorado Assets Predecessor, together with the Tyler Assets Predecessor, are hereinafter collectively referred to as our "Predecessors."
You should read the following discussion of our financial condition and results of operations in conjunction with our historical consolidated financial statements and notes thereto.
time.
Forward-Looking Statements
This Annual Report on Form 10-K (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the" Securities(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").Act. These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, statements regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the actions of members of the Organization of Petroleum Exporting Countries ("OPEC") and other leading oil producing countries (together with OPEC, "OPEC+") with respect to oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to:
•our substantial dependence on Delek Holdings or its assignees and their support of and respective ability to pay us under our commercial agreements;
•our future coverage, leverage, financial flexibility and growth, and our ability to improve performance and achieve distribution growth at any level or at all;
Delek’s•Delek Holdings' future growth, strategic priorities, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution;
positive •industry dynamics, including Permian Basin growth, ownership concentration, efficiencies and takeaway capacity;
•the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or legal actions and other effects related to spills, releases and tank failures;
•changes in insurance markets impacting costs and the level and types of coverage available;
•the timing and extent of changes in commodity prices and demand for refined products;products and the impact of the COVID-19 Pandemic on such demand;
•the wholesale marketing margins we are able to obtain and the number of barrels of product we are able to purchase and sell in our westWest Texas wholesale business;
•the suspension, reduction or termination of Delek'sDelek Holdings' or its assignees' or any third-party's obligations under our commercial agreements including the duration, fees or terms thereof;
•the results of our investments in joint ventures;
•the ability to secure commercial agreements with Delek Holdings or third parties upon expiration of existing agreements;
Management's Discussion and Analysis
•the possibility of inefficiencies, curtailments, or shutdowns in refinery operations or pipelines, whether due to infection in the workforce or in response to reductions in demand as a result of a public health crisis;
•disruptions due to acts of God, equipment interruption or failure, or other events, including terrorism, sabotage or cyber-attacks, at our facilities, Delek’sDelek Holdings’ facilities or third-party facilities on which our business is dependent;
•changes in the availability and cost of capital of debt and equity financing;
•our reliance on information technology systems in our day-to-day operations;
•changes in general economic conditions;conditions, including uncertainty regarding the timing, pace and extent of economic recovery in the United States due to governmental fiscal policy or a public health crisis;
•the effects of existing and future laws and governmental regulations, including, but not limited to, the rules and regulations promulgated by the Federal Energy Regulatory Commission ("FERC") and state commissions and those relating to environmental protection, pipeline integrity and safety;safety as well as current and future restrictions on commercial and economic activities in response to a public heal;
•significant operational, investment or other changes required by existing or future environmental statutes and regulations, including international agreements and national or regional societal, legislation; and regulatory measures to limit or reduce greenhouse gas emissions;
•competitive conditions in our industry;industry including capacity overbuild in areas where we operate;
•actions taken by our customers and competitors;
•the demand for crude oil, refined products and transportation and storage services;
•our ability to successfully implement our business plan;
an •inability to havecomplete growth projects completed on time and on budget;
an inability of Delek to grow as expected and realize the synergies and the other expected benefits of its merger with Alon USA, which became effective as of July 1, 2017, and Delek's acquisition of the remaining interest in Alon USA Partners, LP that Delek did not already own, which became effective as of February 7, 2018;
as it relates to our potential future growth opportunities, including dropdowns, and other potential benefits, the ability to successfully integrate the businesses of Delek and Alon USA;
•our ability to successfully complete acquisitions and integrate acquired businesses;businesses, and to achieve the anticipated benefits therefrom;
•disruptions due to acts of God, natural disasters, weather-related delays, casualty losses, severe weather patterns, such as freezing conditions, cyber or other attacks on our electronic systems, and other matters beyond our control;control which might cause damage to our pipelines, terminal facilities and other assets and could impact our operating results through increased costs and/or loss of revenue;
•changes in the price of RINs could affect our results of operations;
•future decisions by OPEC+ regarding production and pricing and disputes between OPEC+ regarding such;
•changes or volatility in interest and inflation rates;
•labor relations;
•large customer defaults;
•changes in tax status and regulations;
•the effects of future litigation;litigation or environmental liabilities that are not covered by insurance; and
•other factors discussed elsewhere in this Annual Report on Form 10-K.
Many of the foregoing risks and uncertainties are, and will be, exacerbated by any worsening of the global business and economic environment. In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.
In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events
anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.
Forward-lookingAll forward-looking statements speak only as ofincluded in this report are based on information available to us on the date the statements are made.of this report. We assumeundertake no obligation to revise or update any forward-looking statements to reflect actual results, changes in assumptionsas a result of new information, future events or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.otherwise.
Management's Discussion and Analysis
Executive Summary: Management's View of Our Business and Strategic Overview
| | |
| Management's View of Our Business |
The Partnership provides gathering, pipeline and other transportation services primarily owns and operatesfor crude oil and natural gas customers, storage, wholesale marketing and terminalling services primarily for intermediate and refined products logisticsproduct customers, and marketing assets. We gather, transport, offloadwater disposal and store crude oilrecycling services through its owned assets and intermediate products and market, distribute, transport and store refined productsjoint ventures located primarily in the Permian Basin (including the Delaware sub-basin) and other select regions ofareas in the southeastern United States and Texas for Delek and third parties.Gulf Coast region. A substantial majority of our existing assets are both integral to and dependent upon the success of Delek’sDelek Holdings' refining operations, as many of our assets are contracted exclusively to Delek Holdings in support of its Tyler, andTexas (the "Tyler Refinery"), El Dorado, Refineries.Arkansas (the "El Dorado Refinery") and Big Spring, Texas (the "Big Spring Refinery").
Business and Economic Environment Overview
We also own membership interestsDuring much of year ended December 31, 2023, domestic markets have experienced an elevated hydrocarbon pricing environment that has resulted in two joint ventures that were formeda strong demand for hydrocarbons and presented an opportunity for the Partnership to plan, develop, construct, own, operateleverage its extensive network of logistics assets, resulting in increased throughputs and maintain separate pipeline systemshigher utilization as compared to the prior year. Additionally, the successful integration of Delaware Gathering further diversifies our logistics customer base to include significantly more third-party customers, and certain ancillary assets, which are serving third parties and subsidiaries of Delek. We own a 50% membership interestit allows us to provide comprehensive logistics services in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC")Delaware Basin, while also serving as a funnel into our existing midstream Permian activities. As producers continue to operate one of these pipeline systems and a 33% membership interest inramp up production within 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. In February 2018, Andeavor acquired Rangeland RIO.
The Partnership is not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. Instead, for purposes of such income taxes, each partner ofPermian Basin, the Partnership is requiredwell positioned to continue to add value through our gathering and processing services as a result of integrating our Delaware Gathering operations which complement our existing Midland Gathering System assets. Our positioning allows our customers the ability to control quality and adds optionality to place barrels in a variety of markets. Through our joint venture projects, we have increased our supply network to take into account its shareadvantage of itemsgrowth opportunities in expanding markets and added additional flexibility which has delivered realized value through the Partnership system. While we experienced a $32.8 million decrease in net income for the year ended December 31, 2023, our EBITDA (as defined in "Non GAAP Measures" section below) increased $58.3 million in 2023 as compared to 2022. Our gathering and processing segment which had segment EBITDA of income, gain, loss$199.5 million in 2023 compared to $175.3 million in 2022, benefited from additional EBITDA associated with the Delaware Gathering Acquisition as well as rate increases and deductionnew connections in computing its federalour Midland Gathering operations. Our wholesale marketing and state income tax liabilities, regardlessterminalling segment saw a $23.4 million increase in segment EBITDA. Segment EBITDA for our investments in pipeline joint ventures decreased by $0.3 million. See the “Results of whetherOperations” section below for further discussion.
Looking forward, concerns about inflation and a possible economic downturn as well as initiatives to reduce carbon footprints through energy transition to renewables have softened the forward demand expectations for hydrocarbons and natural gas. That said, we are well positioned to manage through an economic downturn because of built-in recessionary protections which include minimum volume commitments on throughput and dedicated acreage agreements. Furthermore, the Partnership benefited from inflationary-linked rate increases effective July 1, 2023, as discussed further below. Additionally, the Partnership has embraced opportunities to enhance our environmental stewardship. It is expected that renewables, other than hydrocarbons, will continue to grow as a percentage of total energy consumption; however, a material reduction in the reliance on oil and gas for energy consumption is unlikely in the near term. Therefore, as we look forward to 2024, we expect that liquid transportation fuels will continue to be in high demand, and we expect to continue to leverage the strength of our cash distributions are madeflows and balance sheet in order to the partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basiscontinue maximizing unitholder returns and the fairlong-term prospects for return on investment.
See further discussion on macroeconomic factors and market value of our assets and financial reporting bases of assets and liabilities,trends, including the acquisition price of the partner's unitsimpact on 2023 and the taxable income allocation requirementsoutlook for 2024, in the ‘Market Trends’ section below.
Other 2023 Developments
Related Party Revolving Credit Facility
On November 6, 2023, the Partnership and certain of its subsidiaries, as guarantors, entered into a certain Promissory Note (the “Related Party Revolving Credit Facility”) with Delek Holdings. The Related Party Revolving Credit Facility provides for revolving borrowings with aggregate commitments of $70.0 million comprised of a (i) $55.0 million senior tranche and a (ii) $15.0 million subordinated tranche (the “Subordinated Tranche”), with the initial borrowings under the Partnership's First Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement").
Recent Developments
Big Spring Asset Dropdown. On February 26, 2018, a definitive agreement was entered into betweenSubordinated Tranche conditioned upon the Partnership and Delek Holdings reaching an agreement with Fifth Third Bank, National Association, as administrative agent under the DKL Credit Facility, on subordination provisions and other material terms related to acquirethe Subordinated Tranche. The Related Party Revolving Credit Facility will bear interest at Term SOFR (as defined in the Related Party Revolving Credit Facility) plus 3.00%. The Related Party Revolving Credit Facility proceeds will be used for the Partnership’s working capital purposes and other general corporate purposes. The Related Party Revolving Credit Facility will mature on June 30, 2028. The Related Party Revolving Credit Facility contains certain logistics assets primarily located adjacentaffirmative covenants, mandatory prepayments and events of default that the Partnership considers to Delek's Big Spring, Texas refinery. In connection withbe customary for an arrangement of this sort. The obligations under the closingRelated Party Revolving Credit Facility are unsecured.
Management's Discussion and Analysis
DKL Credit Facility
On November 6, 2023, the Partnership entered into a First Amendment, a Second Amendment and a Third Amendment to the DKL Credit Facility (together, the “Amendments”) which among other things: extended the maturity of the transaction,DKL Term Loan Facility to April 15, 2025, (ii) added a maturity acceleration clause which will accelerate the maturity of the DKL Term Loan Facility to 180 days prior to the stated maturity date of the 2025 Notes if any of the 2025 Notes remain outstanding on that date, (iii) increased the U.S. Revolving Credit Commitments (as defined in the DKL Credit Facility) by an amount equal to $150.0 million, resulting in aggregate lender commitments under the DKL Revolving Credit Facility of $1.050 billion and (iv) increased the limit allowed for general unsecured debt (as defined in the DKL Credit Facility) by an amount equal to $95.0 million, resulting in an unsecured general debt limit of $150.0 million.
Contractual Rate Adjustments to Keep Pace with Inflation
On July 1, 2023, the tariffs on certain of our FERC regulated pipelines and the throughput fees and storage fees under certain of our agreements with Delek Holdings and third parties that are subject to adjustments using FERC indexing increased by approximately 13.3%, which was the Partnershipamount of the change in the FERC oil pipeline index. The tariff on FERC regulated system acquired from Delaware Gathering (formerly 3 Bear) was adjusted as of January 1, 2023, but adjustments under agreements already in place will be capped at 3.0%. Under certain of our agreements with Delek Holdings and variousthird parties, the fees that are subject to adjustments using the consumer price index increased 17.6% and the fees that are subject to adjustments using the producer price index increased approximately 18.9%. These adjustments allow us to maintain compliance with FERC regulations as well as to ensure that our results are reflective of their subsidiaries expect to enter into a newcurrent market conditions.
Management's Discussion and Analysis
Segment Overview
We review operating results in four reportable segments: (i) gathering and processing; (ii) wholesale marketing and marketing agreementterminalling; (iii) storage and amend certain existing contracts, such as new throughputtransportation; and tankage agreement(iv) investments in pipeline joint ventures. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each reportable segment based on the segment EBITDA, except for the Big Spring Logistics Assets. Seeinvestments in pipeline joint ventures segment, which is measured based on net income. Segment reporting is discussed in more detail in Note 2113 to theour accompanying consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Formation of Green Plains Joint Venture.On February 20, 2018, the Partnership and Green Plains Partners LP ("Green Plains") announced the companies have formed DKGP Energy Terminals, LLC ("DKGP Energy"), a joint venture engaging in the light products terminalling business. The Partnership and Green Plains will each own a 50% membership interest in DKGP Energy. See Item 1, "Business—Recent Developments—Formation of Green Plains Joint Venture" for additional information related to this transaction.
Acquisition of Non-controlling Interest in Alon Partnership.On November 8, 2017, Delek and Alon USA Partners, LP (the "Alon Partnership") entered into a definitive merger agreement under which Delek agreed to acquire all of the outstanding limited partner units of the Alon Partnership that Delek did not already own in an all-equity transaction (the "Alon Partnership Transaction"). The Alon Partnership Transaction was approved by the board of directors of Delek and by all voting members of the board of directors of the general partner of the Alon Partnership upon the recommendation from its conflicts committee. The Alon Partnership Transaction closed on February 7, 2018.
Big Spring Pipeline Acquisition. On September 15, 2017, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Plains Pipeline, L.P. an approximately 40-mile pipeline and related ancillary assets. See Item 1, "Business—Recent Developments—Big Spring Pipeline Acquisition" for additional information on this acquisition.
Delek/Alon Merger. In January 2017, Old Delek, New Delek and various related entities entered into the Merger Agreement with Alon USA. The transactions contemplated by the Merger Agreement became effective on July 1, 2017, and, among other things, resulted in Alon USA and Old Delek surviving as wholly-owned subsidiaries of New Delek.
The Delek/Alon Mergers did not affect the Partnership's commercial agreements with Delek discussed in Note 4 to the consolidated financial statementsincluded in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Inflation Adjustments. The tariffsoperational assets in our gathering and processing segment consist of Midland Gathering Assets and Delaware Gathering Assets. The Midland Gathering Assets support our crude oil gathering activities which primarily serves Delek Holdings refining needs throughout the Permian Basin. The Delaware Gathering Assets support our crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico, and serving primarily third-party producers and customers. Finally, our gathering and processing assets are integrated with our pipeline assets, which we use to transport gathered crude oil as well as provide other crude oil, intermediate and refined products transportation in support of Delek Holdings' refining operations in Tyler, Texas, El Dorado, Arkansas and Big Spring, Texas, as well as to certain third parties. In providing these services, we do not take ownership of the refined products or crude oil that we transport. While we do not take ownership of gas that is gathered, we sell the processed gas at a market price which we remit to the producer, net of our fees. Therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment. The combination of these operational assets provides a comprehensive, integrated midstream service offering to producers and customers.
| | |
| Wholesale Marketing and Terminalling |
Our wholesale marketing and terminalling segment provides wholesale marketing and terminalling services to Delek Holdings’ refining operations and to independent third parties from whom we receive fees for marketing, transporting, storing and terminalling refined products and to whom we wholesale market refined products. In providing certain of these services, we take ownership of the products and are therefore exposed to market risks related to the volatility of commodity and refined product prices in our West Texas operations, which depend on many factors, including demand and supply of refined products in the West Texas market, the timing of refined product deliveries and downtime at refineries in the surrounding area.
| | |
| Storage and Transportation |
The operational assets in our FERC-regulated pipelinesstorage and the throughput feestransportation segment consist of tanks, offloading facilities, trucks and ancillary assets, which provide crude oil, intermediate and refined products transportation and storage fees under our agreements withservices primarily in support of Delek Holdings' refining operations in Tyler, Texas, El Dorado, Arkansas and Big Spring, Texas. Additionally, the assets in this segment provide crude oil transportation services to certain third parties are subject to increase or decrease annually, by the amount of any change in various inflation-based indices, including the FERC oil pipeline index, the consumer price index and the producer price index. See Item 1, "Business—Recent Developments—Inflation Adjustments" for additional information onparties. In providing these changes.
6.750% Senior Notes Due 2025. On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly owned subsidiaryservices, we do not take ownership of the products or crude oil that we transport or store. Therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment.
| | |
| Investments in Pipeline Joint Ventures |
The Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued $250.0 million in aggregate principal amountowns a portion of 6.750% senior notes due 2025 (the “2025 Notes”). See Item 1, "Business—Recent Developments—6.750% Senior Notes Due 2025"three joint ventures (accounted for additional information.
Caddo Pipeline. In March 2015, we entered into a joint venture to construct aas equity method investments) that have constructed separate crude oil pipeline systemsystems and related ancillary assets (the "Caddo Pipeline"),primarily in the Permian Basin and Gulf Coast regions and with strategic connections to Cushing, Midland and other key exchange points, which is servingprovide crude oil and refined product pipeline transportation to third parties and subsidiaries of Delek. We ownDelek Holdings.
The corporate and other segment primarily consists of general and administrative expenses not allocated to a 50% membershipreportable segment, interest inexpense and depreciation and amortization. When applicable, it may also contain operating segments that are not reportable and do not meet the entity formedcriteria for aggregation with an affiliateany of Plains All American Pipeline, L.P. to construct the Caddo Pipeline. Operationsour existing reportable segments.
Long-Term Strategic Objectives
The Partnership’s Long-Term Strategic Objectives have been focused on the Caddo Pipeline began in January 2017.
Business Strategies
Our objectives are to maintainmaintaining stable cash flows and to grow the quarterly distributions paid to our unitholders over time. We areTo that end, we have been focused on growing our asset base within our geographic area, through acquisitions, project development, joint ventures, and enhancing our existing systems. Whilesystems and lowering our carbon footprint, as we will continue to evaluate ways to provide Delek Holdings with logistics services and look for ways to reduce our emphasis willreliance on Delek Holdings as our primary customer.
Management's Discussion and Analysis
2023 Strategic Focus Areas
In service to these overarching Long-Term Strategic Objectives, as we began 2023, we focused on the following Strategic Focus Areas:
I.Generate Stable Cash Flow
II.Focus on Growing Our Business through Acquisitions and Investments in Joint Ventures
III.Engage in Mutually Beneficial Transactions with Delek Holdings
IV.Pursue Attractive Expansion and Construction Opportunities
V.Optimize Our Existing Assets and Expand Our Customer Base
VI.Expand our ESG Consciousness and Lower our Carbon Footprint
Since acquiring Delaware Gathering in 2022, the Partnership has been dedicated to achieving organic growth in our operations. This strategy has proven to be successful, as we have seen substantial growth from new connections in our Midland Gathering operations, as well as continued growth in our Delaware Gathering operations. We continue to increasebe focused on growth opportunities in the logistics servicesPermian Basin given its prime acreage and extensive production history and believe that opportunities exist in crude, natural gas and water which could enhance our gathering and process segment.
The Partnership prioritizes safe and reliable operation of its assets to maintain financial stability and growth. We have successfully avoided lost time injuries for four years, demonstrating our strong safety protocols and adherence to regulations. This commitment protects employees, assets, and operations, minimizing financial losses and maintaining stakeholder trust.
Additionally, we have prioritized reducing our leverage ratio, providing us with more financial flexibility to pursue opportunities and expand operations. By reducing our debt profile and maintaining a strong financial position, we are better equipped to navigate challenges that may arise. This financial stability also allows us to seize emerging opportunities that align with our strategic goals, ensuring that we offercan continue to third parties. We intenddeliver value to achieve these objectivesour unitholders.
2023 Strategic Scorecard
| | | | | | | | | | | | | | | | | | | | |
| Description of Strategic Success | Generate Stable Cash Flow | Focus on Growing Our Business through Acquisitions and Investments in Joint Ventures | Engage in Mutually Beneficial Transactions with Delek Holdings | Pursue Attractive Expansion and Construction Opportunities | Optimize Our Existing Assets and Expand Our Customer Base | Expand our ESG Consciousness and Lower our Carbon Footprint |
| Integration and expansion of Delaware Gathering operations | ü | ü | | ü | ü | |
| Implemented measures to reduce our overall debt profile | | ü | ü | ü | ü | |
| Expansion of our Midland operations | ü | | | ü | ü | |
| Zero lost time injuries | ü | | | | | |
| Continue in Co-Developing our ESG Strategy with our General Partner | | | | | | ü |
Looking Forward: 2024 Strategic Focus Areas
As we look to 2024, we continue to believe that our strategic focus areas are the following business strategies:right ones. As such, we continue to refine our processes for evaluating risks and returns while maintaining a keen eye on our overarching Long-Term Strategic Objectives and our desire to create long-term operational sustainability. To that end, our 2024 Strategic Focus Areas are as follows:
•Generate Stable Cash Flow. We will continueContinue to pursue opportunities to provide logistics, marketing and other services to Delek Holdings and third parties pursuant to long-term, fee-based contracts. In new service contracts, we will endeavor to include minimum volume throughput or other commitments, similar to those included in our current commercial agreements with Delek.
Delek Holdings.
•Focus on Growing Our Business. We intendContinue to evaluate and pursue opportunities to grow our business through both strategic acquisitions and expansion and construction projects, both internally funded or in combination with potential external partners. We believe thatpartners and through investments in joint ventures. Additionally, where possible, leverage our strong relationship with Delek willHoldings to enhance our opportunities to grow our business.
◦Pursue Acquisitions. Pursue strategic acquisitions that both complement our existing assets and provide attractive returns for our unitholders, with a focus on expanding our third-party business. Leverage our current asset base, and our knowledge of the regional markets in which we operate, to target and complete attractive third-party acquisitions, which will enhance our third-party revenues and margin, further diversifying our customer and product mix.
| | | | | |
◦65 | | Pursue Acquisitions. We plan to pursue strategic acquisitions that both complement our existing assets and provide attractive returns for our unitholders. As we continue to grow through acquisitions, we believe we will be able to increase our third party business. |
Management's Discussion and Analysis
Additionally,◦Investments in Joint Ventures. Continue to focus on leveraging and, when appropriate, expanding our investments in joint ventures, which have contributed to our initiative to grow our midstream business while increasing our crude oil sourcing flexibility.
•Engage in Mutually Beneficial Transactions with Delek has granted us a right of first offer on certain logistics assets. We intend to review our right to purchase any such assets as they are offered to us under the terms of the right of first offer, from time to time.Holdings. Delek Holdings is also required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek Holdings may acquire or construct in the future. As a result of the Alon Partnership Transaction,Further, we anticipatewill continue to evaluate additional growth opportunities through subsequent dropdowns of logistics assets acquired or developed by Delek Holdings, while factoring in associated impact on our capital structure and critically evaluating anticipated return on investment. As certain of our commercial agreements with Delek Holdings have expired or are set to expire soon, we are currently engaged in negotiations to renew these contracts and ensure continued value for both ourselves and our sponsor.
•Pursue Attractive Expansion and Construction Opportunities. Continue to evaluate, and when appropriate in the context of our return on investment and risk assessment criteria, pursue organic growth opportunities that complement our existing businesses or that provide attractive returns within or outside our current geographic footprint. Continue to evaluate potential opportunities to make capital investments that will be used to expand our existing asset base through the transaction. In additionexpansion and construction of new logistics assets to those opportunities to acquire assetssupport growth of any of our customers', including Delek Holdings', businesses and from Delek, we believe that our current asset base,increased third-party activity. These construction projects may be developed either through joint venture relationships or by us acting independently, depending on size and our knowledge of the regional markets in which we operate, will enable us to target and complete attractive third-party acquisitions.scale.
| |
◦ | Pursue Attractive Expansion and Construction Opportunities.We intend to pursue organic growth opportunities that complement our existing businesses or that provide attractive returns within or outside our current geographic footprint. We plan to evaluate potential opportunities to make capital investments that will be used to expand our existing asset base through the expansion and construction of new logistics assets to support growth of any of our customers', including Delek's, businesses and from increased third-party activity. These construction projects may be developed either through joint venture relationships or by us acting independently, depending on size and scale.
|
•Optimize Our Existing Assets and Expand Our Customer Base. We seek Continue seeking to enhance the profitability of our existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization. We also expectAdditionally, continue to seek opportunities to further diversify our customer base by increasing third-party throughput volumes running through certain of our existing systems and expanding our existing asset portfolio to service more third-party customers.
Commercial Agreements
The Partnership has a number•Expand our ESG Consciousness and Lower Our Carbon Footprint. Continue to look for ways to grow our business whilst staying conscious of long-term, fee-based commercial agreementsand minimizing the negative environmental impact, while also seeking opportunities to invest in innovative technologies that will reduce our carbon emissions as we achieve our growth objectives and sustainably improve unitholder returns. We expect to achieve this objective through ESG-Conscious Investments with Delek under which we provide various services, including crude oil gatheringClear Value Propositions and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek, and Delek commits to provide us with minimum monthly throughput volumes of crude oil, intermediate and refined products. Generally, these agreements include minimum quarterly volume, revenue or throughput commitments and have tariffs or fees indexed to inflation-based indices, provided that the tariffs or fees will not be decreased below the initial amount. See Note 4 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a discussion of our material agreements with Delek.
Sustainable Returns.
How We Evaluate Our Operations
We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) volumes (including pipeline throughput and terminal volumes); (ii) contribution margin and gross margin per barrel; (iii) operating and maintenance expenses; and (iv) EBITDA and distributable cash flow (as such terms are defined below).
| | | | | |
■volumes (including pipeline throughput and terminal volumes) |
|
■operating and maintenance expenses |
■cost of materials and other |
■EBITDA and distributable cash flow (as such terms are defined below) |
■net income of joint ventures |
The amount of revenue we generate primarily depends on the volumes of crude oil intermediate and refined products that we handle in our pipeline, transportation, terminalling, storage and marketing operations. These volumes are primarily affected by the supply of and demand for crude oil, intermediate and refined products in the markets served directly or indirectly by our assets. Although Delek Holdings has committed to minimum volumes under certain of the commercial agreements, as described above, our results of operations will be impacted by:
Delek’s•Delek Holdings’ utilization of our assets in excess of its minimum volume commitments;
•our ability to identify and execute acquisitions and organic expansion projects and capture incremental volume increases from Delek Holdings or third parties;
•our ability to increase throughput volumes at our refined products terminals and provide additional ancillary services at those terminals;
•our ability to identify and serve new customers in our marketing and trucking operations; and
•our ability to make connections to third-party facilities and pipelines.
Management's Discussion and Gross Margin per Barrel. Because we do not allocate general and administrative expenses by segment, we measure the performance of our segments by the amount of contribution margin generated in operations. Contribution margin is calculated as net sales less cost of goods sold and operating expenses.Analysis
| | |
| Operating and Maintenance Expenses |
For our wholesale marketing and terminalling segment, we also measure gross margin per barrel. Gross margin per barrel reflects the gross margin (net sales less cost of goods sold) of the wholesale marketing operations divided by the number of barrels of refined products sold during the measurement period. Both contribution margin and gross margin per barrel can be affected by fluctuations in the prices and cost of gasoline, distillate fuel, ethanol and Renewable Identification Numbers ("RINs"). Historically, the profitability of our wholesale marketing operations has been affected by commodity price volatility, specifically as it relates to changes in the price of refined products between the time we purchase such products from our suppliers and the time we sell the products to our wholesale customers, and the fluctuation in the value of RINs. Commodity price volatility may also impact our wholesale marketing operations
when the selling price of finished products does not adjust as quickly as the purchase price. Our wholesale marketing gross margin can also be impacted by fixed price ethanol agreements that we enter into to fix the price we pay for ethanol.
Operating and Maintenance Expenses.We seek to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses are comprisedinclude the costs associated with the operation of owned terminals and pipelines and terminalling expenses at third-party locations, excluding depreciation and amortization. These costs primarily of labor expenses, leaseinclude outside services, allocated employee costs, utility costs, insurance premiums, repairs and maintenance costs and energy and utility costs. Operating expenses and property taxes.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. These expenses generally remain relatively stable across broad ranges of throughput volumes, but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of thesesaid expenses. Additionally, compliance with federal, state and local laws and regulations relating to the protection of the environment, health and safety may require us to incur additional expenditures. We will seek to manage our maintenance expenditures on our pipelines and terminals by scheduling maintenance over time to avoid significant variability in our maintenance expenditures and minimize their impact on our cash flow.
| | |
| Cost of Materials and Other |
EBITDA and Distributable Cash Flow. We define EBITDA as net income (loss) before net interest expense, income tax expense, depreciation and amortization expense. DuringThese costs include:
| | | | | | | | |
(i)all costs of purchased refined products in our wholesale marketing and terminalling segment, as well as 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 any third parties; and | | (iv)gains and losses related to our commodity hedging activities. |
The Partnership anticipates paying a cash distribution to its unitholders at a distribution rate of $1.055 per unit for the yearquarter ended December 31, 2016, we revised2023 ($4.22 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of its available cash (as defined in the Partnership Agreement) to its unitholders quarterly. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our definitionrevolving credit facility and any potential future issuances of distributable cash flowequity and debt securities. See Note 11 to include the reconciliationconsolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this non-U.S. GAAP measureAnnual Report on Form 10-K for a discussion of historic cash distributions.
How We Evaluate Our Investments in Pipeline Joint Ventures
We make strategic investments in pipeline joint ventures generally when it provides an economic benefit in terms of pipeline access we can use for our existing or future customers and when we expect a rate of return that meets our internal investment criteria. Our existing investments in pipeline joint ventures all provide a combination of strategic benefit and return on investment. The strategic benefit for each is described below:
•The RIO Pipeline is positioned in the Delaware Basin and benefits from U.S. GAAP net cashdrilling activity in the area, while also offering producers and shippers connections to Midland, Texas takeaway pipelines;
•The Caddo Pipeline provides crude oil logistics connectivity for shippers from operating activities rather thanLongview, Texas area to Shreveport, Louisiana area; and
•The Red River Pipeline provides crude oil transportation and optionality from EBITDA. Distributable cash flow is derived from net cash flow from operating activities plus or minus changesCushing, Oklahoma to Longview, Texas area and connectivity to our Caddo JV along with the Partnership's Paline pipeline for access to Gulf Coast markets. It also has additional expansion optionality.
Market Trends
Fluctuations in assetscrude oil, natural gas and liabilities, less maintenance capital expenditures netNGL prices and the prices of reimbursementsrelated refined and other adjustments not expectedhydrocarbon products impact operations in the midstream energy sector. For example, the prices of each of these products have the ability to settleinfluence drilling activity in cash. We believe this revision ismany basins and the amounts of capital spending that crude oil exploration and production companies incur to support future growth. Exploration and production activities have a more appropriate reflection of a liquidity measure bydirect impact on volumes transported through our gathering assets in the geologic basins in which userswe operate. Additionally, the demand for hydrocarbon-based refined products and related crack spreads significantly impact production decisions of our refining customers and likewise throughputs on our pipelines and other logistics assets. Finally, fluctuations in demand and commodity prices for refined products, as well as the value attributable to RINs, directly impacts our wholesale marketing operations, where we are subject to short-term commodity price fluctuations at the rack.
Management's Discussion and Analysis
Most of the logistics services we provide (including transportation, gathering and processing services) are subject to long-term fee-based contracts with minimum volume commitments or long-term dedicated acreage agreements which mitigate most of our short-term financial statements can assessrisk to price and demand volatility. However, sustained depressed demand/prices over the longer term could not only curb exploration and production expansion opportunities under our agreements, it could also impact our customers' willingness or ability to generate cash. Additionally, distributablerenew commercial agreements or result in liquidity or credit constraints that could impact our longer term relationship with them. That said, our recent expansion of our gas processing capabilities have improved both our customer and geographic diversification which lowers concentration risk in those areas, in addition to adding service offerings to our portfolio. Furthermore, our dedicated acreage agreements provide significant growth opportunities in strong economic conditions (e.g., high demand/high commodity prices) without incremental customer acquisition cost. Given all of these factors, we believe that we continue to be strategically positioned, even in tougher market conditions, to sustain positive operating results and cash flowflows and EBITDAto continue developing profitable growth projects that are not presentations madeneeded to support future distribution growth.
The charts on the following page provide historical commodity pricing statistics for crude oil, refined product and natural gas.
Management's Discussion and Analysis
Management's Discussion and Analysis
Non-GAAP Measures
Our management uses certain "non-GAAP" operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our financial information presented in accordance with accounting principles generally accepted in the United States Generally Accepted Accounting Principles ("U.S. GAAP"). These financial and operational non-GAAP measures include:
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•Earnings before interest, taxes, depreciation and amortization ("EBITDA") - calculated as net income before net interest expense, income tax expense, depreciation and amortization expense, including amortization of marketing contract intangible, which is included as a component of net revenues in our accompanying consolidated statements of income. | | •Distributable cash flow - calculated as net cash flow from operating activities plus or minus changes in assets and liabilities, less maintenance capital expenditures net of reimbursements and other adjustments not expected to settle in cash. The Partnership believes this is an appropriate reflection of a liquidity measure by which users of its financial statements can assess its ability to generate cash. |
EBITDA and distributable cash flow are non-U.S. GAAPnon-GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
•our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods;
•the ability of our assets to generate sufficient cash flow to make distributions to our unitholders;
•our ability to incur and service debt and fund capital expenditures; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that the presentation of EBITDA and distributable cash flow providesprovide information useful to investors in assessing our financial condition and results of operations. EBITDA and distributable cash flow should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. EBITDA and distributable cash flow have important limitations as analytical tools, because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA and distributable cash flow may be defined differently by other companiespartnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies,partnerships, thereby diminishing their utility. ForSee below for a reconciliation of EBITDA and distributable cash flow to their most directly comparable GAAP financial measures calculatedmeasures.
Non-GAAP Reconciliations
The following table provides a reconciliation of EBITDA and presented in accordance with U.S. GAAP, please refer to "—Results of Operations" below.
Factors Affecting the Comparability of Our Financial Results
Our future results of operations may not be comparable to our historical results of operations for the reasons described below:
Revenues. Theredistributable cash flow (which are differences between the way the Predecessors recorded revenues and the way the Partnership records revenues after the Acquisitions from Delek. Because our assets, including the Logistics Assets, were historically a part of the integrated operations of Delek, the Predecessors generally recognized the costs and most revenue associated with the terminalling and storage services provided to Delek on an intercompany basis. Accordingly, the revenues in the Predecessors' consolidated financial statements are different than those reflected in the Partnership's consolidated financial statements, as the Predecessors' amounts relate primarily to amounts received from third parties, while the Partnership's revenues will also reflect amounts associated with our commercial agreements with Delek in addition to amounts received from third parties.
General and Administrative Expenses. The Predecessors' general and administrative expenses included direct monthly charges for the management and operation of our logistics assets and certain expenses allocated by Delek for general corporate services, such
as treasury, accounting and legal services. These expenses were charged or allocateddefined above) to the Predecessors based on the nature of the expensesmost directly comparable GAAP measure, or net income and our proportionate share of employee time and headcount.
Delek continues to charge the Partnership for the management and operation of our logistics assets, including an annual fee under our Omnibus Agreement (as defined in Note 4 to our consolidated financial statements) with Delek, for the provision of various centralized corporate services. Additionally, the Partnership is required to reimburse Delek for direct or allocated costs and expenses incurred by Delek on behalf of the Partnership. The Partnership also incurs additional incremental annual general and administrative expenses as a result of being a publicly traded partnership.
Financing. The Partnership paid anet cash distribution to its unitholders at a distribution rate of $0.725 per unit for the quarter ended December 31, 2017 ($2.90 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute to its unitholders quarterly all of its available cash as defined in the Partnership Agreement. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our revolving credit facility and any potential future issuancesactivities, respectively.
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| Reconciliation of net income to EBITDA (in thousands) | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 |
| Net income | | | | | $ | 126,236 | | | $ | 159,052 | |
| Add: | | | | | | | |
| Income tax expense | | | | | 1,205 | | | 382 | |
| Depreciation and amortization | | | | | 92,384 | | | 62,988 | |
| Amortization of marketing contract intangible | | | | | 7,211 | | | 7,211 | |
| Interest expense, net | | | | | 143,244 | | | 82,304 | |
EBITDA (1) | | | | | $ | 370,280 | | | $ | 311,937 | |
(1) EBITDA includes $14.8 million of equity and debt securities.
Market Trends
Master Limited Partnerships
Fluctuations in crude oil prices and the prices of related refined products impact our operations and the operations of other master limited partnerships in the midstream energy sector. In particular, crude oil prices and the prices of related refined products have the ability to influence drilling activity in many basins and the amounts of capital spending that crude oil exploration companies and smaller producers incur to support future growth. During the first half of 2016, depressed crude oil prices resulted in a reduction in drilling activity, which created excess capacity and reduced throughput on many crude oil pipelines in the United States and limited the needgoodwill impairment expense for new infrastructure projects as crude oil production in the United States was in a period of decline. However, in the latter half of 2016, and throughout the year ended December 31, 2017, market conditions improved. The prices of crude oil and related refined products have increased. Drilling activity has escalated as a result of increasing crude oil prices, particularly in the Permian basin which has attractive drilling economics supported by improved efficiencies and drilling cost. As market conditions improve and demand for our assets' capacity benefits from increased drilling activity, we expect our operations and results2023. Refer to benefit from the trend, particularly in the west Texas area where our results are most driven by market factors. Additionally, improving market conditions allow for the development of profitable growth projects that are needed to support future distribution growth in the midstream energy sector and for the Partnership.
West Texas Marketing Operations
Overall demand for gathering and terminalling services in a particular area is generally driven by crude oil production in the area, which can be impacted by crude oil prices, refining economics and access to alternate delivery and transportation infrastructure. Additionally, volatility in crude oil, intermediate and refined products prices in the west Texas area and the value attributable to RINs can affect the results of our west Texas operations. For example, as discussed above, drilling activity and the prices of crude oil and related refined products have recently increased, resulting in higher demand for finished products from our west Texas operations to industries that support crude oil exploration and production. See below for the high, low and average price per barrel of WTI crude oil for each of the quarterly periods during the years ended December 31, 2017, 2016 and 2015.
Also, the volatility of finished products prices may impact our margin in the west Texas operations when the selling price of finished products does not adjust as quickly as the purchase price. See below for the range of prices per gallon of gasoline and diesel for each of the quarterly periods during the years ended December 31, 2017, 2016 and 2015.
Our west Texas operations can benefit from RINs that are generated by ethanol blending activities. As a result, changes in the price of RINs can affect our results of operations. The RINs we generate are sold primarily to Delek at market prices. We sold approximately $5.6 million, $6.7 million and $5.8 million of RINs to Delek during the years ended December 31, 2017, 2016 and 2015, respectively. See below for the high, low and average prices of RINs for each of the quarterly periods during the years ended December 31, 2017, 2016 and 2015.
All of these factors are subject to change over time. As part of our overall business strategy, management considers aspects such as location, acquisition and expansion opportunities and factors impacting the utilization of the refineries (and therefore throughput volumes), which may impact our performance in the market.
Seasonality and Customer Maintenance Programs
The volume and throughput of crude oil, intermediate and refined products transported through our pipelines and sold through our terminals and to third parties are directly affected by the level of supply and demand for all such products in the markets served directly or indirectly by our assets or our customers. Supply and demand for such products fluctuates during the calendar year. Demand for gasoline, for example, is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. In addition, our refining customers, such as Delek, occasionally reduce or suspend operations to perform planned maintenance during the winter, when demand for their products is lower. Accordingly, these factors affect the need for crude oil or finished products by our customers, and therefore limit our volumes or throughput during these periods, and our operating results will generally be lower during the first and fourth quarters of the year. We believe, however, that many of the potential effects of seasonality on our revenues and contribution margin will be substantially mitigated due to our commercial agreements with Delek that typically include minimum volume and throughput commitments.
Results of Operations
A discussion and analysis of the factors contributing to our results of operations is presented below. The accompanying consolidated financial statements and related notes of the Partnership have been retrospectively adjusted to include the historical results of the Logistics Assets for all periods presented through March 31, 2015. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.
The following table and discussion present a summary of our consolidated results of operations for the years ended December 31, 2017, 2016 and 2015, including a reconciliation of EBITDA to net income and distributable cash flow to net cash provided by operating activities (in thousands, except unit and per unit amounts). Our financial results may not be comparable, as our Predecessors recorded revenues, general and administrative expenses and financed operations differently than the Partnership. See "—Factors Affecting the Comparability of Our Financial Results" for additional information.
|
| | | | | | | | | | | | |
| Statements of Income and Comprehensive Income Data |
| (In thousands, except unit data and per unit data) |
| | | | | | | |
| | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net sales: | | | | | | |
| Pipelines and transportation | | $ | 121,729 |
| | $ | 122,172 |
| | $ | 131,379 |
|
| Wholesale marketing and terminalling | | 416,346 |
| | 325,887 | | 458,290 |
| Total | | 538,075 |
| | 448,059 | | 589,669 |
| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 372,890 |
| | 302,158 | | 436,304 |
| Operating expenses | | 43,274 |
| | 37,198 | | 44,923 |
| General and administrative expenses | | 11,840 |
| | 10,256 | | 11,384 |
| Depreciation and amortization | | 21,914 |
| | 20,813 | | 19,692 |
| (Gain) loss on asset disposals | | (20 | ) | | (16 | ) | | 104 |
|
| Total operating costs and expenses | | 449,898 | | 370,409 | | 512,407 |
| Operating income | | 88,177 |
| | 77,650 | | 77,262 |
| Interest expense, net | | 23,944 |
| | 13,587 | | 10,658 |
|
| (Income) loss from equity method investments | | (4,953 | ) | | 1,178 |
| | 588 |
|
| Other income, net | | (1 | ) | | — |
| | — |
|
| Total non-operating costs and expenses | | 18,990 |
| | 14,765 |
| | 11,246 |
|
| Income before income tax (benefit) expense | | 69,187 |
| | 62,885 |
| | 66,016 |
|
| Income tax (benefit) expense | | (222 | ) | | 81 |
| | (195 | ) |
| Net income | | 69,409 |
| | 62,804 |
| | 66,211 |
|
| Less: Loss attributable to Predecessors | | — |
| | — |
| | (637 | ) |
| Net income attributable to partners | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
|
| Comprehensive income attributable to partners | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
|
EBITDA (1) | | $ | 115,045 |
| | $ | 97,285 |
| | $ | 96,366 |
|
| | |
|
| | | | |
| Less: General partner's interest in net income, including incentive distribution rights | | 18,429 |
| | 12,193 |
| | 5,163 |
|
| Limited partners' interest in net income | | $ | 50,980 |
| | $ | 50,611 |
| | $ | 61,685 |
|
| | | | | | | |
Net income per limited partner unit (2): | | | | | | |
| Common units - (basic) | | $ | 2.09 |
| | $ | 2.08 |
| | $ | 2.55 |
|
| Common units - (diluted) | | $ | 2.09 |
| | $ | 2.07 |
| | $ | 2.52 |
|
| Subordinated units - Delek (basic and diluted) | | $ | — |
| | $ | 2.19 |
| | $ | 2.54 |
|
| | | | | | | |
Weighted average limited partner units outstanding (2): | | | | | | |
| Common units - (basic) | | 24,348,063 |
| | 22,490,264 |
| | 12,237,154 |
| Common units - (diluted) | | 24,376,972 |
| | 22,558,717 |
| | 12,356,914 |
| Subordinated units - Delek (basic and diluted) | | — |
| | 1,803,167 |
| | 11,999,258 |
| | | | | | | |
| Cash distributions per limited partner unit | | $ | 2.835 |
| | $ | 2.575 |
| | $ | 2.240 |
|
| |
(1)
| For a definition of EBITDA, see "—How We Evaluate Our Operations—EBITDA and Distributable Cash Flow." |
| |
(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. See Notes 5 and 12Note 8 - Goodwill to our accompanying consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further discussion.information.
| | | | | | | | | | | | | | | |
| Reconciliation of net cash from operating activities to distributable cash flow (in thousands) |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 |
| Net cash provided by operating activities | | | | | $ | 225,319 | | | $ | 192,168 | |
| Changes in assets and liabilities | | | | | 29,474 | | | 49,423 | |
| Distributions from equity method investments in investing activities | | | | | 9,002 | | | 1,737 | |
| Non-cash lease expense | | | | | (9,549) | | | (16,254) | |
Regulatory and sustaining capital expenditures not distributable (1) | | | | | (7,272) | | | (9,684) | |
Reimbursement from Delek Holdings for capital expenditures (2) | | | | | 1,280 | | | 1,176 | |
| | | | | | | |
| Accretion of asset retirement obligations | | | | | (705) | | | (596) | |
| Deferred income taxes | | | | | (638) | | | (5) | |
| Gain on disposal of assets | | | | | 1,266 | | | 114 | |
| Distributable cash flow | | | | | $ | 248,177 | | | $ | 218,079 | |
|
| | | | | | | | | | | | |
| (in thousands) | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 (2) |
| Reconciliation of net income to EBITDA: | | | | | | |
| Net income | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,211 |
|
| Add: | | | | | | |
| Income tax (benefit) expense | | (222 | ) | | 81 |
| | (195 | ) |
| Depreciation and amortization | | 21,914 |
| | 20,813 |
| | 19,692 |
|
| Interest expense, net | | 23,944 |
| | 13,587 |
| | 10,658 |
|
EBITDA (1) | | $ | 115,045 |
| | $ | 97,285 |
| | $ | 96,366 |
|
| | | | | | | |
| Reconciliation of net cash from operating activities to distributable cash flow: | | | | | | |
| Net cash provided by operating activities | | $ | 87,703 |
| | $ | 100,707 |
| | $ | 68,024 |
|
| Changes in assets and liabilities | | 3,462 |
| | (14,861 | ) | | 20,106 |
|
Maintenance and regulatory capital expenditures (3) | | (9,444 | ) | | (5,920 | ) | | (11,841 | ) |
Reimbursement from Delek for capital expenditures (4) (5) | | 3,453 |
| | 3,251 |
| | 5,503 |
|
| Accretion of asset retirement obligations | | (292 | ) | | (266 | ) | | (251 | ) |
| Deferred income taxes | | 111 |
| | 173 |
| | (14 | ) |
| Gain (loss) on asset disposals | | 20 |
| | 16 |
| | (104 | ) |
Distributable cash flow (1) | | $ | 85,013 |
| | $ | 83,100 |
| | $ | 81,423 |
|
| | | | | |
(1)
70 | | For a definition of EBITDA and distributable cash flow, please see "—How We Evaluate Our Operations—EBITDA and Distributable Cash Flow." |
Management's Discussion and Analysis
| | | | | |
(2)
(1) | EBITDARegulatory and distributable cash flow include net loss of $0.2 million related to our Predecessors during the year ended December 31, 2015. |
| |
(3)
| Maintenance and regulatorysustaining capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance and regulatory capital expenditures areinclude expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. |
| (2) | |
(4)
| For the years ended December 31, 2017, 2016 and 2015,Reimbursement from Delek reimbursed usHoldings for capital expenditures represents amounts for certain capital expenditures reimbursable to us from Delek Holdings pursuant to the terms of the Omnibus Agreement (as defined in Note 4 to our accompanying consolidated financial statements).
|
| |
(5)
| In the current year, the reimbursed capital expenditure amounts in the determination of distributable cash flow were revised to reflect the accrual of reimbursed capital expenditures from Delek rather than the cash amounts received for reimbursed capital expenditures during the years ended December 31, 2017, 2016 and 2015. This resulted in an increase to the distributable cash flow of $1.4 million and $0.3 million during the years ended December 31, 2016 and 2015, respectively, from amounts presented on our Annual Report on Form 10-K for the year ended December 31, 2016. |
Segment Data:
The following is a summary of business segment capital expenditures for the periods indicated (in thousands):
Management's Discussion and Analysis
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Capital spending (excluding business combinations) | | | | | | |
| Pipelines and Transportation | | $ | 14,262 |
| | $ | 8,478 |
| | $ | 16,030 |
|
| Wholesale Marketing and Terminalling | | 4,141 |
| | 3,289 |
| | 6,397 |
|
| Total capital spending | | $ | 18,403 |
| | $ | 11,767 |
| | $ | 22,427 |
|
Consolidated Results of Operations - ComparisonA discussion and analysis of the Year Ended December 31, 2017 versusfactors contributing to our results of operations is presented below. A detailed discussion of the Year Ended December 31, 2016fiscal year 2022 compared to year-over-year changes from fiscal year 2021 can be found in Part II, Item 7. Management's Discussion and Analysis, "Results of Operations", of our 2022 Annual Report on Form 10-K, filed on March 1, 2023. The financial statements, together with the Year Ended December 31, 2016 versusfollowing information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the Year Ended December 31, 2015
only criteria for predicting our future performance.
The following table presentsprovides summary financial data (in thousands, except unit and per unit amounts):
| | | | | | | | | | | | | | | |
Summary Statement of Operations Data (1) | | | Year Ended December 31, |
| | | | | 2023 | | 2022 |
| Net revenues: | | | | | | | |
| Gathering and Processing | | | | | $ | 371,110 | | | $ | 305,427 | |
| Wholesale marketing and terminalling | | | | | 505,701 | | | 588,884 | |
| Storage and transportation | | | | | 143,598 | | | 142,096 | |
| | | | | | | |
| | | | | | | |
| Total | | | | | 1,020,409 | | | 1,036,407 | |
| | | | | | | |
| Cost of materials and other | | | | | 532,627 | | | 641,363 | |
| Operating expenses (excluding depreciation and amortization presented below) | | | | | 118,101 | | | 88,307 | |
| General and administrative expenses | | | | | 24,766 | | | 34,181 | |
| Depreciation and amortization | | | | | 92,384 | | | 62,988 | |
| Impairment of goodwill | | | | | 14,848 | | | — | |
| Gain on disposal of assets | | | | | (1,266) | | | (114) | |
| Operating income | | | | | $ | 238,949 | | | $ | 209,682 | |
| Interest expense, net | | | | | 143,244 | | | 82,304 | |
| Income from equity method investments | | | | | (31,433) | | | (31,683) | |
| Other income, net | | | | | (303) | | | (373) | |
| Total non-operating expenses, net | | | | | 111,508 | | | 50,248 | |
| Income before income tax expense | | | | | 127,441 | | | 159,434 | |
| Income tax expense | | | | | 1,205 | | | 382 | |
| Net income attributable to partners | | | | | $ | 126,236 | | | $ | 159,052 | |
| Comprehensive income attributable to partners | | | | | $ | 126,236 | | | $ | 159,052 | |
EBITDA(2) (3) | | | | | $ | 370,280 | | | $ | 311,937 | |
| Net income per limited partner unit: | | | | | | | |
| Basic | | | | | $ | 2.90 | | | $ | 3.66 | |
| Diluted | | | | | $ | 2.89 | | | $ | 3.66 | |
| Weighted average limited partner units outstanding: | | | | | | | |
| Basic | | | | | 43,583,938 | | | 43,487,910 | |
| Diluted | | | | | 43,611,314 | | | 43,511,650 | |
(1)This information is presented at a summary level for your reference. See the Consolidated Statements of our consolidated resultsIncome included in Item 8. Financial Statements and Supplementary Data, of operations andthis Annual Report on Form 10-K for more detail regarding our segment operating performance for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 (in thousands). The discussion immediately following presents the consolidated results of operations.
(2) For a definition of EBITDA, see "Non-GAAP Measures" above. |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Pipelines and Transportation | | | | | | |
| Net sales: | | | | | | |
| Affiliate | | 109,298 |
| | $ | 103,749 |
| | 102,551 |
|
| Third-Party | | 12,431 |
| | 18,423 |
| | 28,828 |
|
| Total Pipelines and Transportation | | 121,729 |
| | 122,172 |
| | 131,379 |
|
| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 18,210 |
| | 19,425 |
| | 19,607 |
|
| Operating expenses | | 33,240 |
| | 29,235 |
| | 33,751 |
|
| Segment contribution margin | | $ | 70,279 |
| | $ | 73,512 |
| | $ | 78,021 |
|
| | | | | | | |
| Wholesale Marketing and Terminalling | | | | | | |
| Net Sales: | | | | | | |
| Affiliate | | 46,982 |
| | 45,815 |
| | 50,013 |
|
| Third-Party | | 369,364 |
| | 280,072 |
| | 408,277 |
|
| Total Wholesale Marketing and Terminalling | | 416,346 |
| | 325,887 |
| | 458,290 |
|
| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 354,680 |
| | 282,733 |
| | 416,697 |
|
| Operating expenses | | 10,034 |
| | 7,963 |
| | 11,172 |
|
| Segment contribution margin | | $ | 51,632 |
| | $ | 35,191 |
| | $ | 30,421 |
|
| | | | | | | |
| Consolidated | | | | | | |
| Net Sales: | | | | | | |
| Affiliate | | $ | 156,280 |
| | $ | 149,564 |
| | $ | 152,564 |
|
| Third-Party | | 381,795 |
| | 298,495 |
| | 437,105 |
|
| Net sales | | 538,075 |
| | 448,059 |
| | 589,669 |
|
| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 372,890 |
| | 302,158 |
| | 436,304 |
|
| Operating expenses | | 43,274 |
| | 37,198 |
| | 44,923 |
|
| Contribution margin | | 121,911 |
| | 108,703 |
| | 108,442 |
|
| General and administrative expenses | | 11,840 |
| | 10,256 |
| | 11,384 |
|
| Depreciation and amortization | | 21,914 |
| | 20,813 |
| | 19,692 |
|
| (Loss) gain on asset disposals | | (20 | ) | | (16 | ) | | 104 |
|
| Operating income | | $ | 88,177 |
| | $ | 77,650 |
| | $ | 77,262 |
|
Net Sales
We generated net sales(3) EBITDA includes $14.8 million of $538.1 milliongoodwill impairment expense for the year ended December 31, 2017 compared2023. Refer to $448.1 millionNote 8 - Goodwill to our accompanying consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for 2016, an increase of $90.0 million, or 20.1%. The increase was primarily attributable to increases in the average sales prices per gallon of gasoline and diesel and in volumes sold in our west Texas marketing operations. The average sales prices per gallon of gasoline and diesel sold increased $0.33 per gallon and $0.39 per gallon, respectively, during the year ended December 31, 2017 compared to average sales prices during 2016. The net increase of gasoline and diesel gallons sold in west Texas was 8.0 million gallons during the year ended December 31, 2017 compared to gallons sold during 2016. Also contributing to the increase in net sales were increased fees under our marketing agreement with Delek as a result of increased throughput due to higher demand following product supply disruptions associated with Hurricane Harvey. Partially offsetting the increase was a decline in fees on our Paline Pipeline System. During the year ended December 31, 2017, the Paline Pipeline System was a FERC regulated pipeline with a tariff established for potential shippers, compared to the year ended December 31, 2016, when the pipeline capacity was under contract with two third parties for a monthly fee.further information.
We generated net sales of $448.1 million for the year ended December 31, 2016 compared to $589.7 million for 2015, a decrease of $141.6 million, or 24.0%. The decrease was primarily attributable to decreases in both the average sales prices per gallon of gasoline and diesel and in volumes sold in our west Texas marketing operations. The average sales prices per gallon of gasoline and diesel sold decreased $0.29 per gallon and $0.28 per gallon, respectively, during the year ended December 31, 2016 compared to average sales prices during 2015. Volumes of gasoline and diesel sold in west Texas decreased 33.5 million gallons and 13.9 million gallons, respectively, during the year ended December 31, 2016 compared to gallons sold during 2015. Further contributing to the decrease were declines in fees on our Paline Pipeline System as a result of lower contractual volumes and declines in fuel surcharge revenues and lower asphalt hauling associated with our trucking assets. Partially offsetting the decreases were increased throughput at most of our terminals, the majority of which occurred at our terminals in El Dorado, Arkansas and Tyler, Texas, as operations matched commercial demand, and the effects of the throughput and tankage agreements for the Logistics Assets, pursuant to which we generated revenue on the Logistics Assets during all periods for the year ended December 31, 2016, with no comparable revenue earned during the first quarter of 2015. Also offsetting the decreases were increases in volumes and fees associated with our marketing agreement with Delek, which increased primarily as a result of the turnaround that occurred at the Tyler Refinery in the first quarter of 2015, during which the refinery was not fully operational.
Cost of Goods Sold
Cost of goods sold was $372.9 million for the year ended December 31, 2017 compared to $302.2 million for the year ended December 31, 2016, an increase of $70.7 million, or 23.4%. The increase in cost of goods sold was primarily attributable to increases in the average cost per gallon of gasoline and diesel and in volumes purchased in our west Texas marketing operations. The average cost per gallon of gasoline and diesel purchased increased $0.27 per gallon and $0.31 per gallon, respectively, during the year ended December 31, 2017 compared to average costs during 2016. The net increase of gasoline and diesel gallons purchased in west Texas was 8.0 million gallons during the year ended December 31, 2017, compared to gallons purchased during 2016.
Cost of goods sold was $302.2 million for the year ended December 31, 2016, compared to $436.3 million for 2015, a decrease of $134.1 million, or 30.7%. The decrease in cost of goods sold was primarily attributable to decreases in both the average cost per gallon of gasoline and diesel and in volumes purchased in our west Texas marketing operations. The average cost per gallon of gasoline and diesel purchased decreased $0.27 per gallon and $0.30 per gallon, respectively, during the year ended December 31, 2016 compared to average costs during 2015. Gallons of gasoline and diesel purchased in west Texas decreased 33.5 million gallons and 13.9 million gallons, respectively, during the year ended December 31, 2016 compared to gallons purchased during 2015.
Operating Expenses
Operating expenses were $43.3 million for the year ended December 31, 2017 compared to $37.2 million for 2016, an increase of $6.1 million or 16.3%. The increase in operating expenses during the year ended December 31, 2017 compared to 2016, was primarily due to increases in labor and utilities costs associated with certain of our pipelines as a result of increased usage and higher maintenance costs associated with certain of our tanks at our tank farms. Also contributing to the increase were employee incentive costs incurred during the year ended December 31, 2017, with no comparable costs incurred during the year ended December 31, 2016. Partially offsetting these increases were a reduction in operating expenses for one of our terminal locations at which we incurred increased costs related to internal tank contamination during the year ended December 31, 2016 that were not incurred during the year ended December 31, 2017.
Operating expenses were $37.2 million for the year ended December 31, 2016 compared to $44.9 million for 2015, a decrease of $7.7 million, or 17.2%. The decrease in operating expenses during the year ended December 31, 2016, compared to 2015, was due to cost saving initiatives taken during the year ended December 31, 2016, which resulted in decreases in
maintenance costs and supplies expenses associated with our terminals, including tanks at those terminals, and the SALA Gathering System. Partially offsetting these decreases were increases in operating expenses related to internal tank contamination at one of our terminals and hydro testing on our Paline Pipeline during the year ended December 31, 2016.
Contribution Margin
Contribution margin for the year ended December 31, 2017 was $121.9 million compared to $108.7 million in 2016, an increase of $13.2 million, or 12.2%. The increase in contribution margin was primarily attributable to improved contribution margin in our west Texas operations as a result of increased drilling activity in the region, which has improved market conditions and increased demand. Also contributing to the increase in contribution margin were increased fees associated with our marketing agreement with Delek as described above. Partially offsetting these increases was a decline in fees on our Paline Pipeline System as described above.
Contribution margin for the year ended December 31, 2016 was $108.7 million compared to $108.4 million in 2015, an increase of $0.3 million, or 0.2%. The increase in contribution margin was primarily attributable to increased throughput at most of our terminals and increased fees associated with the Logistics Assets and marketing agreement as discussed above. Also contributing to the increase were improved margins in our west Texas operations as a result of increased drilling activity in the region, which has improved market conditions and increased demand. Our contribution margin in our west Texas operations during the year ended December 31, 2015 was impacted by lower crude oil prices that reduced demand in the region and lowered throughput in our west Texas operations. Partially offsetting the increases were declines in fees on our Paline Pipeline System and declines in fuel surcharge revenues and lower asphalt hauling associated with our trucking assets as discussed above.
General and Administrative Expenses
General and administrative expenses were $11.8 million for the year ended December 31, 2017, compared to $10.3 million for the year ended December 31, 2016, an increase of $1.5 million, or 15.4%. The increase in general and administrative expenses was primarily due to increases in certain direct employee costs allocated to us as a result of an increase in employee headcount in connection with operating and maintaining our assets and in employee incentive costs incurred during the year ended December 31, 2017, with no comparable costs incurred during the year ended December 31, 2016.
General and administrative expenses were $10.3 million for the year ended December 31, 2016 compared to $11.4 million for the year ended December 31, 2015, a decrease of $1.1 million, or 9.9%. The decrease in general and administrative expenses was
primarily due to decreases in professional services feesduring the year ended December 31, 2016 compared to the year ended December 31, 2015, during which we incurred greater professional services fees in connection with our various acquisition activities and joint venture projects.
Depreciation and Amortization
Depreciation and amortization was $21.9 million for the year ended December 31, 2017 compared to $20.8 million for the year ended December 31, 2016, an increase of $1.1 million, or 5.3%. The increase in depreciation and amortization was primarily due to the addition of assets to our asset base as a result of the completion of capital projects that were placed into service during the year ended December 31, 2017 compared to the year ended December 31, 2016.
Depreciation and amortization was $20.8 million for the year ended December 31, 2016 compared to $19.7 million for the year ended December 31, 2015, an increase of $1.1 million, or 5.7%. The increase in depreciation and amortization was primarily due to the Logistics Assets added to our asset base and the completion of capital projects, which were placed into service during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Interest Expense
Interest expense was $23.9 million for the year ended December 31, 2017 compared to $13.6 million for the year ended December 31, 2016, an increase of $10.3 million, or 76.2%. This increase was primarily attributable to higher total debt balances and higher average interest rates on our debt outstanding under 2025 Notes and our revolving credit facility.
Interest expense was $13.6 million for the year ended December 31, 2016 compared to $10.7 million for the year ended December 31, 2015, an increase of $2.9 million, or 27.5%. This increase was primarily attributable to increases in interest costs under our revolving credit facility due to changes in debt utilization and interest rates thereunder as a result of increased borrowings incurred in connection with continued investments made in our joint ventures.
Income Tax Expense
Income tax benefit was $0.2 million for the year ended December 31, 2017 compared to expense of $0.1 million for the year ended December 31, 2016. The Partnership is not subject to federal income taxes as a limited partnership. Accordingly, our taxable income or loss is included in the federal and state income tax returns of our partners.
Income tax expense was $0.1 million for the year ended December 31, 2016, compared to a benefit of $0.2 million for the year ended December 31, 2015.
Operating Segments
We reviewreport operating results in twofour reportable segments: (i) pipelines
•Gathering and transportationProcessing
•Wholesale Marketing and (ii) wholesale marketingTerminalling
•Storage and terminalling. Transportation
•Investments in Pipeline Joint Ventures
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 segmentsegments based on the segment contribution margin. Segment contribution margin is definedEBITDA.
Management's Discussion and Analysis
Results of Operations
Consolidated Results of Operations - Comparison of the Year Ended December 31, 2023 versus the Year Ended December 31, 2022
Net Revenues
2023 vs. 2022
Net revenues decreased by $16.0 million, or 1.5%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily driven by the following:
•decreased revenue of $99.6 million in our West Texas marketing operations primarily driven by decreases in the average sales prices per gallon and the volumes of gasoline and diesel sold:
◦the average sales prices per gallon of gasoline and diesel sold decreased by $0.46 per gallon and $0.73, respectively; and
◦the volumes of diesel sold decreased by 3.6 million gallons, partially offset by a 0.6 million increase in gallons of gasoline sold.
Such decreases were partially offset by the following:
•increase in revenue as net sales lessa result of our Delaware Gathering operations, which began in June 2022; and
•increase in volumes associated with Midland Gathering operations primarily due to new connections finalized during 2022.
Cost of Materials and Other
2023 vs. 2022
Cost of materials and other decreased by $108.7 million, or 17.0%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
•decrease in costs of materials and other of $101.9 million in our West Texas marketing operations primarily driven by decreases in the average cost per gallon and the volumes of diesel sold:
◦the average cost per gallon of gasoline and diesel sold decreased by $0.49 per gallon and $0.74 per gallon, respectively; and
◦the volumes of diesel sold decreased by 3.6 million gallons, partially offset by a 0.6 million increase in gallons of gasoline sold.
Such decreases were partially offset by the following:
•increase in cost of goods soldmaterials and operatingother as a result of our Delaware Gathering operations, which began in June 2022.
Operating Expenses
2023 vs. 2022
Operating expenses excluding increased by $29.8 million, or 33.7%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by incremental expenses associated with our Delaware Gathering operations which began in June 2022.
General and Administrative Expenses
2023 vs. 2022
General and administrative expenses decreased by $9.4 million, or 27.5%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
•higher outside services associated with the Delaware Gathering Acquisition in the prior year; and
•partially offset by lower allocated employee related expenses.
Management's Discussion and Analysis
Depreciation and Amortization
2023 vs. 2022
Depreciation and amortization increased by $29.4 million, or 46.7%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
•the acquisition of property, plant and equipment and customer relationship intangible as part of the Delaware Gathering Acquisition; and
•depreciation associated with new projects in-serviced during the period.
Impairment of Goodwill
2023 vs. 2022
Impairment of goodwill was $14.8 million for the year ended December 31, 2023. The goodwill impairment is related to our Delaware Gathering reporting unit due to significant increases in interest rates and amortization. Segment reporting is more fully discussed intiming of system connections with our producer customers. The Partnership's long-term outlook of its Delaware Gathering system remains unchanged. Refer to Note 158 to our accompanying consolidated financial statements.statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.
There was no asset impairment in the year ended December 31, 2022.
Interest Expense
2023 vs. 2022
Interest expense increased by $60.9 million, or 74.0%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
•increased borrowings under the DKL Credit Facility to fund the Delaware Gathering Acquisition; and Transportation
•higher floating interest rates applicable to the DKL Credit Facility.
Results from Equity Method Investments
2023 vs. 2022
Income from equity method investments decreased by $0.3 million, or 0.8%, in the year ended December 31, 2023 compared to the year ended December 31, 2022.
Management's Discussion and Analysis
Operating Segments
Gathering and Processing Segment
Our pipelines and transportation segment assets provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services to Delek and third parties. These assets include the Lion Pipeline System, the SALA Gathering System, the Paline Pipeline System, the East Texas Crude Logistics System, the Tyler-Big Sandy Product Pipeline, the El Dorado Tank Assets, the Tyler Tank Assets, the Greenville-Mount Pleasant Pipeline and Greenville Storage Facility, the El Dorado Rail Offloading Racks, the Tyler Crude Tank and refined product pipeline capacity leased from Enterprise TE Products Pipeline Company LLC that runs from El Dorado, Arkansas to our Memphis terminal and the Big Spring Pipeline. In addition to these operating systems, we own 95 tractors and 231 trailers used to haul primarily crude oil and other products for related and third parties.
The following table and discussion present the results of operations and certain operating statistics of the pipelinesgathering and transportationprocessing segment for the years ended December 31, 2017, 20162023 and 2015 (in thousands):2022:
| | | | | | | | | | | | | | | | | |
| Gathering and Processing |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net Revenues | | | | | $ | 371,110 | | | $ | 305,427 | | | |
| Cost of materials and other | | | | | $ | 83,118 | | | $ | 81,525 | | | |
| Operating expenses (excluding depreciation and amortization) | | | | | $ | 75,136 | | | $ | 48,211 | | | |
Segment EBITDA (1) | | | | | $ | 199,463 | | | $ | 175,250 | | | |
(1) EBITDA includes $14.8 million of goodwill impairment expense for the year ended December 31, 2023. Refer to Note 8 - Goodwill to our accompanying consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information. | | | | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Throughputs (average bpd) | | | | | | |
| Lion Pipeline System: | | | | | | |
| Throughputs (average bpd) | |
| Throughputs (average bpd) | |
| | | Year Ended December 31, | | | | | Year Ended December 31, |
| | | | | 2023 | |
| El Dorado Assets: | |
| El Dorado Assets: | |
| El Dorado Assets: | |
| Crude pipelines (non-gathered) | |
| Crude pipelines (non-gathered) | |
| Crude pipelines (non-gathered) | | 59,362 |
| | 56,555 |
| | 54,960 |
|
| Refined products pipelines to Enterprise Systems | | 51,927 |
| | 52,071 |
| | 57,366 |
|
| SALA Gathering System | | 15,871 |
| | 17,756 |
| | 20,673 |
|
| Refined products pipelines to Enterprise Systems | |
| Refined products pipelines to Enterprise Systems | |
| El Dorado Gathering System | |
| El Dorado Gathering System | |
| El Dorado Gathering System | |
| East Texas Crude Logistics System | | 15,780 |
| | 12,735 |
| | 18,828 |
|
| East Texas Crude Logistics System | |
| East Texas Crude Logistics System | |
| Midland Gathering System | |
| Midland Gathering System | |
| Midland Gathering System | |
| Plains Connection System | |
| Plains Connection System | |
| Plains Connection System | |
| | | | | | | | | | | | | | | | | |
| Delaware Gathering Assets Volumes | | |
| | | Year Ended December 31, | | |
| | | | | 2023 | | 2022 (1) | | |
Natural Gas Gathering and Processing (Mcfd(2)) | | | | | 71,239 | | | 60,971 | | | |
Crude Oil Gathering (bpd(3)) | | | | | 111,335 | | | 87,519 | | | |
Water Disposal and Recycling (bpd(3)) | | | | | 102,340 | | | 72,056 | | | |
(1) Volumes for the year ended December 31, 2022 are for the period from June 1, through December 31, 2022, for which we owned the Delaware Gathering Assets.
(2) Mcfd - average thousand cubic feet per day.
Pipelines and Transportation Segment (3) bpd - average barrels per day.
Operational Comparison of the Year Ended December 31, 20172023 versus the Year Ended December 31, 2016 and the Year Ended December 31, 2016 versus the Year Ended December 31, 2015
2022:
Net SalesRevenues
2023 vs. 2022
Net salesrevenues for the pipelinesgathering and transportationprocessing segment were $121.7increased by $65.7 million, foror 21.5%, in the year ended December 31, 2017 compared to $122.2 million for the year ended December 31, 2016, a decrease of $0.5 million, or 0.4%. The decrease in net sales was primarily attributable to declines in fees on our Paline Pipeline System. During the year ended December 31, 2017, the Paline Pipeline System was a FERC regulated pipeline with a tariff established for potential shippers,2023 compared to the year ended December 31, 2016, when2022, driven primarily by the pipeline capacity was under contract with two third parties forfollowing:
•incremental revenues as a monthly fee. Partially offsetting the decrease were increasesresult of our Delaware Gathering operations, which began in pipeline feesJune 2022, partially offset by lower natural gas prices; and
•increase in throughput associated with our Greenville-Mount Pleasant PipelineMidland Gathering operations primarily due to new connections finalized during 2022.
Management's Discussion and a related pipeline connection.Analysis
Cost of Materials and Other
Net sales2023 vs. 2022
Cost of materials and other for the pipelinesgathering and transportationprocessing segment were $122.2increased by $1.6 million, foror 2.0%, in the year ended December 31, 2016 compared to $131.4 million for the year ended December 31, 2015, a decrease of $9.2 million, or 7.0%. The decrease in net sales was primarily attributable to declines in fees on our Paline Pipeline System, as a result of lower contractual volumes and declines in fuel surcharge revenues and lower asphalt hauling associated with our trucking assets. Partially offsetting these decreases were the effects of the throughput and tankage agreements for the Logistics Assets, pursuant to which we generated revenue on the Logistics Assets during all periods for the year ended December 31, 2016, with no comparable revenue earned during the first quarter of 2015.
Cost of Goods Sold
Cost of goods sold for the pipelines and transportation segment was $18.2 million for the year ended December 31, 2017 compared to $19.4 million for the year ended December 31, 2016, a decrease of $1.2 million, or 6.3%. The decrease in cost of goods sold was attributable to lower pipeline allowance losses on our Paline Pipeline System, reduced costs associated with our leased refined product pipeline capacity as a result of lower volumes on the pipeline and decreases in transportation costs related to our trucking assets duringthe year ended December 31, 2017,2023 compared to the year ended December 31, 2016.2022, driven primarily by the following:
•incremental cost of materials and other as a result of our Delaware Gathering operations which began in June 2022; and
Cost of goods sold was $19.4•partially offset by lower natural gas costs.
Operating Expenses
2023 vs. 2022
Operating expenses for the gathering and processing segment increased by $26.9 million, foror 55.8%, in the year ended December 31, 2016 compared to $19.6 million for the year ended December 31, 2015, a decrease of $0.2 million, or 0.9%. The decrease in cost of goods sold was attributable to lower pipeline allowance losses duringthe year ended December 31, 20162023 compared to the year ended December 31, 2015.2022, primarily driven by the following:
•increase in outside services associated with Midland Gathering operations.
Operating ExpensesEBITDA
2023 vs. 2022
Operating expenses for the pipelines and transportation segment were $33.2EBITDA increased by $24.2 million, foror 13.8%, in the year ended December 31, 20172023 compared to $29.2 million for the year ended December 31, 2016, an increase of $4.0 million, or 13.7%. The increase in operating expenses was2022, primarily due to increases in labor and utilities costs associated with certain of our pipelines as a result of increased usage. Also contributing todriven by the increase were higher maintenance costs associated with certain of our tanks at our tank farms.following:
Operating expenses were $29.2 million for the year ended December 31, 2016 compared to $33.8 million for the year ended December 31, 2015, a decrease of $4.6 million, or 13.4%. The decrease in operating expenses was primarily due to cost saving initiatives taken during the year ended December 31, 2016, which resulted in decreases in maintenance costs and supplies expenses associated with our tanks and the SALA Gathering System. Partially offsetting these decreases were increases in costs•additional EBITDA associated with the hydro testingDelaware Gathering operations, which began in June 2022;
•increase in throughput associated with new connections in our Midland Gathering operations; and
•partially offset by the impairment of our Paline Pipeline.goodwill associated the Delaware Gathering Acquisition.
Contribution Margin
Contribution margin for the pipelines and transportation segment for the year ended December 31, 2017 was $70.3 million, or 57.6% of our consolidated segment contribution margin, compared to $73.5 million, or 67.6% of our consolidated segment contribution margin, for the year ended December 31, 2016, a decrease of $3.2 million, or 4.4%. The decrease in the pipelines and transportation segment contribution margin was primarily attributable to decreases in net sales related to our Paline Pipeline System as described above.
Contribution margin for the pipelines and transportation segment for the year ended December 31, 2016 was $73.5 million, or 67.6% of our consolidated segment contribution margin, compared to $78.0 million, or 71.9% of our consolidated segment contribution margin, for the year ended December 31, 2015, a decrease of $4.5 million, or 5.8%. The decrease in the pipelines and transportation segment contribution margin was primarily attributable to decreases in net sales as described above.
Management's Discussion and Analysis
Wholesale Marketing and Terminalling Segment
We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek’s refining operations and to independent third parties.
The table and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the years ended December 31, 2017, 20162023 and 2015 (in thousands):2022:
| | | | | | | | | | | | | | | | | |
| Wholesale Marketing and Terminalling |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net Revenues | | | | | $ | 505,701 | | | $ | 588,884 | | | |
| Cost of materials and other | | | | | $ | 388,536 | | | $ | 491,452 | | | |
| Operating expenses (excluding depreciation and amortization presented below) | | | | | $ | 17,796 | | | $ | 19,458 | | | |
| Segment EBITDA | | | | | $ | 106,512 | | | $ | 83,098 | | | |
| | | | | | | | | | | | | | | | | |
| Operating Information |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | |
East Texas - Tyler Refinery sales volumes (average bpd) (1) | | | | | 60,626 | | | 66,058 | | | |
| Big Spring marketing throughputs (average bpd) | | | | | 77,897 | | | 71,580 | | | |
| West Texas marketing throughputs (average bpd) | | | | | 10,032 | | | 10,206 | | | |
| West Texas marketing gross margin per barrel | | | | | $ | 5.18 | | | $ | 4.45 | | | |
Terminalling throughputs (average bpd) (2) | | | | | 113,803 | | | 132,262 | | | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Operating Information: | | | | | | |
| East Texas - Tyler Refinery sales volumes (average bpd) | | 73,655 |
| | 68,131 |
| | 59,174 |
|
| West Texas marketing throughputs (average bpd) | | 13,817 |
| | 13,257 |
| | 16,357 |
|
| West Texas marketing gross margin per barrel | | $ | 4.03 |
| | $ | 1.43 |
| | $ | 1.35 |
|
Terminalling throughputs (average bpd) (1) | | 124,488 |
| | 122,350 |
| | 106,514 |
|
(1)(2)Consists of terminalling throughputs at our Memphis and Nashville, Tennessee terminals, ourTyler, Big Spring, Big Sandy Tyler and Mount Pleasant, Texas terminals, our El Dorado and our North Little Rock, Arkansas terminals and El Dorado, Arkansasour Memphis and Nashville, Tennessee terminals.
Wholesale Marketing and Terminalling Segment Operational Comparison of the Year Ended December 31, 20172023 versus the Year Ended December 31, 2016 and the Year Ended December 31, 2016 versus the Year Ended December 31, 2015
2022:
Net SalesRevenues
2023 vs. 2022
Net salesrevenues for the wholesale marketing and terminalling segment were $416.3decreased by $83.2 million, foror 14.1%, in the year ended December 31, 20172023 compared to $325.9 million for the year ended December 31, 2016, an increase2022, primarily driven by the following:
•decreased revenue of $90.4$99.6 million or 27.8%. The increase wasin our West Texas marketing operations primarily attributable to increasesdriven by decreases in the average sales prices per gallon and the volumes of diesel sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel sold decreased by $0.46 per gallon and $0.73 per gallon, respectively; and
◦the average volumes of diesel sold decreased by 3.6 million gallons, partially offset by a 0.6 million increase in volumes soldgallons of gasoline sold.
Such decreases were partially offset by the following:
•increase in our west Texasterminalling and marketing revenue primarily due to increased volume and rates associated with Big Spring marketing operations. Also contributing to the increase in net sales were increased fees associated with our marketing agreement with Delek as a result of increased throughput due to higher demand following product supply disruptions associated with Hurricane Harvey.
Net sales for the wholesale marketing and terminalling segment were $325.9 million for the year ended December 31, 2016 compared to $458.3 million for the year ended December 31,
Management's Discussion and Analysis
2015, a decrease of $132.4 million, or 28.9%. The decrease was primarily attributable to decreases in the average sales prices per gallon of gasoline and diesel and in volumes sold in our west Texas marketing operations. Partially offsetting the decrease were increased throughput at most of our terminals, the majority of which occurred at our terminals in El Dorado, Arkansas and Tyler, Texas, as operations matched commercial demand and increases in volumes and fees associated with our marketing agreement with Delek, which increased primarily as a result of the turnaround that occurred at the Tyler Refinery in the first quarter of 2015, during which the refinery was not fully operational.
The following charts show summaries of the average sales prices per gallon of gasoline and diesel and finishedrefined products volume impacting our westWest Texas operations for the years ended December 31, 2017, 2016 and 2015.2023, 2022:
Cost of Goods SoldMaterials and Other
2023 vs. 2022
Cost of goods soldmaterials and other for the wholesale marketing and terminalling segment was $354.7decreased by $102.9 million, foror 20.9%, in the year ended December 31, 20172023 compared to $282.7 million for the year ended December 31, 2016, an increase2022, primarily driven by the following:
•decreased costs of $72.0materials and other of $101.9 million or 25.4%. The increase in our West Texas marketing operations primarily driven by decreases in the average cost per gallon and the volumes of goods sold was attributable to increases in gasoline and diesel sold:
◦the average cost per gallon of gasoline and diesel and in volumes purchased in our west Texas marketing operations.
Cost of goods sold was $282.7 million in the year ended December 31, 2016 compared to $416.7 million for the year ended December 31, 2015, a decrease of $134.0 million, or 32.1%. The decrease in cost of goods sold was attributable to decreases in the average costdecreased by $0.49 per gallon and $0.74 per gallon, respectively; and
◦the volumes of diesel sold decreased by 3.6 million gallons, partially offset by a 0.6 million increase in gallons of gasoline and diesel and in volumes purchased in our west Texas marketing operations.sold.
The following chart shows a summary of the average prices per gallon of gasoline and diesel purchased in our westWest Texas operations for the years ended December 31, 2017, 20162023 and 2015.2022. Refer to the FinishedRefined Products Volume - Gallons chart above for a summary of volumes impacting our westWest Texas operations.
Management's Discussion and Analysis
Operating Expenses
2023 vs. 2022
Operating expenses in the wholesale marketing and terminalling segment were approximately $10.0 million for the year ended December 31, 2017 compared to $8.0 million for the year December 31, 2016, an increase of $2.0 million, or 26.0%. The increase in operating expenses was primarily due to increases in employee costs allocated to us as a result of an increase in employee headcount in connection with operating and maintaining our assets. Also contributing to the increase were employee incentive costs incurred during the year ended December 31, 2017, with no comparable costs incurred during the year ended December 31, 2016. Partially offsetting the increase were a reduction in operating expenses for one of our terminal locations
at which we incurred increased costs related to internal tank contamination during the year ended December 31, 2016 that were not incurred during the year ended December 31, 2017.
Operating expenses in the wholesale marketing and terminalling segment were approximately $8.0 million for the year ended December 31, 2016 compared to $11.2 million for the year ended December 31, 2015, a decrease of $3.2 million, or 28.7%. The decrease in operating expenses was primarily due to cost saving initiatives taken during the year ended December 31, 2016, which resulted in decreases in maintenance costs and supplies expenses at our terminals, including tanks at those terminals. Partially offsetting these decreases was an increase in operating expense related to internal tank contamination at one of our terminals during the year ended December 31, 2016.
Contribution Margin
Contribution margin for the wholesale marketing and terminalling segment amounted to $51.6decreased by $1.7 million, or 42.4%8.5%, in the year ended December 31, 2023 compared to the year ended December 31, 2022.
EBITDA
2023 vs. 2022
EBITDA increased by $23.4 million, or 28.2%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
•increases in terminalling utilization and improved wholesale margins.
Management's Discussion and Analysis
Storage and Transportation Segment
The table and discussion below present the results of operations and certain operating statistics of the storage and transportation segment for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Storage and Transportation |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net revenues | | | | | $ | 143,598 | | | $ | 142,096 | | | |
| Cost of materials and other | | | | | $ | 63,710 | | | $ | 66,953 | | | |
| Operating expenses (excluding depreciation and amortization presented below) | | | | | $ | 18,104 | | | $ | 17,843 | | | |
| Segment EBITDA | | | | | $ | 63,850 | | | $ | 56,269 | | | |
Operational Comparison of the Year Ended December 31, 2023 versus the Year Ended December 31, 2022:
Net Revenues
2023 vs. 2022
Net revenues for the storage and transportation segment increased by $1.5 million, or 1.1%, in the year ended December 31, 2023 compared to the year ended December 31, 2022.
Cost of Materials and Other
2023 vs. 2022
Cost of materials and other for the storage and transportation segment decreased by $3.2 million, or 4.8%, in the year ended December 31, 2023 compared to the year ended December 31, 2022.
Operating Expenses
2023 vs. 2022
Operating expenses for the storage and transportation segment increased by $0.3 million, or 1.5%, in the year ended December 31, 2023 compared to the year ended December 31, 2022.
2023 vs. 2022
EBITDA increased by $7.6 million, or 13.5%, in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by an increase in storage and transportation rates.
Management's Discussion and Analysis
Investments in Pipeline Joint Ventures Segment
The Investments in Pipeline Joint Ventures segment relates to strategic Joint Venture investments, accounted for as equity method investments, to support the Delek Holdings operations in terms of offering connection to takeaway pipelines, alternative crude supply sources and flow of high quality crude oil to the Delek Holdings refining system. As a result, Delek Holdings is a major shipper and customer on certain of the Joint Venture pipelines, with minimum volume commitment ("MVC") agreements, which cushion the Joint Venture entities during periods of low activity. The other Joint Venture owners are usually major shippers on the pipelines resulting in a majority of the revenue of the Joint Venture entities coming from MVC agreements with related entities.
Investments in pipeline joint ventures segment include the Partnership's joint ventures investments described in Note 12 to our accompanying consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Refer to Consolidated Results of Operations above for details and discussion of the investments in pipeline joint ventures segment contribution margin, for the year ended December 31, 2017 compared to $35.2 million, or 32.4% of our consolidated segment contribution margin, for the year ended December 31, 2016, an increase of $16.4 million, or 46.7%. The increase in contribution margin was primarily attributable to improved contribution margin in our west Texas operations as a result of increased drilling activity in the region, which has improved market conditions and increased demand. Additionally, contribution margin in our west Texas operations benefited from higher margins during a period of product supply disruptions associated with Hurricane Harvey. Also contributing to the increase were increased fees associated with our marketing agreement with Delek as described above. Further contributing to the increase was a reduction in operating expenses for one of our terminal locations at which we incurred increased costs related to internal tank contamination during the year ended December 31, 2016 that were not incurred during the year ended December 31, 2017.2023.
Contribution margin for the wholesale marketing and terminalling segment amounted to $35.2 million, or 32.4% of our consolidated segment contribution margin, for the year ended December 31, 2016 compared to $30.4 million, or 28.1% of our consolidated segment contribution margin, for the year ended December 31, 2015, an increase of $4.8 million, or 15.7%. The increase in contribution margin was attributable to increases in terminalling volumes and increased fees under our marketing agreement with Delek, as discussed above. Also contributing to the increase were improved margins in our west Texas operations as a result of increased drilling activity in the region, which has improved market conditions and increased demand. Our contribution margin in our west Texas operations during the year ended December 31, 2015 was impacted by lower crude oil prices that reduced demand in the region and lowered throughput in our west Texas operations.
Liquidity and Capital Resources
Sources of Capital
We expectconsider the following when assessing our ongoing sourcesliquidity and capital resources:
| | | | | |
(i) cash generated from operations; | (iv) potential issuance of additional debt securities; and |
(ii) borrowings under our revolving credit facility; | (v) potential sale of assets. |
(iii) potential issuance of additional equity; | |
At December 31, 2023, our total liquidity amounted to $343.3 million comprised of liquidity$269.5 million and $70.0 million in unused credit commitments under the DKL Credit Facility and the Related Party Revolving Credit Facility, respectively, and $3.8 million in cash and cash equivalents. We have the ability to includeincrease the DKL Credit Facility to $1.15 billion subject to receiving increased or new commitments from lenders and meeting certain requirements under the credit facility. Historically, we have generated adequate cash generated from operations borrowings under our revolving credit facility and potential issuances of additional equity and debt securities. We believe that cash generated from these sources will be sufficient to satisfy the anticipated cashfund ongoing working capital requirements, associated with our existing operations, including minimumpay quarterly cash distributions and operational capital expenditures, and we expect the same to continue in the foreseeable future. Other funding sources, including the issuance of additional debt securities, have been utilized to fund growth capital projects such as dropdowns and other acquisitions. In addition, we have historically been able to source funding at rates that reflect market conditions, our financial position and our credit ratings. We continue to monitor market conditions, our financial position and our credit ratings and expect future funding sources to be at rates that are sustainable and profitable for at leastthe Partnership. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us.
We believe we have sufficient financial resources from the above sources to meet our funding requirements in the next 12 months.months, including working capital requirements, quarterly cash distributions and capital expenditures. Nevertheless, our ability to satisfy working capital requirements, to service our debt obligations, to fund planned capital expenditures, or to pay distributions will depend upon future operating performance, which will be affected by prevailing economic conditions in the oil industry and other financial and business factors, including crude oil prices, some of which are beyond our control.
On February 12, 2018, we paid a cash distribution of $0.725 per limited partner unit for the quarter endedAt December 31, 2017, which equates to $22.8 million, or $2.90 per limited partner unit on an annualized basis, based on2023, the number of common and general partner units outstanding, including general partner incentive distribution rights.
The table below summarizesDKL Credit Facility was classified as long-term in the quarterly distributions related to our 2017 fiscal quarters:
|
| | | | | | | | |
| 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 |
| March 31, 2017 | | $0.690 | | $2.76 | | $21,024 | | May 12, 2017 |
| June 30, 2017 | | $0.705 | | $2.82 | | $21,783 | | August 11, 2017 |
| September 30, 2017 | | $0.715 | | $2.86 | | $22,270 | | November 14, 2017 |
| December 31, 2017 | | $0.725 | | $2.90 | | $22,777 | | February 12, 2018 |
Expiration of Subordination Period
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. See Notes 5 and 12 to theaccompanying consolidated financial statementsbalance sheets in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K as we currently have the ability and intent to refinance the 2025 Notes on a long-term basis through available capacity under the DKL Revolving Facility, Related Party Revolving Credit Facility or new funding sources.
We continuously review our liquidity and capital resources. If market conditions were to change, for additional information.instance due to a significant decline in crude oil prices, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our debt agreements. Such actions include seeking alternative financing solutions and enacting cost reduction measures. Refer to the Business Overview section of this MD&A for a complete discussion of the uncertainties identified by management and the actions taken to respond to these uncertainties.
We believe we were in compliance with the covenants in all our debt facilities as of December 31, 2023.
Management's Discussion and Analysis
Cash Distributions
On January 24, 2024, the board of directors of our general partner declared a distribution of 1.055 per common unit (the "Distribution"), which equates to approximately $46.0 million per quarter, or approximately $184.0 million per year, based on the number of common units outstanding as of February 5, 2024. The Distribution will be paid on February 12, 2024 to common unitholders of record on February 5, 2024 and represents a 3.4% increase over the fourth quarter 2022 distribution. This increase in the distribution is consistent with our intent to maintain an attractive distribution growth profile over the long term. Although our Partnership Agreement requires that we distribute all of our available cash each quarter, we do not otherwise have a legal obligation to distribute any particular amount per common unit.
The table below summarizes the quarterly distributions related to our quarterly financial results:
| | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Total Quarterly Distribution Per Limited Partner Unit | | Total Cash Distribution (in thousands) | | | | |
| March 31, 2022 | | $0.980 | | $42,604 | | | | |
| June 30, 2022 | | $0.985 | | $42,832 | | | | |
| September 30, 2022 | | $0.990 | | $43,057 | | | | |
| December 31, 2022 | | $1.020 | | $44,440 | | | | |
| March 31, 2023 | | $1.025 | | $44,664 | | | | |
| June 30, 2023 | | $1.035 | | $45,112 | | | | |
| September 30, 2023 | | $1.045 | | $45,558 | | | | |
| December 31, 2023 | | $1.055 | | $46,010 | | | | |
Cash Flows
The following table sets forth a summary of our consolidated cash flows for the yearsyear ended December 31, 2017, 20162023 and 20152022 (in thousands):
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| Net cash provided by operating activities | $ | 225,319 | | | $ | 192,168 | |
| Net cash used in investing activities | (89,629) | | | (770,437) | |
| Net cash (used in) provided by financing activities | (139,905) | | | 581,947 | |
| Net (decrease) increase in cash and cash equivalents | $ | (4,215) | | | $ | 3,678 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash Flow Data: | | | | | | |
| Cash flows provided by operating activities | | $ | 87,703 |
| | $ | 100,707 |
| | $ | 68,024 |
|
| Cash flows used in investing activities | | (30,672 | ) | | (72,692 | ) | | (56,592 | ) |
| Cash flows used in financing activities | | (52,415 | ) | | (27,956 | ) | | (13,293 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 4,616 |
| | $ | 59 |
| | $ | (1,861 | ) |
Cash Flows from Operating Activities
Net cash provided by operating activities was $87.7increased by $33.2 million for the year ended December 31, 2017,2023 compared to $100.7the year ended December 31, 2022. The cash receipts from customer activities increased by $14.7 million and cash payments to suppliers and for 2016. The decrease inallocations to Delek Holdings for salaries decreased by $71.0 million. In addition, cash flows provided by operations was due to increases in accounts receivable, inventory and other current assets and income from equity method investments. Inventory increased as a result of increases in purchases associated with our west Texas operations. Incomedividends received from equity method investments was $5.0increased by $5.8 million and cash paid for debt interest increased by $58.3 million.
Investing Activities
Net cash used in investing activities decreased by $680.8 million during the year ended December 31, 2017, partially offset by distributions of $3.1 million,2023 compared to a loss of $1.2 millionthe year ended December 31, 2022, primarily due to the Delaware Gathering Acquisition, effective June 1, 2022, which was partially financed through borrowings under the DKL Credit Facility amounting to $625.6 million. There were no acquisitions during the year ended December 31, 2016. Partially offsetting the2023. In addition, there was a $45.0 million decrease in cash flows provided by operations were increases in accounts payable, which were due to increases in payables to supplierspurchases of property, plant and equipment primarily associated with growth projects in our west Texas operationsgathering and processing segment, and a $7.3 million increase in distributions from equity method investments.
to vendors associated with certain of our capital projects. Net income for the year ended December 31, 2017 was $69.4 million, compared to net income of $62.8 million in 2016.
Financing Activities
Net cash provided by operatingfinancing activities was $100.7decreased by $721.9 million for the year ended December 31, 2016,2023 compared to $68.0 million for 2015. The increase in cash flows provided by operations was due to decreases in accounts receivable and inventories and other current assets. Accounts receivable decreased as a result of the receipt of an excise tax refund related to finished product purchases from the Tyler Refinery. Inventories and other current assets decreased as a result of lower prices in our west Texas operations. Net income for the year ended December 31, 20162022. This decrease was $62.8primarily driven by net borrowings under the revolving credit facility which decreased by $402.5 million, primarily associated with financing of the Delaware Gathering Acquisition in the prior year. Also contributing to the decrease was a decrease in net borrowings on the term loan of $317.3 million and a $8.9 million increase in cash distributions paid.
Debt Overview
As of December 31, 2023, we had total indebtedness of $1,711.8 million. The increase of $41.3 million in our long-term debt balance compared to net income of $66.2 million in 2015.
Cash Flows from Investing Activities
Net cash used in investing activities was $30.7 million for the year endedbalance at December 31, 2017, compared to $72.7 million used in 2016. The decrease in cash used in investing activities was primarily due to decreases in contributions made to our joint ventures. Partially offsetting these decreases were increases in our capital expenditures. We contributed approximately $3.5 million in cash to our joint ventures2022 resulted from the borrowings under the DKL Credit Facility during the year ended December 31, 2017, compared to contributions2023. As of approximately $61.6 million during the year ended December 31, 2016 for the construction2023, our total indebtedness consisted of:
Management's Discussion and Analysis
•An aggregate principal amount of two pipeline systems and ancillary assets. We purchased the Big Spring Pipeline and associated rights-of-way during the year ended December 31, 2017 for $9.0 million. We did not have any acquisitions during the year ended December 31, 2016. Cash used in investing activities during the year ended December 31, 2017 includes the cash portion of our capital expenditures, which was $18.2 million. Total capital expenditures for 2017 were $18.4$780.5 million compared to total capital expenditures of $11.8 million made during the year ended December 31, 2016. Capital expenditures made during the year ended December 31, 2017 related primarily to maintenance projects on certain of our tanks, discretionary projects on our terminalling assets and a discretionary project on a crude oil pipeline connection. Capital expenditures made during the year ended December 31, 2016 related primarily to maintenance projects on certain of our tanks and crude pipelines, discretionary projects on our terminalling assets, maintenance projects on our Lion Pipeline System and hydro testing on our Paline Pipeline System.
Net cash used in investing activities was $72.7 million for the year ended December 31, 2016, compared to $56.6 million used in 2015. Cash used in investing activities in 2016 included the cash portion of our capital expenditures of approximately $11.3 million. Total capital expenditures for 2016 were $11.8 million. This compares to total capital expenditures made during the year ended December 31, 2015 of $22.4 million. Capital expenditures made during the year ended December 31, 2016 related primarily to maintenance projects on certain of our tanks and crude pipelines, discretionary projects on our terminalling assets, maintenance projects on our Lion Pipeline System and hydro testing on our Paline Pipeline System. Capital expenditures made during the year ended December 31, 2015 related primarily to projects on certain of our tanks and crude pipelines, our terminalling assets and the purchase of assets from Delek. We had no third party acquisition activity during the year ended December 31, 2016 compared to $0.4 million during the year ended December 31, 2015. Additionally, we contributed approximately $61.6 million in cash to our joint ventures during the year ended December 31, 2016 compared to $37.4 million during the year ended December 31, 2015. Partially offsetting the cash used in investing activities during the year ended December 31, 2015 was an asset sale generating proceeds of approximately $1.2 million.
Cash Flows from Financing Activities
Net cash used in financing activities was $52.4 million in the year ended December 31, 2017, compared to $28.0 million used in 2016. The increase in cash used in financing activities was primarily due to increases in our quarterly cash distributions and net payments under the Second Amended and Restated Credit Agreement, as defined below. We paid quarterly cash distributions totaling $86.2 million duringDKL Revolving Facility, due on October 13, 2027 (which will accelerate to 180 days prior to the year ended December 31, 2017, compared to quarterly cash distributions totaling $70.9 million duringstated maturity date of the year ended December 31, 2016. We made net paymentsDelek Logistics 2025 Notes if any of $212.7the Delek Logistics 2025 Notes remain outstanding on that date), with an average borrowing rate of 8.46%.
•An aggregate principal amount of $281.3 million, under our Second Amended and Restated Credit Agreement during the year ended December 31, 2017, comparedDKL Term Facility, due on April 15, 2025 (which will accelerate to net proceeds180 days prior to the stated maturity date of $41.0the Delek Logistics 2025 Notes if any of the Delek Logistics 2025 Notes remain outstanding on that date), with an average borrowing rate of 9.46%.
•An aggregate principal amount of $250.0 million, during the year ended December 31, 2016. Offsetting the cash used in financing activities during the year ended December 31, 2017 were net proceeds under the 2025 Notes and reimbursement(6.75% senior notes), due in 2025, with an effective interest rate of capital expenditures by Delek. The Partnership received net proceeds, after deducting the initial purchasers' discounts, commissions and offering expenses,7.19%.
•An aggregate principal amount of $242.3$400.0 million, from the issuance of the 2025 Notes. Reimbursements of capital expenditures from Delek amounted to $4.3 million during the year ended December 31, 2017 compared to $1.9 million during the year ended December 31, 2016.
Net cash used in financing activities was $28.0 million in the year ended December 31, 2016, compared to $13.3 million used in 2015. We paid quarterly cash distributions totaling $70.9 million during the year ended December 31, 2016, compared to quarterly cash distributions totaling $56.6 million during the year ended December 31, 2015. We had no acquisition activity during the year ended December 31, 2016, compared to cash paid of $61.9 million in exchange for assets included in the El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition during the year ended December 31, 2015. Partially offsetting the cash used in financing activities during the years ended December 31, 2016 and 2015 were net proceeds of $41.0 million and $99.9 million, respectively, under the Second Amended and Restated Credit Agreement.
Cash Position and Indebtedness
2028 Notes (7.125% senior notes), due in 2028, with an effective interest rate of 7.39%.
As of December 31, 2017,2023, the DKL Revolving Facility and DKL Term Facility were classified as long-term in the accompanying consolidated balance sheets in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K as we had $4.7 million cashcurrently have the ability and cash equivalents, and we had total indebtedness of $422.6 million. Unused credit commitmentsintent to refinance the 2025 Notes on a long-term basis through available capacity under the Second Amended and RestatedDKL Revolving Facility, Related Party Revolving Credit Agreement were $511.1 million, and we had letters of credit issued of $9.0 million as of December 31, 2017. Facility or new funding sources.
We believe we were in compliance with the applicable covenants in the Second Amended and Restated Credit Agreementall debt facilities as of December 31, 2017.
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 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 are $700.0 million. The Second Amended and Restated Credit Agreement also contains an accordion feature whereby the Partnership can increase the size of the revolving 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. The Second Amended and Restated Credit Agreement matures on December 30, 2019.
On May 23, 2017, the Partnership and Finance Corp. issued $250.0 million in aggregate principal amount of 6.750% senior notes due 2025. The 2025 Notes are general unsecured senior obligations of the Issuers. The net proceeds from the issuance of the 2025 Notes totaled approximately $242.3 million, after deducting the initial purchasers' discount, commissions and offering expenses. The Partnership used substantially all of the net proceeds to pay down a portion of the outstanding balance under the Partnership's revolving credit facility.
2023. See Note 1110 to theour consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a complete discussion of our third-party indebtedness.
Agreements Governing Certain Indebtedness of Delek Holdings
Although we are not contractually bound by and are not liable for Delek’s debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, certain of Delek's credit arrangements require that Delek meet certain minimum levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders' equity to adjusted total assets. We cannot assure you that such covenants will not impact our ability to use the full capacity under our revolving credit facility in the future. Delek, due to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek to violate any covenant in its credit arrangements or otherwise be in default under any of its credit arrangements. Please read Item 1A. "Risk Factors—Risks Relating to Our Business—Delek’sDelek Holdings’ level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek’sDelek Holdings' level of indebtedness and creditworthiness.financial performance and credit ratings.”
Capital Spending
A key component of our long-term strategy is our capital expenditure program. Our capital expendituresprogram, which includes strategic consideration and planning for the year ended December 31, 2017 were $18.4 million,timing and extent of which approximately $14.3 million was spent in our pipelinesregulatory maintenance, sustaining maintenance, and transportation segment and approximately $4.1 million was spent in our wholesale marketing and terminalling segment. Ourgrowth capital expenditure budget is approximately $17.5 million for 2018.projects. These categories are described below:
The following table summarizes our actual capital expenditures for the year ended December 31, 2017 and planned capital expenditures for the full year 2018 by major category (in thousands):
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 Forecast | | 2017 Actual (2) |
| Capital Spending: | | | | |
| Regulatory | | $ | 3,789 |
| | $ | 3,208 |
|
Maintenance (1) | | 8,818 |
| | 7,896 |
|
| Discretionary | | 4,910 |
| | 7,299 |
|
| Total capital spending | | $ | 17,517 |
| | $ | 18,403 |
|
| |
(1)
| Maintenance capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of•Regulatory maintenance capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Delek has agreed to reimburse us with respect to certain assets it has transferred to us pursuant to the terms of the Omnibus Agreement (as defined in Note 4 to our consolidated financial statements). |
| |
(2)
| Of the total $18.4 million spent in 2017, $9.0 million was related to growth projects. |
For the full year 2018, we plan to spend approximately $17.5 million, of which $10.3 million is budgeted to the pipelines and transportation segment and $7.2 million to the wholesale marketing and terminalling segment. We plan to spend approximately $4.9 million for discretionary projects in 2018, of which $3.7 million isthe gathering and processing segment are those expenditures expected to be spent in the pipelines and transportation segment and $1.2 million in the wholesale marketing and terminalling segment. The majority of the $3.7 million budgeted to discretionary projects in the pipelines and transportation segment relates to the construction of a new tank and a pipeline pump expansion. We plan to spend approximately $8.8 million for maintenance projects in 2018, of which $4.7 million is expected to be spent in the pipelines and transportation segment and $4.1 million in the wholesale marketing and terminalling segment. The majority of the $4.7 million budgeted for maintenance projects in the pipelines and transportation segment relates to the repair and replacement ofon certain of our tanks. The majority of the $4.1 million budgeted for maintenancepipelines to maintain their operational integrity pursuant to applicable environmental and other regulatory requirements. Regulatory projects in the wholesale marketing and terminalling segment relates to repairsscheduled maintenance and improvements on our terminalling tanks and racks at certain of our terminals in order to maintain environmental and other regulatory compliance. These expenditures have historically been and will continue to be financed through cash generated from operations.
•Sustaining capital expenditures represent capitalizable expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets made to maintain our long-term operating income or operating capacity. Examples of sustaining capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines, tanks and system upgrades at the terminals.
Under the Omnibus Agreement,terminals, to maintain equipment reliability, integrity and safety and to maintain compliance with environmental laws and regulations. Delek reimbursesHoldings has agreed to reimburse us for (i) certain expenses that we incur for inspections, maintenance, repairs and failures of certain assets we acquired from Delek to cause such assets to comply with applicable regulatory and/or industry standards, (ii) certain expenses that we incur for inspections, maintenance, repairs and failures of most of the storage tanks and pipelines contributed to us by Delek (subject to a deductible of $0.5 million per year for certain assets as specified) that are necessary to comply with minimum standards under certain United States Department of Transportation pipeline integrity rules and certain American Petroleum Institute storage tank standards for a period of five years from the date of the purchase of the affected assets, and (iii) for certain non-discretionary maintenance capital expenditures with respect to certain assets it has transferred to us pursuant to the terms of the Omnibus Agreement (as defined in Note 4 to our assetsaccompanying consolidated financial statements). When not provided for under reimbursement agreements, such activities are generally funded by cash generated from operations.
•Growth projects include those projects that do not fall into one of the two categories above, and could include committed expansion projects under contracts with customers as well as other incremental growth projects, but are generally expected to produce incremental cash flows in excessaccordance with our internal return on invested capital policy. Depending on the magnitude, funding for such projects may include cash generated from operations, borrowings under existing credit facilities, or issuances of specified amounts.additional debt or equity securities.
Management's Discussion and Analysis
The following table summarizes our actual capital expenditures, including any material capital expenditure payments made or forecasted to be made in advance of receipt of goods and materials, for the year ended December 31, 2023:
| | | | | | | | | | | |
| (in thousands) | Full Year 2024 Forecast | | Year Ended December 31, 2023 |
| Gathering and Processing |
| Regulatory | $ | 750 | | | $ | 31 | |
| Sustaining | 3,900 | | | 2,016 | |
| Growth | 49,500 | | | 72,636 | |
| Gathering and Processing Segment Total | $ | 54,150 | | | $ | 74,683 | |
| Wholesale Marketing and Terminalling |
| Regulatory | $ | 3,300 | | | $ | 924 | |
| Sustaining | 2,379 | | | 163 | |
| Growth | — | | | 1,024 | |
| Wholesale Marketing and Terminalling Segment Total | $ | 5,679 | | | $ | 2,111 | |
| Storage and Transportation |
| Regulatory | $ | 1,500 | | | $ | 2,005 | |
| Sustaining | 8,500 | | | 2,543 | |
| Growth | — | | | — | |
| Storage and Transportation Segment Total | $ | 10,000 | | | $ | 4,548 | |
| Total Capital Spending | $ | 69,829 | | | $ | 81,342 | |
The amount of our capital expenditure budgetforecast is subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects. For example, we may experience increases in the cost of and/or timing to obtain necessary equipment required for our continued compliance with government regulations or to complete improvement projects. Additionally, the scope and cost of employee or contractor labor expense related to installation of that equipment could increase from our projections.
Contractual Obligations and Commitments
Long-term Cash Requirements
Information regarding our known contractual obligations of the types described below, as of December 31, 2017,2023, is set forth in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| <1 Year | | 1-3 Years | | 3-5 Years | | >5 Years | | Total |
| Long term debt and notes payable | $ | 30,000 | | | $ | 501,250 | | | $ | 1,180,500 | | | $ | — | | | $ | 1,711,750 | |
Interest (1) | 136,972 | | | 204,009 | | | 94,325 | | | — | | | 435,306 | |
| Finance Lease Obligation | 583 | | | 551 | | | 417 | | | — | | | 1,551 | |
Operating lease commitments (2) | 7,515 | | | 6,349 | | | 2,104 | | | 1,111 | | | 17,079 | |
| Total | $ | 175,070 | | | $ | 712,159 | | | $ | 1,277,346 | | | $ | 1,111 | | | $ | 2,165,686 | |
(1) Includes expected interest payments on debt balances outstanding under the DKL Credit Facility and the 2025 and 2028 Notes at December 31, 2023. Floating interest rate debt is calculated using rates in effect on December 31, 2023. |
| | | | | | | | | | | | | | | | | | | | |
| | | <1 Year | | 1-3 Years | | 3-5 Years | | >5 Years | | Total |
| Long term debt and notes payable | | $ | — |
| | $ | 179,900 |
| | $ | — |
| | 250,000 |
| | $ | 429,900 |
|
| Capital lease obligations | | — |
| | — |
| | — |
| | — |
| | — |
|
Interest (1) | | 24,765 |
| | 41,618 |
| | 33,750 |
| | 42,188 |
| | 142,321 |
|
Operating lease commitments (2) | | 2,482 |
| | 1,029 |
| | 466 |
| | 9 |
| | 3,986 |
|
| Total | | $ | 27,247 |
| | $ | 222,547 |
| | $ | 34,216 |
| | $ | 292,197 |
| | $ | 576,207 |
|
| | |
| (1)
Includes expected interest payments on debt outstanding under our revolving credit facility in place at December 31, 2017 and on the 2025 Notes. Floating interest rate debt is calculated using December 31, 2017 rates. |
| |
(2)
| Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of December 31, 2017. |
We also have other noncurrentnon-current liabilities pertaining to environmental liabilities and asset retirement obligations. With the exception of amounts classified as current, there is uncertainty as to the timing of future cash flows related to these obligations. As such, we have excluded the future cash flows from the contractual commitments table above. See additional information on asset retirement obligations and environmental liabilities in Notes 2 and 19,14, respectively, to our consolidated financial statements in Item 8.
Other Cash Requirements
Our other cash requirements consisted of operating activities and cash distributions to unitholders. Operating activities included cash outflows related to payments to suppliers for crude and other materials and payments for services. Refer to the Cash Flow section for our operating activities spend in 2023. While many of the expenses related to the operating activities are variable in nature, some of the expenditures can be somewhat fixed in the short-term due to forward planning on our level of activity. Refer to Cash Distributions section for cash distributions made in 2023 and planned distributions for 2024. Refer to the capital spending section for our capital expenditures for 2023 and our planned capital expenditures for 2024.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements through the date of the filing of this Annual Report on Form 10-K.
Management's Discussion and Analysis
Critical Accounting PoliciesEstimates
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. We prepare our consolidated financial statements in conformity with U.S. GAAP, and in the process of applying these principles, we must make judgments, assumptions and estimates based on the best available information at the time. To aid a reader’sreader's understanding, management has identified our critical accounting policies.estimates. These policiesestimates are considered critical because they are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments. Often they require judgments and estimation about matters which are inherently uncertain and involve measuring at a specific point in time, events which are continuous in nature. Actual results may differ based on the accuracy of the information utilized and subsequent events, ofsome over which we may have little or no control.
Business Combinations
Property, PlantWe recognize and Equipmentmeasure the assets acquired and Intangibles Impairment
Property, plant and equipment and definite life intangibles are evaluated for impairment whenever indicators of impairment exist. Accounting standards require that if an impairment indicator is present, we must assess whetherliabilities assumed in a business combination based on their estimated fair values at the carrying amountacquisition date. Any excess or surplus of the asset is unrecoverable by estimating the sum of the future cash flows expectedpurchase consideration when compared to result from the asset, undiscounted and without interest charges. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the fair value of the asset.net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use quoted market prices whenall available information to make these fair value determinations and our internal cash flowengage third-party consultants for valuation assistance. The estimates discounted at an appropriate interest rateused in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value, as appropriate.value.
Goodwill
Goodwill and Potential Impairment
in an acquisition represents the excess of the aggregate purchase price over the fair value of the identifiable net assets. Goodwill is reviewed at least annually for impairment, or more frequently if indicators of impairment exist.exist, such as disruptions in our business, unexpected significant declines in operating results or a sustained market capitalization decline. Goodwill is testedevaluated for impairment by comparing net book value of the operating segments to the estimated fair valuecarrying amount of the reporting unit. unit to its estimated fair value.
In assessing the recoverability of goodwill, assumptions are made with respect to future business conditions and estimated expected future cash flows to determine the fair value of a reporting unit. We usemay consider inputs such as a market participant weighted average cost of capital estimated minimal growth rates for revenue, gross profit("WACC"), forecasted operating performance, volumes and capital expenditures, based on historyall of which are subject to significant judgment and our best estimate of future forecasts.estimates. We may also estimateconsider a market approach in determining or corroborating the fair values of ourthe reporting units using a multiple of expected future cash flows, such as those used by third partythird-party analysts. The market approach involves significant judgment, including selection of an appropriate peer group, selection of valuation multiples, and determination of the appropriate weighting in our valuation model. If these estimates and assumptions change in the future, due to factors such factors as a decline in general economic conditions, sustained decrease in the crack spreads, competitive pressures on sales and margins and other economic and industry factors beyond management’smanagement's control, an impairment charge may be required. The most significant risks to our valuation and the potential future impairment of goodwill are the WACC and the volatility of volumes, which is based on internal forecasts and depend, in part, on assumptions about our customers’ drilling activity which is inherently subjective and contingent upon a number of variable factors (including future or expected pricing considerations).
We may also elect to perform a qualitative impairment assessment of goodwill balances. The qualitative assessment permits companies to assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If a company concludes that, based on the qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the company is required to perform the quantitative impairment test. Alternatively, if a company concludes based on the qualitative assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it has completed its goodwill impairment test and does not need to perform the quantitative impairment test.
At December 31, 2023, we had three reporting units with goodwill totaling approximately $12.2 million. Our annual goodwill impairment testing was performed on a quantitative basis for our Delaware Gathering reporting unit during the fourth quarter of 2023. As part of our annual assessment, we recorded a $14.8 million impairment charge in the fourth quarter of 2023 related to our Delaware Gathering reporting unit within the gathering and processing segment, which brought the amount of goodwill recorded within this reporting unit to zero. The impairment was primarily driven by the significant increases in interest rates and timing of system connections with our producer customers. The estimated fair value of our Delaware Gathering reporting unit was derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approach includes both the guideline public company and guideline transaction methods. Both market approach methods use pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs).
Management's Discussion and Analysis
Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions. Significant assumptions include:
•Future volumes. Our estimates of future throughput of crude oil, natural gas, and water volumes are based on internal forecasts and depend, in part, on assumptions about our customers’ drilling activity which is inherently subjective and contingent upon a number of variable factors (including future or expected pricing considerations), many of which are difficult to forecast. Management considers these volume forecasts and other factors when developing our forecasted cash flows.
•Discount rate. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.
•Future capital requirements. These are based on authorized spending and internal forecasts.
If estimates for future cash flows, which are impacted primarily by future volumes and EBITDA projections, were to decline, the overall reporting units’ fair value would decrease, resulting in potential goodwill impairment charges.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment tests will prove to be an accurate prediction of the future.
For our other reporting units in 2023, we assessed qualitative factors such as macroeconomic conditions, industry considerations, cost factors, and reporting unit financial performance and determined it was not more likely than not that the fair value of our reporting units were less than the respective carrying value. For the 2022 annual impairment assessment, we performed a qualitative assessment on all reporting units, as we determined it was more likely than not that the fair value of the reporting units exceeded the carrying value. Therefore, in accordance with GAAP, further testing was not required.
An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a discussion of new accounting pronouncements applicable to us.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk. Market risk is the risk of loss arising from adverse changes in market rates and prices. As we do not take title to any of the crude oil that we handle, and typically we take title to only limited volumes of light products in our marketing business, we have limited direct exposure to risks associated with fluctuating commodity prices. However, from time to time, we enter into Gulf Coast product swap arrangements with respect to the products we purchase to hedge our exposure to fluctuations in commodity prices for the period between our purchase of products and subsequent sales to our customers. At December 31, 2017 and 2016, we had open derivative contracts representing 370,000 barrels and 93,000 barrels, respectively, of refined petroleum products. We recognized (losses) gains associated with commodity derivatives not designated as hedging instruments of $(1.6) million, $2.1 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts were recorded to cost of goods sold in the accompanying consolidated statements of income. Please see Note 17 to our accompanying consolidated financial statements for additional detail related to our derivative instruments.
Impact of Changing Prices.Prices
Our revenues and cash flows, as well as estimates of future cash flows, are sensitive to changes in energycommodity prices. Shifts in the cost of crude oil, the prices ofnatural gas, NGLs, refined products and the costethanol and related selling prices of ethanolthese products can generate changes in theour operating margin in our wholesale marketing and terminalling segment. A hypothetical ten percent adverse change in year-end market prices of the underlying commodities being hedged by derivative contracts would result in a nominal decrease in market value of the hedge contracts at December 31, 2017. This hypothetical loss was estimated by multiplying the difference between the hypothetical and the actual year-end market prices of the underlying commodities by the contract volume amounts.margins.
Interest Rate Risk.Risk
Debt that we incur under our revolving credit facilitythe DKL Credit Facility bears interest at floating rates and will expose us to interest rate risk. The outstanding floating rate borrowings totaled approximately $1,061.8 million as of December 31, 2023. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt outstanding as of December 31, 20172023 would be to change interest expense by approximately $1.8$10.6 million.
Inflation
From time to time, weInflationary factors, such as increases in the costs of our inputs, operating expenses, and interest rates may use certain derivative instruments to hedgeadversely affect our exposure to floating interest rates. Additionally,operating results. In addition, current or future governmental policies may increase or decrease the risk of inflation, which could further increase costs and may have an adverse effect on our prior revolving credit facility required usability to maintain interest rate hedging arrangementscurrent levels of gross margin and operating expenses as a percentage of sales if the prices at which we are able to sell our products and services do not increase in line with respect to at least 50% of the amount funded on November 7, 2012 under the revolving credit facility, which was required to beincreases 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 London Interbank Offered Rate 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. The interest rate hedge remained in place in accordance with its terms through its maturity date in February 2016. In accordance with ASC 815, Derivatives and Hedging, we recorded no non-cash expense representing the change in estimated fair value of the interest rate hedge agreement for the years ended December 31, 2017 and 2016, respectively.costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference to the section beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintainOur disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended ("Exchange Act") that are designed to provide reasonable assurance that the information that we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is accumulated and appropriately communicated to management. We carried out an evaluation required by Rule 13a-15(b) of the Exchange Act, is recorded, processed, summarizedunder the supervision and reported withinwith the time periods specified in the SEC's rules and forms, and such information is accumulated and communicated toparticipation of our management, including our Chiefthe Principal Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controlseffectiveness of the design and procedures are met.
Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectivenessoperation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as ofat the end of the period covered by this report,reporting period. Based on that evaluation, the Principal Executive Officer and has, based on this evaluation,Chief Financial Officer concluded that our disclosure controls and procedures arewere effective to provide reasonable assurance that information required to be disclosed by us inas of the reports that we file or submit underend of the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms including, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.reporting period.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process that is designed under the supervision of our ChiefPrincipal Executive Officer and Chief Financial Officer, and implemented by the board of directors of our Board of Directors,general partner, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
| |
i. | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
i.Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
ii.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures recorded by us are being made only in accordance with authorizations of our management and the board of directors of our general partner; and
| |
ii. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures recorded by us are being made only in accordance with authorizations of our management and Board of Directors; and |
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iii. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
iii.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate.
Management has conducted its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2017,2023, based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit Committee of the Boardboard of Directors.directors of our general partner. Based on its assessment and review with the Audit Committee, management concluded that, atas of December 31, 2017,2023, we maintained effective internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2017,2023, as stated in their report, which is included in the section beginning on page F-1.
The information required by Item 8 is incorporated by reference to the section beginning on page F-1.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15-d-15(f) under the Exchange Act) during the fourth quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Rule 10b5-1 Trading Plans
On February 26, 2018,During the Boardquarter ended December 31, 2023, none of our general partnerdirectors or officers (as defined in Rule 16a-1 under the Exchange Act) adopted, Amendment No. 1 (“Amendment No. 1”) to the Partnership Agreement, effective upon adoption,modified or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 105b-1 trading arrangement" (as those terms are defined in response to certain changes to the Internal Revenue Code enacted by the Bipartisan Budget ActItem 408 of 2015 (the “BBA”) relating to partnership auditRegulation S-K).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
Directors, Executive Officers, Corporate Governance, and adjustment procedures. Amendment No. 1 amends Section 9.3 of the Partnership Agreement to implement administrative provisions including the designation of a partnership representative to assist the Partnership with tax-related matters, and Section 9.4 to enable the Partnership to seek indemnity and reimbursement from unitholders for taxes paid by the Partnership that the unitholder would have owed individually had the tax been assessed at the unitholder level. A copy of Amendment No. 1 is filed as Exhibit 3.2(b) to this Annual Report on Form 10-K.Security Ownership
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our general partner, Delek Logistics GP, LLC, is an indirect subsidiary of Delek.Delek Holdings. As of December 31, 2017,2023, three individuals (Messrs. Yemin, GinzburgSoreq, Spiegel, and Green) whoYemin) serve as both directors and executive officers of the general partner and as officers - and, with respect to Mr.Messrs. Soreq and Yemin, a director -directors, of Delek also own membership interests of 5.00%, 0.20% and 0.20%, respectively, in the general partner.Holdings. Our general partner manages our operations and activities on our behalf through its officers and directors. References in this Part III to the "Board," "directors," or "officers" refer to the Board, directors and officers of our general partner.
The Board of Directors of Our General Partner
The directors of our general partner oversee our operations. The members of the Board are not elected by our unitholders and will not be subject to re-election by our unitholders in the future. The general partner is a limited liability company and its directors are elected by Delek Logistics Services Company, its members, allsole member, which is a subsidiary of which are subsidiaries, affiliates, directors, officers and/or employees of Delek.Delek Holdings. The directors hold office for a term of one year or until their successors have been elected or qualified or until their earlier death or removal. Our general partner is liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made expressly without recourse to the general partner. Our general partner therefore may cause us to incur indebtedness or other obligations that are without recourse to the general partner.
Our common units are traded on the NYSE.New York Stock Exchange (the "NYSE"). Because we are a limited partnership, we rely on an exemption from the provisions of Section 303A.01 of the NYSE Listed Company Manual which would require the Board to be composed of a majority of independent directors. Despite this exemption, our Board is currently comprised of a majority of independent directors, though this composition could change in the future. We are not required to establish either a compensation or a nominating and corporate governance committee. We are, however, required to have an audit committee of at least three members, and all of our audit committee members are required to meet the independence and experience tests established by the NYSE and the Exchange Act.
At the date of this report, the Board consists of the following nine members: Ezra Uzi Yemin, Sherri A. Brillon, Charles J. Brown, III, Mark B. Cox, Francis C. D'Andrea, Eric D. Gadd, Assaf Ginzburg, Frederec Charles Green, RonaldRon W. Haddock, Gennifer F. Kelly, Reuven Spiegel and Reuven Spiegel.Avigal Soreq. The Board has determined that each of Messrs. Brown, D'Andrea, Gadd and Haddock and SpiegelMses. Brillon and Kelly qualifies as an independent director under applicable SEC rules and regulations and the rules of the NYSE. Under the NYSE's listing standards, a director will not be deemed independent unless the Board affirmatively determines that the director has no material relationship with us. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, the Board has determined that each of Messrs. Brown, D'Andrea, Gadd and Haddock and SpiegelMses. Brillon and Kelly has no material relationship with Delek Holdings or us, either directly or as a partner, stockholder or officer of an organization that has a relationship with Delek Holdings or us, and each of them is therefore independent under the NYSE's listing standards and applicable SEC rules and regulations.
Directors, Executive Officers, Corporate Governance, and QualificationsSecurity Ownership
Directors' Experiences and Skills
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | YEMIN | SOREQ | BRILLON | BROWN | GADD | GREEN | HADDOCK | KELLY | SPIEGEL |
| PUBLIC COMPANY LEADERSHIP EXPERIENCE | ● | ● | ● | | | ● | ● | ● | ● |
| PUBLIC COMPANY BOARD EXPERIENCE | ● | ● | ● | ● | ● | ● | ● | ● | ● |
| FINANCE | ● | ● | ● | ● | ● | ● | ● | ● | ● |
| ACCOUNTING AND AUDITING | ● | ● | ● | ● | ● | ● | ● | ● | ● |
| ENERGY INDUSTRY EXPERIENCE | ● | ● | ● | ● | ● | ● | ● | ● | ● |
| OPERATIONS EXPERIENCE | ● | ● | ● | ● | ● | ● | | ● | |
| INTERNATIONAL BUSINESS EXPERIENCE | ● | ● | ● | ● | ● | | ● | | ● |
| RISK MANAGEMENT | ● | ● | ● | ● | ● | ● | | ● | ● |
| COMPENSATION | ● | ● | ● | ● | ● | ● | ● | | |
| ENVIRONMENTAL/SUSTAINABILITY | ● | ● | | ● | ● | | ● | ● | ● |
| ESG/SOCIAL RESPONSIBILITY | ● | ● | | ● | ● | | ● | ● | ● |
| CYBERSECURITY/INFORMATION TECHNOLOGY | ● | | ● | | | ● | | ● | |
| M&A/CAPITAL MARKETS | ● | ● | ● | | ● | ● | ● | | ● |
| STRATEGY | ● | ● | ● | | ● | ● | | ● | ● |
| GOVERNMENT/REGULATORY/PUBLIC POLICY | ● | ● | ● | ● | ● | ● | ● | ● | |
The members of the general partner are responsible for filling vacancies on the Board at any time during the year and for selecting individuals to serve on the Board. From time to time, the members may utilize the services of search firms or consultants to assist in identifying and screening potential candidates. In accordance with the general partner's Governance Guidelines, in evaluating potential Board candidates,governance guidelines, the members consider such qualifications and other factors as they deem appropriate in evaluating potential Board candidates, including the individual’s independence, education, experience, reputation, judgment, skill, integrity and industry knowledge. Directors should have experience in positions with a high degree of responsibility;responsibility, be leaders in the organizations with which they are affiliated;affiliated, and have the time, energy, interest and willingness to serve as a member of the Board. While the general partner has no policy requiring consideration of racial or ethnic classifications, gender, religion or sexual orientation, the members give consideration to the diversity of experiences and backgrounds of its directors, the degree to which the individual’s qualities and attributes will complement those of other directors, the extent to which the candidate would be a desirable addition to the Board and committees thereof, and other factors.
Executive Officers of Our General Partner
Our general partner's executive officers manage the day-to-day affairs of our business and conduct our operations. The executive officers of our general partner are appointed by the Board and serve in that capacity at the discretion of the Board. All of our general partner's executive officers are employees and officers of Delek.Delek Holdings. While the amount of time that our general partner's executive officers devote to our business varies in any given year, we currently estimate that approximately 10% to 20% of their productive business time is spent on the management and conduct of our operations, except for all executive officers except Mr. Moret,Odely Sakazi, who following his appointment as President of our general partner in November 2017 now devotes a majority of his time to our operations. The executive officers of our general partner intend to devote as much of their time as is necessary for the proper conduct of our business. We also utilize a significant number of Delek'sDelek Holdings' employees to operate our business and provide us with general and administrative services. Under the Omnibus Agreement, we pay Delek Holdings an annual fee, indexed for inflation, for Delek'sDelek Holdings' provision of centralized corporate services, including executive management services of Delek Holdings employees who devote less than 50% of their time to our business, financial and administrative services, information technology services, legal services, health, safety and environmental services, human resource services, and insurance administration. In addition, we reimburse Delek Holdings for allocated expenses of personnel who devote 50% or more of their time performing services for our benefit.
Directors, Executive Officers, Corporate Governance, and Security Ownership
Directors and Executive Officers of Our General Partner
The following table shows information for the directors and executive officers of our general partner.
| | | | | | | | |
| Name | Age | |
Name | Age | Position With Delek Logistics GP, LLC |
| Avigal Soreq | 45 | Director and President, Delek Logistics |
| Ezra Uzi Yemin | 4954 | Executive Chairman of the Board of Directors and Chief Executive Officer |
| Sherri A. Brillon | 63 | Chair of Audit Committee and Member of Technology and Governance, Compensation and Conflicts Committees |
| Charles J. Brown, III | 7075 | Director, ChairmanChair of Conflicts Committee and Member of Audit and EHSGovernance and Compensation Committees |
Mark Baker CoxEric D. Gadd | 5967 | Director, Chair of EHS Committee and Member of Governance and Compensation and Conflicts Committees |
Francis C. D'AndreaFrederec Charles Green | 6457 | Director Chairmanand Member of Technology Committee |
| Ron W. Haddock | 82 | Director, Chair of Governance and Compensation Committee, and Member of Audit and EHS Committee |
| Gennifer F. Kelly | 50 | Director, Chair of Technology Committee, and Member of Conflicts and EHS Committees |
Eric D. Gadd | 62 | Director, Chairman of EHS Committee and Member of Audit and Conflicts Committees |
Assi Ginzburg | 42 | Director and Executive Vice President |
Frederec Green | 52 | Director and Executive Vice President |
Ron W. Haddock | 77 | Director |
| Reuven Spiegel | 6166 | Director, and Member of Audit, EHS and Conflicts Committees |
Alan P. Moret | 63 | President |
Kevin L. Kremke | 44 | Executive Vice President and Chief Financial Officer |
Melissa M. BuhrigDenise McWatters | 4263 | Executive Vice President, General Counsel and Secretary |
Daniel L. GordonOdely Sakazi | 4039 | ExecutiveSenior Vice President, |
Jared Paul Serff | 50 | Executive Vice President |
Avigal Soreq | 39 | Executive Vice President Delek Logistics |
Ezra Uzi Yemin has servedAvigal Soreq rejoined the Partnership as President and as one of our directors on June 9, 2022, after serving as the Chief Executive Officer of El Al Israel Airlines, the national airline of Israel, since January 2021. Mr. Soreq also currently serves as the chief executive officer and president of Delek Holdings. Prior to that, Mr. Soreq was a member of the Delek Holdings’ executive management team, including as the Chief Operating Officer from March 2020 until January 2021, its Chief Commercial Officer from November 2016 until March 2020, an Executive Vice President from August 2015 until January 2021, and a Vice President from 2012 until 2015. In addition, Mr. Soreq served as an Executive Vice President of Delek Logistics GP, LLC from 2015 until 2021, and as its Vice President from 2012 until 2015. Prior to joining Delek Holdings, Mr. Soreq worked for SunPower Corporation (NASDAQ: SPWR), and previously as a senior finance and business consultant for Trabelsy & Co., and as a consultant in the corporate finance department for KPMG’s Tel-Aviv office. His past experience includes service in the Israeli Air Force in various roles between 1996 and 2004, where he reached the rank of Major. Mr. Soreq is a certified public accountant in Israel.
Ezra Uzi Yemin has served as the Executive Chairman of the Board since June 2022. Mr. Yemin has served as one of our general partnerdirectors since April 2001 and as the chair of the Board since April 2012. He has alsoMr. Yemin previously served as our chief executive officer and president from April 2012 and August 2019, respectively, until June 2022. Mr. Yemin also serves as the executive chairman of the board of directors of Delek since December 2012, its chief executive officer since June 2004Holdings, and its president andhas served as a director since April 2001.2001 and as the chair since December 2012. He also previously served as the chief executive officer and president of Delek Holdings, from June 2004 and April 2001, respectively, until June 2022. Mr. Yemin has served as the president of Alon USA Partners GP, LLC, an affiliate of the Partnership, sincefrom July 2017 until its acquisition by Delek Holdings in February 2018 and the chairman of the board of directors of Alon USA Energy, Inc., an affiliate of the Partnership, since from May 2015.2015 until its acquisition by Delek Holdings in July 2017. Mr. Yemin’s duties include the formulation of our policies and strategic direction, oversight of executive officers and overall responsibility for our operations and performance. The Board believes that, because he has worked for Delek Holdings since its founding, Mr. Yemin brings to the Board a thorough and complete understanding of our business, operations and operating environment, as well as thatthe business, operations and operating environment of Delek Holdings (the owner of approximately 63.5%over 21% of our units and the customer on whom the Partnership is most dependent). Mr. Yemin also brings to the Board substantial leadership, planning and industry experience.
Charles J. Brown, IIISherri A. Brillon has served as one of our directors since January 2021. She has served as a member of the Audit Committee since January 2021 and as its Chairperson since January 2022. She has also served as a member of the Governance and Compensation Committee and the Technology Committee since July 2021 and has been a member of the Conflicts Committee since May 2023. Ms. Brillon has over 35 years of experience in the oil and gas industry. From 1985 to 2019, Ms. Brillon held various positions of increasing responsibility at Encana Corporation, a leading North American hydrocarbon exploration and marketing company now known as Ovintiv Inc. (NYSE: OVV), before retiring as Executive Vice President and Chief Financial Officer in 2019. At Encana, Ms. Brillon was responsible for directing the financial operations of the organization and she also implemented Encana’s business strategy through multiple strategic transactions. Ms. Brillon has served on the Board of our general partnerDirectors for Enerplus (NYSE: ERF) since October 2022. She is a past director of the Canadian Chamber of Commerce, Alberta Energy Regulator, Tim Hortons Inc., a Canadian multinational fast food restaurant chain, and PrairieSky Royalty Ltd. (TSX: PSK), which owns properties generating royalty revenues from petroleum and natural gas in Canada. Ms. Brillon attended the University of Calgary, where she graduated with a Bachelor of Arts degree in economics. Ms. Brillon was appointed to the Board because the board of directors believed her many years of experience in both the upstream and midstream sectors of the oil and gas industry will be important as the Board navigates rapid developments in the petroleum industry.
Charles J. Brown, III has served as a member of the Board since November 2012, as a member of the Audit Committee and Conflicts Committee (of which he is Chairman)Chairperson) since November 2012, as a member of the Governance and Compensation Committee since July 2021, and as a member of the Environmental, Health and SafetyEHS Committee (the "EHS Committee") sincefrom its inception in October 2016.2016 to July 2021. Mr. Brown is a licensed attorney with more than 30 years of experience in the energy industry. SinceFrom July 2013 until his retirement on January 1, 2020, Mr. Brown has served as the executive vice president of Apex Clean Energy, Inc., an independent renewable energy company, where he managesmanaged legal and business development
Directors, Executive Officers, Corporate Governance, and Security Ownership
activities. Mr. Brown is currently the owner of, and since 2011, the chief advisor for, CRW Energy, a consulting firm focused inon the international power and utility industries. From 2008 through 2011, Mr. Brown served as a partner in the energy department of a large international law firm. Mr. Brown was appointed to the
Board because of his experience in the energy industry, and because, as an attorney, he provides the Board with valuable expertise in matters involving the financial, legal, regulatory and risk matters affecting the Partnership.
Mark Baker Cox has been a member of the Board of our general partner since April 2012. From October 2016 to January 2017, Mr. Cox served as anExecutive Vice President and Chief Administrative Officer of our general partner and Delek. From May 2013 until February 2016, Mr. Cox was the chief financial officer of Eco-Energy, Inc., an alternative energy company focused on the marketing, trading, transportation and blending of biofuels. He was an executive vice president of our general partner from April 2012 until March 2013 and of Delek from September 2009 until March 2013. Mr. Cox served as the chief financial officer of our general partner from April 2012 until January 2013 and as the chief financial officer of Delek from September 2009 until January 2013. From June 2007 until September 2009, Mr. Cox served as the senior vice president-treasurer and director of investor relations of Western Refining, Inc. Between 1994 and 2007, he was employed by Giant Industries, Inc., and served in various positions including vice president, executive vice president, treasurer, chief financial officer and assistant secretary. Mr. Cox was appointed to the Board because his energy industry and financial experience provides the Board with valuable expertise in financial and accounting matters typically confronted by companies in our industry.
Francis C. D'Andrea Eric D. Gadd has served as a member of the Board of our general partner since August 2015, as Chairman of the Audit CommitteeOctober 2013 and as a member of the Conflicts Committee since August 2015. He has also been a memberChairperson of the EHS Committee since its inception in October 2016. He has also been a member of the Conflicts Committee since October 2013 and the Governance and Compensation Committee since July 2021. Mr. D’Andrea is a certified public accountant. From 1979 through his retirement in 2012, Mr. D’Andrea served in various roles with Deloitte & Touche LLP, culminating in the role of senior partner from 2011 through 2012, preceded by his role as managing partner from 2005 through 2011 of Deloitte’s Houston/New Orleans audit practice, and was involved in such capacities with several public companies, including sponsors of master limited partnerships. Mr. D’Andrea was appointed to the Board of our general partner because the Board believes that his experience as a certified public accountant and partner with Deloitte & Touche LLP provides the Board with valuable experience in matters involving finance and accounting in general and master limited partnerships in particular.
Eric D. Gadd has previously served as a member of the Board of our general partner sinceAudit Committee from October 2013 and as Chairman of the EHS Committee since its inception in October 2016.to July 2021. Mr. Gadd is currently principal director at Contanda LLC, which is a private company that operates bulk liquid terminals in North America. He has also been a member of the Audit Committee and Conflicts Committee since October 2013. Mr. Gadd is the founder and president of the consulting firm Awelon LLC, which is focused on expanding business development opportunities for both public and private companies in the energy sector. He has over 3540 years of diverse experience in the energy industry including exploration and production field services, mid-stream, renewable energy, commodity trading and risk management, and mergers and acquisitions. Prior to forming Awelon LLC in 2006, Mr. Gadd held various executive positions with multiple leading companies in the energy industry over a 25-year period. Mr. Gadd was appointed to the Board because of his extensive energy industry experience.
Assi GinzburgFrederec Green has served as a member of the Board since April 2012 and has served as a member of our Technology Committee since July 2021. Mr. Green served as an Executive Vice President and member of the Board of our general partner since April 2012.from May 2009 until November 2020. Mr. Ginzburg hasGreen also served in numerous executive roles at Delek Holdings from January 2005 through November 2020, including serving as Delek's executive vice president since May 2009the primary operational officer for Delek Holdings’ refineries and as a vice president of Delek since February 2005. Previously, Mr. GinzburgExecutive Vice President and Chief Operating Officer from November 2016 until March 2020. He also served as chief financial officer of our general partner and Delek from January 2013 to June 2017 and as a member ofon the board of directors of Alon Energy USA, Energy, Inc. from May 2015 until its acquisition by Delek in July 2017. Mr. Ginzburg has been a member of the Israel Institute of Certified Public Accountants since 2001. Mr. Ginzburg was instrumental in the successful completion of our initial public offering in November 2012,2017, and he was appointed to the Board because his financial experience and knowledge of our and Delek's businesses provide the Board with valuable expertise into relevant business and financial and accounting matters.
Frederec Green has been an Executive Vice President and a member of the Board of our general partner since April 2012. Mr. Green has been Delek's chief operating officer since November 2016, an executive vice president of Delek since May 2009 and was the primary operational officer for Delek's refining operations from January 2005 to December 2016. He has served as an executive vice president and chief operating officerthe Chief Executive Officer of Alon USA Partners, GP, LLC sinceLP from July 2017 its chief executive officer since August 2017, and a member of the board of directors of Alon USA Energy, Inc. since May 2015.until December 2017. Mr. Green has more than 2535 years of experience in the refining industry,and midstream industries, including 14fourteen years at Murphy Oil USA, Inc. (NYSE: MUR), where he served as a senior vice president during his last six years. Mr. Green has experience in mergers and acquisitions as well as all aspects of managing a refining business, from crude oil and feedstock supply to product trading, transportation, and sales. Mr. Green is currently an independent consultant serving clients in the midstream and downstream sectors, including Delek Holdings and Delek Logistics. Mr. Green was appointed to the Board because of his extensive energy industry experience and his in-depth knowledge of our and Delek'sDelek Holdings’ businesses and operations.
Ron W. Haddock has served as a member of the Board of our general partner since July 2017. He has served as the Chairperson of the Governance and Compensation Committee since July 2021 and as a member of the EHS Committee and Audit Committee since May 2018 and 2022, respectively. Mr. Haddock has also served as our Lead Independent Director since February 2021. Mr. Haddock is currently Chairman and Chief Executive Officer of AEI Services LLC, an international power generation/distribution and natural gas distribution company, positions he has held since 2004 and August 2003, respectively. He also served on the board of Alon Energy USA, Inc. from December 2000 until its acquisition by Delek in July 2017 and has served on the board of Petron Corporation, an oil refining and marketing company in the Philippines since December 2008.from 2010 to 2022. From January 1989 to July 2000, Mr. Haddock served as chief executive officer of FINA, Inc., a Belgian oil company. Mr. Haddock also served on the boards of Safety-KleenSafety‑Kleen Systems, Inc., a waste management, oil recycling and refining company, from 2003 to 2012, and Trinity Industries, Inc. (NYSE: TRN), a diversified transportation, industrial and construction company, from 2007 to 2013, as well as eight other corporate boards. The Board believes that Mr. Haddock’s extensive directorship experience, past executive positions within the refining and petrochemical industry, financial reporting background and expertise qualify him to serve as a member of the Board.
Reuven SpiegelGennifer Kelly has served as a memberdirector since July 2020. She has served as the Chairperson of the Board of our general partner since July 2014, as a member of the Audit Committee and ConflictsTechnology Committee since September 2014its inception in July 2021 and as a member of the EHS Committee and Conflicts Committee since its inceptionJuly 2020. She also serves on the board of Devon Energy Corp. (NYSE: DVN) and is a member of Audit and Reserves committees. Ms. Kelly has 25 years of oil and gas industry experience in October 2016.both upstream and midstream sectors. Ms. Kelly previously held the role of Chief Operating Officer and SVP of Western Midstream Partners (NYSE: WES) and Vice President of Marketing for Anadarko Petroleum Corporation (NYSE: APC). Prior to her role at Western Midstream, Ms. Kelly led Operations Transformation efforts, as well as Strategic Planning, Portfolio Management and Asset Management teams for Anadarko. She has diverse operations experience in production, drilling and completions engineering, working extensively in East Texas, West Texas and the Gulf of Mexico. Prior to joining Anadarko Petroleum, Ms. Kelly worked as an engineer for Kerr McGee Corporation and the Louisiana Office of Conservation. Ms. Kelly holds both a Bachelor of Science in Petroleum Engineering and a Master of Business Administration from Louisiana State University. Ms. Kelly is a registered Professional Engineer in the state of Texas and a member of the Society of Petroleum Engineers. Ms. Kelly is currently the board chair of Lone Star College Foundation; a non‑profit organization aiding Lone Star College students with funding their education. The Board values Ms. Kelly’s years of experience in the oil and gas industry and operations experience as well as her technical background.
Reuven Spiegel has served as our Chief Financial Officer since May 2020, and as a member of the Board since July 2014. Mr. Spiegel haspreviously served inas a member of the financialAudit Committee from September 2014 until April 2020 and real estate industry since 1983.as a member of the EHS Committee from October 2016 until April 2020. Prior to joining the Board, Mr. Spiegel served as president, chief executive officer, and senior executive vice presidentChief Executive Officer of Israel Discount Bank Ltd. (TLV: DSCT) from 2011 through 2014 where he had previously held the position of Executive Vice President from 2001 through 2014.2005. In 2005 and 2006, Mr. Spiegel also served as chairmanChairperson of the board of Discount Mortgage Bank. Mr. Spiegel also served as Chief Executive Officer of IDB Bank of NY from 2006 to 2010. He also has experience as an executive in the real estate industry. The Board believes that Mr. Spiegel'sSpiegel’s financial industry experience provides the Board with valuable expertise in the Partnership'sPartnership’s financial and accounting matters.
Alan P. Moret has been the President of our general partner since November 2017
Directors, Executive Officers, Corporate Governance, and an Executive Vice President of our general partner since July 2017. Mr. Moret was the chief executive officer of Alon USA Partners GP, LLC from January 2017 until August 2017 and the interim chief executive officer of Alon USA Energy, Inc. from January 2017 until its merger with a subsidiary of Delek in July 2017. Prior to these appointments, Mr. Moret served as senior vice president of supply, trading and logistics at Alon USA Partners GP, LLC since 2008 and, prior to that, as Senior vice president of supply of Alon USA Energy, Inc.'s Asphalt Division where he directed the company's asphalt operations and marketing. Mr. Moret joined Alon USA Energy, Inc. in August 2006 in connection with Alon's acquisition of Paramount Petroleum Corporation, where he served as president from November 2001 to August 2006. Prior to joining Paramount Petroleum Corporation, Mr. Moret held various positions with Atlantic Richfield Company, most recently as president of ARCO Crude Trading, Inc. and served as president of ARCO Seaway Pipeline Company from 1997 to 1998.Security Ownership
Kevin L. KremkeDenise McWatters has served as the Chief Financial Officer of our general partner since June 2017 and an Executive Vice President of our general partner since April 2017. He has also served as Delek's chief financial officer since June 2017 and as an executive vice president of Delek since April 2017. He served as an executive vice president and secretary of Alon USA Partners GP, LLC since July 2017 and its chief financial officer since August 2017. He has served as a director of Alon USA Energy, Inc. since July 2017.Prior to joining us in April 2017, Mr. Kremke served as the chief financial officer of Ciner Resources Corporation and Ciner Resources LP (NYSE: CINR), a publicly traded master limited partnership, since June 2014, and as director of the general partner of Ciner Resources LP since December 2014. His responsibilities at Ciner Resources Corporation included overseeing the overall financing activities, strategic planning, investor relations, treasury and accounting.He also has served on the audit committee of American Natural Soda Ash Corporation since June 2014. From August 2011 to February 2014, Mr. Kremke served as the vice president of finance and strategic planning at Cheniere Energy, Inc. (NYSE American: LNG).
Melissa M. Buhrig has served as the Executive Vice President, General Counsel and Corporate Secretary since February 2021. Ms. McWatters previously served as the General Counsel, Chief Compliance Officer and Corporate Secretary of our general partnerHollyFrontier Corporation, an independent petroleum refiner (NYSE: HFC), and of Delek since October 2017. Ms. Buhrig has nearly 18 years of legal experience, primarily in the refining sector. Most recently, she served as senior vice president - services and compliance officer for Western Refining, Inc. and Western Refining Logistics, LP (NYSE: WNRL). Ms. Buhrig joined Western Refining in 2005 as deputy general counsel and held roles of increasing responsibility including vice president, assistant general counsel and secretary. In 2014, she joined the general partner of Northern TierHolly Energy LPPartners, L.P. (NYSE: HEP) from May 2008 until August 2019. Prior to joining HollyFrontier, Ms. McWatters served as executive vice president, general counsel, secretarythe General Counsel of The Beck Group, an architecture, construction and compliance officer until completion of the merger between Western Refining, Inc. and Northern Tier Energy in 2016. design firm, from 2005 through October 2007.
Daniel L. GordonOdely Sakazi has been an Executiveserved as Senior Vice President, Delek Logistics since August 2019.He previously served as our Vice President of our general partner since October 2014, an executive vice presidentBusiness Strategy and corporate development from November 2017 until August 2019, as Senior Director of Delek since August 2014, a vice presidentBusiness Strategy from January 2017 until November 2017, as Director of Delek since November 2012,Business Strategy from June 2016 until January 2016, and a vice presidentas Director of Delek's former subsidiary, MAPCO Express, Inc.,Corporate Operation from 2011 until the sale of our retail segment in November 2016. Prior to joining us in 2011, Mr. Gordon had served as president of Aska Energy in Atlanta, Georgia since 2009.
Jared Paul Serff has served as an Executive Vice President of our general partner and Delek since May 2017 and a Vice President since July 2015. Prior to joining us, Mr. Serff was the chief human resources officer of Itron, Inc. (NASDQ: ITRI) from July 2004 to February 2014. Itron is a publicly-traded technology company offering products and services in energy and water resource management. Mr. Serff’s responsibilities at Itron included overseeing the global human resources function supporting approximately 10,000 employees operating in 60 countries around the world.
Avigal Soreq has been an Executive Vice President of our general partner since October 2015 and a Vice President since December 2012. He has also served as Delek's chief commercial officer since November 2016, an executive vice president of Delek since August 2015 and as a vice president of Delek since December 2012. until June 2016.He served as a member of the board of directors of Alon USA Energy, Inc. from May 2015 until its acquisition by Delek in July 2017. Prior to joining us in October 2011, Mr. Soreq worked in business development for SunPower Corporation (NASDAQ: SPWR), an American energy company that designs and manufactures solar panels. Prior to joining SunPower Corporation, Mr. Soreq worked as a senior finance and business consultant for Trabelsy & Co and as a consultant in the corporate finance department for KPMG’s Tel-Aviv office. Mr. Soreqformerly served in the Israeli Air ForceNavy as an officer in various roles between 19962010 and 2004 and reached the rank of Major. Mr. Soreq is a certified public accountant in Israel.2014.
Board Leadership Structure
Mr. Yemin serves as Executive Chairman of the Board. Our general partner has no policy with respect to the unification or separation of the offices of Chairman and CEO. Rather, the Board's policy is to let the Board make such a determination in the manner it deems most appropriate for the general partner and us at a given point in time. At this time, the Board believes that our general partner's Chief Executive Officer is best situated to serve as Chairman of the Board because he is the director most familiar with our business and industry. He is also the Executive Chairman of the board of directors of Delek Holdings, which provides the Board and us with important interaction with, and access to, our most important customer and majority unitholder.unitholders. Mr. Yemin also brings to the Board and us the perspectivesperspective of our majority unitholder and the principal executive officer and chairmanchair of the board of a publicly traded company. As such, the Board feels that combining the roles of Chairman and CEO provides the Board with the individual who is most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy and facilitating the information flow between management and the Board and its committees, which are essential to effective governance of the Partnership. The Board met 2019 times in the year ended December 31, 2017,2023, with each director attending at least 75% of the aggregate of all meetings of the Board and committees on which he or she served during the year.
Because the Executive Chairman of the Board is not an independent director, on February 22, 2021, the Board designated Ron W. Haddock to serve in a lead capacity (the "Lead Independent Director") to coordinate the activities of the other independent directors and to perform such other duties and responsibilities as the Board may determine from time to time. The Lead Independent Director is appointed annually by the Board and may be removed from or replaced at any time. The Lead Independent Director will chair all meeting of the Board at which the Executive Chairman is not present, including executive sessions of the independent directors, call additional meetings of the independent directors as deemed appropriate, and perform such other functions as the Board may direct.
Executive Sessions
Independent directors and management have different perspectives and roles in strategy development. Our independent directors bring experience, oversight and expertise from outside the Partnership and our industry, while the other Board members bring experience and expertise specific to us and Delek.Delek Holdings. In addition, the independent directors are the sole members of our Audit and Conflicts Committees. The NYSE listing standards require our independent directors to meet at regularly scheduled executive sessions without management. Our independent directors generally conduct such executive sessions in connection with each quarterly meeting of the Audit Committee and otherwise as may be necessary. Mr. SpiegelHaddock was appointed lead independent directorLead Independent Director of the Board during the year ended December 31, 2017.in February 2021. In this capacity, Mr. SpiegelHaddock generally presides over these executive sessions.
Communications with the Board of Directors of Our General Partner
Unitholders or other interested parties who wish to communicate with any of our directors, any committee chairperson or the Board may do so by writing to the director, committee chairperson or the Board in care of the Secretary of the general partner of Delek Logistics Partners, LP at 7102 Commerce310 Seven Springs Way, Suite 400 and 500, Brentwood, Tennessee 37027. Any such communication received will be forwarded directly to the director to whom it is addressed. If the communication is addressed to the Board and no particular director is named, the communication will be forwarded, depending on the subject matter, to the appropriate committee chairperson or to all members of the Board.
Committees of the Board of Directors of Our General Partner
Audit Committee
The Board has a standing Audit Committee. The Audit Committee consists of Ms. Brillon (chair) and Messrs. D'Andrea (chairman), Brown Gadd and Spiegel. Mr. D'Andrea joined the committee in August 2015.Haddock. Mr. Brown joined the committee at its inception in November 2012, and Messrs. Gadd and SpiegelMr. Haddock joined the committee in October 20132022 and September 2014, respectively.Ms. Brillon joined the committee in January 2021. The Audit Committee met seven times during the year ended December 31, 2017,in 2023, either in person or telephonically, with each member attending at least 75% of all meetings of the Audit Committee and at least 75% of the aggregate of all meetings of the Board and committees on which he served during the year.
Committee.
The Board has determined that (i) each of Messrs. D'Andrea, Brown Gadd and SpiegelHaddock and Ms. Brillon qualifies as independent and as financially literate under applicable SEC rules and regulations and the rules of the NYSE, and as financially literate, and (ii) Mr. D'AndreaMs. Brillon meets the definition of an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K.
| | | | | | | | | | | |
| Audit Committee Members | Independent | Financially Literate | Qualifies as an Audit Committee Financial Expert |
| Sherri A. Brillon (Chair) | ü | ü | ü |
| Charles J. Brown III | ü | ü | ü |
| Ron Haddock | ü | ü | |
Directors, Executive Officers, Corporate Governance, and Security Ownership
The purpose of the Audit Committee is to provide assistance to the Board in the oversight of (a) the quality and integrity of our financial statements; (b) the disclosure and financial reporting process, including our financial statements; (c) our internal controls and procedures for financial reporting; (d) the performance of our internal audit function and the independent registered public accounting firm employed by us for the purpose of preparing and issuing an audit report or related work; (e) the qualifications and independence of our independent registered public accounting firm; and (f) our compliance with policies under our Code of Business Conduct & Ethics and legal and regulatory requirements. These responsibilities are set forth in the Audit Committee’sCommittee's charter, which is available on our corporate website at www.DelekLogistics.com.
www.DelekLogistics.com.
Conflicts Committee
The Conflicts Committee consists of Messrs. Brown (chairman), D'Andrea,(chair) and Gadd and Spiegel.Mses. Brillon and Kelly. The Board has determined that each of Messrs. Brown D'Andrea,and Gadd and SpiegelMses. Brillon and Kelly qualifies as independent under applicable SEC rules and regulations and the rules of the NYSE. Mr. Brown joined the committee at its inception in November 2012. Messrs.Mr. Gadd Spiegel and D'Andrea joined the committee in October 2013, September 2014 and August 2015, respectively.2013. Ms. Brillon joined the committee in March 2023. Ms. Kelly joined the committee in July 2020. The Conflicts Committee met two times during the year ended December 31, 2017,in 2023 either in person or telephonically, with each member attending at least 75% of all meetings of the Conflicts Committee.
Our Partnership Agreement does not require that the Board seek approval from the Conflicts Committee to determine the resolution of any conflict of interest between us and Delek Holdings or any other person. However, pursuant to the Partnership Agreement and our Related Party Transactions Policy adopted by the Board, the Board or management of our general partner may submit certain related party transactions for review and approval or ratification by the Board or an authorized committee thereof. It is generally expected that the Conflicts Committee will be best suited to review such related party transactions. In certain instances, the Related Party Transactions Policy effectively requires that certain related party transactions be submitted to the Conflicts Committee for review. The members of the Conflicts Committee may not be officers or employees of our general partner or directors, officers or employees of its affiliates, may not hold an ownership interest in the general partner or its affiliates other than common units or awards under any long-term incentive plan, equity compensation plan or similar plan implemented by the general partner or the Partnership and must meet the independence and experience standards established by the NYSE and the SEC to serve on an audit committee of a board of directors. Any unitholder challenging any matter approved by the Conflicts Committee in accordance with the terms of our Partnership Agreement will have the burden of proving that the members of the Conflicts Committee did not act in good faith in accordance with the terms of our Partnership Agreement. For further discussion of the Conflicts Committee and the Related Party Transactions Policy, see Item 13. "Certain Relationships and Related Transactions and Director Independence—Certain Relationships and Related Transactions—Procedures for Review, Approval or Ratification of Transactions with Related Parties."
Environmental, Health and Safety Committee
The EHS Committee was formedconsists of Messrs. Gadd (chair) and Haddock and Ms. Kelly. Mr. Gadd joined the committee at its inception in October 2016, Mr. Haddock joined the committee in May 2018, and has consisted of Messrs. Gadd (chairman), Brown, D'Andrea and Spiegel from its inception.Ms. Kelly joined the committee in July 2020. The EHS Committee met four times in 2017,2023, either in person or telephonically, with each member attending at least 75% of all meetings of the EHS Committee.The purpose of the EHS Committee is to assist the Board in fulfilling certain of the Board’s oversight responsibilities by, among other things, overseeing management’s establishment and administration of the Company’sPartnership’s environmental, health and safety policies, programs, procedures and initiatives. These responsibilities are set forth in the EHS Committee's charter, which is available on our corporate website at www.DelekLogistics.com.www.DelekLogistics.com.
Governance and Compensation Committee
In July 2021 the Board established the Governance and Compensation Committee of the Board. The Governance and Compensation Committee consists of Messrs. Haddock (chair), Brown, and Gadd and Ms. Brillon. The Governance and Compensation Committee met four times in 2023, either in person or telephonically, with each member attending at least 75% of all meetings of the Governance and Compensation Committee. The purpose of the Governance and Compensation Committee is to (a) recommend to the Board director nominees for each Board committee; (b) periodically review the corporate governance policies applicable to the Partnership (the “Governance Guidelines”) and recommend to the Board any changes deemed necessary or desirable; (c) monitor, oversee and review compliance of the Governance Guidelines and all other applicable policies of the Partnership as the Governance and Compensation Committee or the Board deem necessary or desirable; (d) support the Board and work with management to ensure that compensation practices properly reflect management and Partnership philosophy, competitive practice and regulatory requirements; and (e) review, provide advice on and, where appropriate, approve the following items: (1) executive and employee compensation objectives, plans, and levels; (2) culture and employee engagement; (3) diversity and inclusion; (4) leadership and talent engagement; and (5) executive succession planning. These responsibilities are set forth in the Governance and Compensation Committee's charter, which is available on our corporate website at www.DelekLogistics.com.
Directors, Executive Officers, Corporate Governance, and Security Ownership
Technology Committee
In July 2021 the Board established the Technology Committee of the Board. The Technology Committee consists of Mses. Kelly (chair) and Brillon and Mr. Green. The Technology Committee met four times in 2023, either in person or telephonically, with each member attending at least 75% of all meetings of the Technology Committee. The purpose of the Technology Committee is to assist the Board in fulfilling certain of the Board’s oversight responsibilities by, among other things, overseeing management’s establishment and administration of the Partnership’s policies, programs, procedures and initiatives with respect to technology and information security. These responsibilities are set forth in the Technology Committee's charter, which is available on our corporate website at www.DelekLogistics.com.
Director Nominations and Corporate Governance
As a limited partnership, we rely on an exemption from the provisions of the NYSE Listed Company Manual, which would otherwise require us to have a nominating and corporate governance committee. Our general partner is a limited liability company and its directors are not elected by our unitholders, but by its members in their sole discretion. Accordingly,However, in July 2021 the Board believes it is unnecessaryestablished the Governance and Compensation Committee of the Board, which, among other responsibilities, makes recommendations to have a nominatingthe Board regarding changes to the size and corporate governance committee or a committee performingcomposition of the functionscommittees of such a committee.the Board and makes recommendation to the Board with respect to the structure of Board committees and nominees for appointment to committees of the Board. Candidates to serve on the Board are reviewed and selected in accordance with our general partner's Governance Guidelines, which are available on our corporate website at www.DelekLogistics.com. Pursuant towww.DelekLogistics.com.
Compensation Decisions
In July 2021, the Merger Agreement, Delek agreed to cause our general partner to increaseBoard established the sizeGovernance and Compensation Committee of the Board, by one seat, to appoint an individual selected bywhich, among other responsibilities, oversees director and executive officer compensation for the Independent Director Committee of Alon USA prior to the closing date of the Delek/Alon Merger to such newly created seat, and to cause such individual to be re-elected to the Board for terms to be no less than two years after the closing date of the Delek/Alon Merger, subject to our Governance Guidelines. Ronald Haddock was designated by the Independent Director Committee of Alon USA to fill such seat pursuant to the Merger Agreement and, on July 18, 2017, the Board elected Mr. Haddock to fill such seat for a term ending no less than two years after the closing date of the Delek/Alon Merger, subject to our Governance Guidelines.Partnership.
Compensation Decisions
Our general partner does not have a compensation committee. Our general partner has decided that a compensation committee is not necessary at this time, primarily because neither our general partner nor the Partnership regularly provides compensation to the general partner's executive officers.
However,Additionally, our Board believes it is important to promote the interests of the Partnership by providing to employees of the Partnership's affiliates and others who perform services for us or on our behalf, incentive compensation awards for their service. Accordingly, the general partner adopted the Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP"). Due to the fact that several of the members of the Board perform services on our behalf in their roles as executive officers of Delek Holdings, the LTIP is administered by the Conflicts Committee with respect to those awards. The disinterested members of the full Board may also grant awards and the Conflicts Committee may delegate, and has delegated in the past, to an executive officer of the general partner the authority to issue awards to non-Section 16 officers of the general partner. A compensation consultant was not used in the formulation of our executive compensation framework, objectives and philosophy. For a further discussion on the compensation practices of the general partner, see Item 11. Executive Compensation.
Governance Guidelines, Code of Business Conduct & Ethics and Committee Charters
The Governance Guidelines of the Board of Directors of our general partner, the chartercharters of the Audit Committeestanding Board committees of our general partner and our Amended and Restated Code of Business Conduct & Ethics covering all employees, including our principal executive officer, principal financial officer, principal accounting officer and controllers, are available on our website, www.DelekLogistics.com under the "About Us - Corporate Governance" caption. A copy of any of these documents will be mailed upon a request made to Investor Relations, Delek Logistics Partners, LP, or ir@deleklogistics.com.ir@deleklogistics.com. We intend to disclose any amendments to, or waivers of, the Code of Business Conduct & Ethics on behalf of our Chief Executive Officer,President, Chief Financial Officer and persons performing similar functions on our website, at www.DelekLogistics.com,, under the “Investor Relations” caption, promptly following the date of any such amendment or waiver.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, and regulations of the SEC thereunder, requires the executive officers and directors of our general partner and persons who own more than ten percent of our common units, as well as certain affiliates of such persons, to file initial reports of ownership of our common units and changes in their ownership with the SEC. Executive officers, directors and persons owning more than ten percent of our common units are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us and written representations that no other reports were required for or by those persons, we believe that, during the year ended December 31, 2017, all filing requirements applicable to the executive officers and directors of our general partner and owners of more than ten percent of our common units were met, except for the following late reports:
On April 17, 2017, Delek US Holdings, Inc. filed a Form 4 reporting the acquisition of 1,800 common units that occurred on April 12, 2017.
On November 15, 2017, Ms. Melissa M. Buhrig filed a Form 3 reporting that Ms. Buhrig became an executive officer on October 24, 2017.
On December 13, 2017, Mr. Frederec Green filed a Form 4 reporting the disposition of 1,367 common units that occurred on December 10, 2017 due to the fact that the vesting date fell over a weekend.
On December 13, 2017, Mr. Ezra Uzi Yemin filed a Form reporting the disposition of 3,348 common units that occurred on December 10, 2017 due to the fact that the vesting date fell over a weekend.
On December 14, 2017, Mr. Daniel L. Gordon filed a Form 4 reporting the disposition of 273 common units that occurred on December 10, 2017 due to the fact that the vesting date fell over a weekend.
On December 13, 2017, Mr. Assaf Ginzburg filed a Form 4 reporting the disposition of 673 common units that occurred on December 10, 2017 due to the fact that the vesting date fell over a weekend.
On February 14, 2018, Mr. Mark Cox filed a Form 5 reporting the disposition of 81 common units that occurred on June 10, 2015, 81 common units that occurred on June 10, 2016, 80 common units that occurred on June 10, 2016 and 814 common units that occurred on June 10, 2017.
On February 19, 2018, Mr. Francis D'Andrea filed a Form 4/A correcting certain information contained in a Form 4 filed by Mr. Francis D'Andrea reporting the acquisition of 2,018 common units that occurred on June 10, 2017.
ITEM 11. EXECUTIVE COMPENSATION
All of our general partner's executive officers are employees of Delek.Delek Holdings. Neither we nor our general partner directly employsemploy any of the executive officers responsible for managing our business.
Compensation Discussion and Analysis
This Compensation Discussion and Analysis (“CD&A”) discusses the principles underlying our general partner's compensation programs and the key executive compensation decisions that were made for 2017.2023. It also explains the most important factors relevant to such
decisions. This CD&A provides context and background for the compensation earned and awarded to the individuals named in the Summary Compensation Table below. These individuals may beMessrs. Soreq, Yemin, Sakazi and Spiegel and Ms. McWatters are referred to collectively herein as our named"named executive officersofficers" or “NEOs.”"NEOs".
Directors, Executive Officers, Corporate Governance, and Security Ownership
Overview - Compensation Decisions and Allocation of Compensation Expenses
Under the terms of the Omnibus Agreement, we pay an annual administrative fee of $4.4 million per year to Delek Holdings for the provision of general and administrative services. The general and administrative services covered by the annual administrative fee include, without limitation, executive management services of Delek Holdings employees who devote less than 50% of their time to our business, financial and administrative services, information technology services, legal services, health, safety and environmental services, human resources services and insurance administration. No service covered by the administrative fee is assigned any particular value individually. Additionally, the Omnibus Agreement requires us to reimburse Delek Holdings directly for a proportionate amount of the salary and employee benefits costs of Delek Holdings employees who devote more than 50% of their time to our business and affairs.
Our general partnerNone of our NEOs other than Mr. Sakazi devoted more than 50% of their total business time to our business and affairs in 2023. Although our NEOs provide services to both Delek Holdings and us, no portion of the administrative fee is specifically allocated to services provided by our NEOs to us except with respect to Mr. Sakazi. Instead, the administrative fee covers all centralized services provided to us by our NEOs other than Mr. Sakazi, and we have not reimbursed Delek Holdings for the cost of such services. Except for awards under the LTIP, Delek Holdings has the ultimate decision-making authority with respect to the compensation of our NEOs.
In July 2021, the Board established the Governance and Compensation Committee of the Board, which, among other responsibilities, oversees director and executive officer compensation for the Partnership. While the Governance and Compensation Committee does not have aestablish the compensation committee. Our general partner has determined that apaid to our NEOs, it does monitor the compensation committee is not necessary at this time, primarily becauseprogram applicable to our general partner's executive officers do not regularly receive material compensation from our general partner or the Partnership.NEOs.
However,Additionally, our Board believes it is important to promote the interests of the Partnership and the general partner by providing incentive compensation to employees of the Partnership's affiliates and others who perform services for us or on our behalf. Accordingly, pursuant to our Partnership Agreement, the general partner is allowed to and has adopted the LTIP. Due to the fact that several of the members of the Board perform services on our behalf in their roles as executive officers of Delek Holdings, the awards to these individuals under the LTIP isare administered by the Conflicts Committee, with respect to awards to these individuals.Committee. The disinterested members of the Board may also grant awards and the Conflicts Committee may delegate, and has delegated in the past, to an executive officer of the general partner the authority to issue awards to non-Section 16 officers of the general partner.
Under the terms of the Omnibus Agreement, we pay an annual administrative fee of $3.7 million per year to Delek for the provision of general and administrative services. The general and administrative services covered by the annual administrative fee include, without limitation, executive management services of Delek employees who devote less than 50% of their time to our business, financial and administrative services, information technology services, legal services, health, safety and environmental services, human resources services and insurance administration. No service covered by the administrative fee is assigned any particular value individually. Additionally, the Omnibus Agreement requires us to reimburse Delek directly for a proportionate amount of the salary and employee benefits costs of Delek employees who devote more than 50% of their time to our business and affairs.
None of our NEOs devoted more than 50% of his total business time to our business and affairs in 2017. Although our NEOs provide services to both Delek and us, no portion of the administrative fee is specifically allocated to services provided by our NEOs to us. Instead, the administrative fee covers all centralized services provided to us by Delek, and we have not reimbursed Delek for the cost of such services. Except for awards under the LTIP, Delek has the ultimate decision-making authority with respect to the compensation of our NEOs.
Compensation Objectives and Philosophy
Because neither we nor our general partner directly employ any of our NEOs, and because our NEOs are compensated by Delek Holdings to manage our business and affairs, we did not provide traditional fixed or discretionary compensation (e.g. salary or bonus) to our NEOs in 2017.2023. However, we believe that our NEOs should have an ongoing stake in our success, that their interests should be aligned with those of our unitholders and that the best interests of our unitholders will be most effectively advanced by enabling our NEOs, who are responsible for our management, growth and success, to receive compensation in the form of long-term incentive awards. Accordingly, our executive compensation program consists of a single element: long-term incentives in the form of awards under the LTIP, which was adopted in connection with the Offeringour initial public offering and is administered by the Conflicts Committee. The Conflicts Committee’s decisions with respect to the amount of awards made under the LTIP to our NEOs are governed by the following objectives:
•to motivate and retain our general partner's key executives;
•to align the long-term economic interests of our general partner's executives with those of our unitholders; and
•to reward excellence and performance by our general partner's executives that increases the value of our units.
Awards may be made under the LTIP to officers, directors and employees of Delek Holdings, our general partner or its affiliates, as well as any consultants or other individuals who perform services for us. Phantom units have been the sole form of award under the LTIP to date, and these awards are accompanied by distribution equivalent rights that provide for a lump sum amount paid in cash on the vesting date that is equal to the accrued distributions from the grant date of the phantom units through the vesting date. No phantom units were granted toIn 2023 our executive officers in 2017.
received time-vesting phantom units under the LTIP.
Pursuant to the terms of the LTIP, upon the occurrence of an Exchange Transaction (as defined in the LTIP, and generally including a merger, consolidation, acquisition, reorganization or similar extraordinary transaction), the Board may, in its discretion, accelerate the vesting of the phantom units, adjust the terms of any outstanding phantom units, or, in the event of an Exchange Transaction in which
our unitholders receive equity of another entity, provide for the conversion of the phantom units into comparable awards for such entity's equity. By providing the potential for immediate value to our NEOs in connection with an Exchange Transaction, this provision aligns our NEOs' interests with those of our unitholders and incentivizes our NEOs to work to maximize the value of our units in the event such a transaction werewas to occur. For additional detail regarding the amount of compensation our NEOs may be entitled to in the event of their termination or a change-in-control, see “—Potential Payments Upon Termination or Change-In-Control.”
Directors, Executive Officers, Corporate Governance, and Security Ownership
Compensation Consultants
Our general partner does not have a compensation committee,The Governance and itsCompensation Committee of the Board did not retainretained a compensation consultant with respect to compensation paid to our NEOs or to its non-employee directors in 2017, as the Board elected to keep 2017 compensation to its non-employee directors the same as it was in 2016 and 2015.
2023.
Perquisites
Our general partner does not provide any fringe benefits or perquisites to our NEOs.
Unit Ownership Requirements
Our general partner does not have express unit ownership requirements.
Prohibition Against Speculative Transactions
Our general partner's Code of Business Conduct & Ethics, which applies to all executive officers and directors of our general partner, prohibits speculative transactions in our units such as short sales, puts, calls or other similar options to buy or sell our units in an effort to hedge certain economic risks or otherwise.
Guidelines for Trades by Insiders
We maintain policies that govern trading in our units by officers and directors required to report under Section 16 of the Exchange Act, as well as certain other employees who may have regular access to material non-public information about us. These policies include pre-approval requirements for all trades and periodic trading “black-out” periods designed with reference to our quarterly financial reporting schedule. We also require pre-approval of all trading plans adopted pursuant to Rule 10b5-1 promulgated under the Exchange Act. To mitigate the potential for abuse, no trades are allowed under a trading plan within 30 days after adoption. In addition, we discourage termination or amendment of trading plans by prohibiting trades under new or amended plans within 90 days following a plan termination or amendment.
Compensation Committee Report
The members of the ConflictsGovernance and Compensation Committee have reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the ConflictsGovernance and Compensation Committee recommended to the Board of our general partner that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
The members of the ConflictsGovernance and Compensation Committee have submitted this Governance and Compensation Committee Report to the Board of Directors as of February 28, 2018:2024:
•Ron W. Haddock (Chair)
•Sherri A. Brillon
•Charles J. Brown, III (Chairman)
Francis C. D'Andrea
•Eric D. Gadd
Directors, Executive Officers, Corporate Governance, and Security Ownership
20172023 Summary Compensation Table
The Summary Compensation Table below summarizes the compensation for the fiscal year ended December 31, 20172023 (and the two prior fiscal years) for our general partner's principal executive officerpresident (Mr. Soreq), Executive Chairman (Mr. Yemin), former principal financial officer (Mr. Ginzburg)Spiegel), Executive Vice President, General Counsel, and current principalSecretary (Ms. McWatters) and Senior Vice President (Mr. Sakazi).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Name and Principal Position (1) | Fiscal Year | Salary ($) | Bonus ($) (2) | Unit Awards ($) (3) | Option Awards ($) | Non-Equity Incentive ($) (4) | Other Compensation ($) (5) | Total ($) |
Avigal Soreq,
President | 2023 | — | — | 874,992 | — | — | — | 874,992 |
| 2022 | — | — | 499,955 | — | — | — | 499,955 |
| 2021 | — | — | — | — | — | — | — |
Ezra Uzi Yemin,
Executive Chairman | 2023 | — | — | 749,971 | — | — | — | 749,971 |
| 2022 | — | — | 1,233,943 | — | — | — | 1,233,943 |
| 2021 | — | — | 1,049,979 | — | — | — | 1,049,979 |
Reuven Spiegel,
Chief Financial Officer
| 2023 | — | — | 274,953 | — | — | — | 274,953 |
| 2022 | — | — | 133,418 | — | — | — | 133,418 |
| 2021 | — | — | 133,323 | — | — | — | 133,323 |
Denise McWatters,
General Counsel | 2023 | — | — | 174,998 | — | — | — | 174,998 |
| 2022 | — | — | 166,705 | — | — | — | 166,705 |
| 2021 | — | — | 116,648 | — | — | — | 116,648 |
Odely Sakazi,
Senior Vice President | 2023 | 332,000 | 180,000 | 258,739 | — | 314,985 | 16,514 | 1,102,238 |
| 2022 | 300,000 | — | 250,075 | — | 305,100 | 11,871 | 867,046 |
| 2021 | 294,231 | — | 246,645 | — | — | 4,370 | 545,246 |
(1) As noted above, no compensation other than grants of service phantom units under our LTIP is reported for the NEOs except for Mr. Sakazi, because none of our executive officers other than Mr. Sakazi received compensation from us or our general partner in 2023.
(2) The $180,000 was a discretionary award given as a result of the Delaware Gathering (formerly 3 Bear) Acquisition that was paid out in March 2023.
(3) Amounts in this column represent the grant date fair value of DK PSUs, DK RSUs, with respect to Mr. Sakazi, and DKL phantom units, with respect to all NEOs, granted under the 2016 Plan or the LTIP, as applicable. The fair value of DK PSUs is calculated using a Monte-Carlo simulation model, which assumes a risk-free rate of interest of 4.32%, an expected term of 2.81 years and expected volatility of 64.46%. Assumptions used in the calculation of these amounts for the 2023 fiscal year are included in footnote 20 to the audited financial officer (Mr. Kremke). Messrs. Yemin, Ginzburgstatements of Delek Holdings for the 2023 fiscal year included in Delek Holdings’ Annual Report on Form 10-K filed with the SEC on or about February 28, 2024. The fair value of DK RSUs and Kremke are referredDKL phantom units is calculated using the closing price of Delek Holdings’ Common Stock and our common limited partner units, respectively, on the date of the grant.
(4) Bonus paid under the 2023 AIP Plan for 2023 plan year.
(5) For fiscal year 2023, this amount includes matching contributions to collectively herein as our "named executive officers" or "NEOs."
the Partnership’s 401(k) Plan in the amount of $15,028 for Mr. Sakazi and group term life insurance premiums of $486 for Mr. Sakazi. For Mr. Sakazi, this amount also includes reimbursement in the amount of $1,000 for HSA employer in 2023. | | |
| | | | | | | |
(a) | (b) | (c) | (d) | (e) | (f) | (i) | (j) |
Name and
Principal Position (1)
| Fiscal Year | Salary
($)
| Bonus
($)
| Unit Awards
($)
| Option Awards
($)
| All Other Compensation ($) | Total
($)
|
Ezra Uzi Yemin
Chief Executive Officer
| 2017 | — | — | — | — | — | — |
2016 | — | — | — | — | — | — |
2015 | — | — | — | — | — | — |
Assaf Ginzburg
Executive Vice President and Former Chief Financial Officer
| 2017 | — | — | — | — | — | — |
2016 | — | — | — | — | — | — |
2015 | — | — | — | — | — | — |
Kevin Kremke
Chief Financial Officer
| 2017 | — | — | — | — | — | — |
2016 | — | — | — | — | — | — |
2015 | — | — | — | — | — | — |
| |
(1)
| Because none of our executive officers received total compensation from us or our general partner in excess of $100,000 in 2017, information is presented only for Messrs. Yemin, Ginzburg and Kremke. |
Grants of Plan Based Awards in 20172023
BecauseThe following table provides information regarding plan-based awards granted to our NEOs continuedduring fiscal year 2023:
| | | | | | | | | | | | | | | | | | | | |
| | Estimated Future Payouts Under Equity Incentive Plan Awards (#) (1) | All Other Stock Awards: Number of Shares of Units (#) | Grant Date Fair Value of Units and Option Awards (2) |
| Name | Grant Date | Threshold | Target | Maximum |
| Avigal Soreq | 3/10/2023 | | | | 16,895 (3) | 874,992 |
| Ezra Uzi Yemin | 3/10/2023 | | | | 14,481 (3) | 749,971 |
| Reuven Spiegel | 3/10/2023 | | | | 5,309 (3) | 274,953 |
| Denise McWatters | 3/10/2023 | | | | 3,379 (3) | 174,998 |
| Odely Sakazi | 3/10/2023 | | | | 2,681 (4) | 62,494 |
| 3/10/2023 | | | | 1,206 (3) | 62,459 |
| 3/10/2023 | 536 | 1,072 | 2,144 | | 18,063 |
| 3/10/2023 | 536 | 1,072 | 2,144 | | 31,024 |
| 3/10/2023 | 537 | 1,073 | 2,146 | | 30,902 |
| 3/10/2023 | 1,073 | 2,145 | 4,290 | | 53,797 |
(1) The amounts in this column reflect the threshold, target, and maximum shares to benefit from significant plan-based equity awardsbe issued upon the vesting of PSUs. The PSUs granted to Mr. Sakazi are subject to a performance period beginning January 1, 2023 and ending December 31, 2023.
(2) The amounts in priorthis column reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for financial statement reporting purposes over the expected term of the grant. Assumptions used in the calculation of these amounts for the 2023 fiscal year are included in footnote 20 to the audited financial statements of Delek Holdings for the 2023 fiscal year included in Delek Holdings’ Annual Report on Form 10-K filed with the SEC on or about February 28, 2024. Because the fair value of PSUs is calculated differently than the fair value of RSUs, the grant date fair values for PSUs and RSUs covering identical quantities of shares may differ.
(3) The amounts in this column reflect the Partnership's common units to be issued upon the vesting of RSUs granted under the Partnership's 2012 Long-Term Incentive Plan. The RSUs vest quarterly for three years, our NEOs were notpro rata.
(4) The amounts in this column reflect the Delek Holdings shares to be issued upon the vesting of RSUs granted plan-based equity awards during 2017.under the 2016 Plan. The RSUs vest quarterly for three years, pro rata.
Outstanding Equity Awards at December 31, 2017
2023
The following table provides information regarding the number of outstanding equity awards held by our NEOs at December 31, 2017.2023.
| | | | | | | | | | | | | | | | | | | | |
| Option Awards | Unit Awards |
| Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Option Exercise Price | Option Expiration Date | Number of Units That Have Not Vested | Market Value of Units That Have Not Vested |
Avigal Soreq
President | — | — | n/a | n/a | 17,340 | $748,568 |
Ezra Uzi Yemin
Executive Chairman | — | — | n/a | n/a | 22,091 | $953,668 |
Reuven Spiegel
Chief Financial Officer | — | — | n/a | n/a | 3,035 | $131,021 |
Denise McWatters
General Counsel | — | — | n/a | n/a | 3,980 | $171,817 |
Odely Sakazi
Senior Vice President | — | — | n/a | n/a | 44,129 | $507,409 |
| | |
| | | | | | |
| Option Awards | Unit Awards |
Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Option Exercise Price | Option Expiration Date | Number of Units That Have Not Vested | Market Value of Units That Have Not Vested |
Ezra Uzi Yemin | — | — | n/a | n/a | — | $— |
Assaf Ginzburg | — | — | n/a | n/a | — | $— |
Kevin Kremke | — | — | n/a | n/a | — | $— |
Option Exercises and Stock Vested in 2017
2023
The following table provides information about the vesting of phantom units for our NEOs during fiscal year 2017.2023.
| | | | | | | | | | | | | | |
| Option Awards | Stock Awards |
| Name | Number of Shares Acquired on Exercise | Value Realized on Exercise | Number of Shares Acquired on Vesting | Value Realized on Vesting |
| Avigal Soreq, President | — | $— | 7,331 | $338,136 |
| Ezra Uzi Yemin, Executive Chairman | — | $— | 26,857 | $1,272,902 |
| Reuven Spiegel, Chief Financial Officer | — | $— | 5,655 | $263,686 |
| Denise McWatters, General Counsel | — | $— | 2,860 | $135,860 |
| Odely Sakazi, Senior Vice President | — | $— | 4,711 | $140,449 |
|
| | | | |
| | Option Awards | Stock Awards (1) |
| Name | Number of Shares Acquired on Exercise | Value Realized on Exercise | Number of Shares Acquired on Vesting | Value Realized on Vesting |
| Ezra Uzi Yemin | — | n/a | 24,488 | $758,516 |
| Assaf Ginzburg | — | n/a | 5,000 | $154,875 |
| Kevin Kremke | — | n/a | — | $— |
| | |
| (1)
Consists of the following: |
|
| | | | |
| Date | NEO | Phantom Units Vested | Fair Market Value Per Unit | Value Realized on Vesting |
| 6/10/2017 | Yemin | 12,244 | $32.20 | $394,257 |
| Ginzburg | 2,500 | $80,500 |
| Kremke | — | $— |
| 12/10/2017 | Yemin | 12,244 | $29.75 | $364,259 |
| Ginzburg | 2,500 | $74,375 |
| Kremke | | $— |
Potential Payments Upon Termination or Change-In-Control
The following table discloses the estimated payments and benefits that would be provided by us to each of our NEOs, assuming that each of the triggering events relating to termination of employment or change in control described in their respective employment agreements with Delek Holdings and the LTIP took place on December 31, 20172023 and their last day of employment with our general partner or its affiliates was December 31, 2017.2023. Due to a number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may differ. Factors that could affect these amounts include the timing during the year of any such event and our stock price.
| | | | | | | | |
| Name | Termination of Employment | Change-In-Control |
| Avigal Soreq, President | — | $— |
| Ezra Uzi Yemin, Executive Chairman | — | $— |
| Reuven Spiegel, Chief Financial Officer | — | $— |
| Denise McWatters, General Counsel | — | $— |
| Odely Sakazi, Senior Vice President | $1,085,573 (1) | $1,860,371 (2) |
(1) Assumes acceleration of 1,178 unvested DK RSUs, 411 unvested DKL RSUs, and 8,856 unvested PSUs.
(2) Assumes acceleration of 3,506 unvested DK RSUs, 1,319 unvested DKL RSUs, and 13,954 unvested PSUs.
| | | | | |
| | |
Name | Termination of Employment98 | | Change-In-Control (1) |
Ezra Uzi Yemin | — | $— |
Assaf Ginzburg | — | $— |
Kevin Kremke | — | $— |
(1) The phantom units previously held by Messrs. Yemin and Ginzburg were fully vested as of December 31, 2017.
2012 Long-Term Incentive Plan
Under the terms of the LTIP and the applicable awards, phantom units that have not vested at the time the participant’s employment with our general partner or its affiliates terminates will generally be immediately forfeited, unless the Board determines otherwise. In the event of an Exchange Transaction, defined generally under the LTIP to include a merger, consolidation, acquisition or disposition of stock, separation, reorganization, liquidation or other similar event or transaction designated by the Board in which our unitholders receive cash, stock or other property in exchange for or in connection with their units, our NEOs may be entitled, at the discretion of the Board, to the accelerated vesting of phantom units awarded under the LTIP. The LTIP and applicable awards provide that the Board may, in its discretion, (i) accelerate the vesting of the phantom units, (ii) make other adjustments to the terms of the phantom units, or (iii) in the event the Exchange Transaction involves the receipt of equity of another entity in exchange for units, convert the phantom units into comparable awards relating to such entity's equity.
Compensation of Directors in 20172023
Officers and employees of Delek Holdings or its subsidiaries do not receive additional compensation for serviceservices on the Board or its committees. The compensation framework for the Board's other directors during 20172023 (Messrs. Brown, Cox, D'Andrea, Gadd, Green and Haddock and Spiegel)Mses. Brillon and Kelly) (the "Compensated Directors") was determined by the Board. In setting compensation for the Compensated Directors, the Board considers various factors and objectives, including aligning the interests of Compensated Directors with the interests of unitholders and attracting and retaining qualified directors to serve on the Board. From time to time, the Board also engages an independent compensation consultant to provide an analysis of compensation paid to directors of entities considered by the Board to be peers of the Partnership at the time. For 2017,
In November 2022, the Board did not engagevoted to approve a new compensation consultant to evaluate Compensated Director compensation, and instead considered the other factors outlined above. The Board determined to keep the amount of compensationstructure for the Compensated Directors in 2017 the same as it was in 2016 and 2015, except that Mr. Spiegel was awarded a portion of the $10,000 Lead Director Fee for his service as Lead Independent Director in 2017,non-employee directors, which was not previously a position on the Board.effective for fiscal year 2023. This compensation includes a cash retainer for serviceservices on the Board and its Committees (and a Lead Directorlead director fee), payable quarterly, and an annual equity award of phantom units under the LTIP that vests semi-annually over a one-year period, as set forth below: period. The following table shows our non-employee director compensation for 2023, the cash portions of which is paid ratably each quarter:
| | | | | |
| Board of Directors Retainer (Per Year) | $85,000 |
| Lead Director Fee (Per Year) | $15,000 |
| Target Value for Equity Awards (Per Year) | $120,000 |
|
| | | |
| Board of Directors Retainer (Per Year) | $50,000 |
| Lead Director Fee (Per Year) | $10,000 |
| Committee Retainers (Per Year): | Chairman | Others |
| Audit Committee | $10,000 | $5,000 |
| Conflicts Committee | $5,000 | $2,500 |
| EHS Committee | $5,000 | $3,000 |
| Target Value for Equity Awards (Per Year) | $65,000 |
| | | | | |
| Committee Retainers (Per Year): | Chair |
| Audit Committee | $10,000 |
| Conflicts Committee | $7,500 |
| EHS Committee | $5,000 |
| Technology Committee | $5,000 |
| Governance and Compensation Committee | $7,500 |
In addition, each director is reimbursed for out-of-pocket expenses in connection with attending meetings of the Board and committee meetings. Each director is fully indemnified by us for actions associated with being a director to the fullest extent permitted under Delaware law pursuant to our Partnership Agreement.
The following table sets forth a summary of the compensation we paid to the members of the BoardCompensated Directors for service during 2017.2023.
| | | | | | | | | | | | | | | | | |
| Director Compensation |
Name (1) | Fees Earned or Paid in Cash ($) (2) | Stock Awards ($) (3) | Option Awards ($) | All Other Compensation ($) | Total ($) |
| Sherri A. Brillon | 95,000 | 119,995 | — | — | 214,995 |
| Charles J. Brown, III | 92,500 | 119,995 | — | — | 212,495 |
| Eric D. Gadd | 90,000 | 119,995 | — | — | 209,995 |
Frederec C. Green (4) | 85,000 | 119,995 | — | — | 204,995 |
| Ron W. Haddock | 107,500 | 119,995 | — | — | 227,495 |
Gennifer Kelly | 90,000 | 119,995 | — | — | 209,995 |
(1) Because they are officers and employees of Delek Holdings or its subsidiaries, Messrs. Soreq, Yemin and Spiegel do not receive any compensation for their service as directors.
(2) This column reports the amount of cash compensation earned in 2023 for Board and committee service and the Lead Director Fee.
(3) Amounts in this column represent the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for financial statement reporting purposes. Assumptions used in the calculation of these amounts for the 2023 fiscal year are included in footnote 20 to the audited financial statements of Delek Holdings for the 2023 fiscal year included in Delek Holdings’ Annual Report on Form 10-K filed with the SEC on or about February 28, 2024. The grant date fair value of $53.26 per unit is equal to the NYSE closing price of our common units as of June 10, 2023. Each of Messrs. Brown, Gadd, Haddock and Green and Mses. Kelly and Brillon held 2,253 outstanding phantom units at December 31, 2023.
(4) During 2023, Mr. Green also received $171,999 in fees from Delek Holdings for consulting work.
|
| | | | | |
| Director Compensation |
Name (1) | Fees Earned or Paid in Cash ($)(2) | Stock Awards ($)(3) | Option Awards ($) | All Other Compensation ($) | Total ($) |
| Charles J. Brown, III | 62,750 | 64,980 | — | — | 127,730 |
| Mark Baker Cox | 35,278 | 64,980 | — | — | 100,258 |
| Francis C. D'Andrea | 67,750 | 64,980 | — | — | 132,730 |
| Eric D. Gadd | 62,083 | 64,980 | — | — | 127,063 |
Ron W. Haddock (4) | 13,125 | — | — | — | 13,125 |
| Reuven Spiegel | 62,750 | 64,980 | — | — | 127,730 |
| | | | | |
(1)
99 | | Because they are officers and employees of Delek or its subsidiaries, Messrs. Yemin, Ginzburg and Green did not receive any compensation for their service as directors in 2017. |
| |
(2)
Directors, Executive Officers, Corporate Governance, and Security Ownership | This column reports the amount of cash compensation earned in 2017 for Board and committee service and the Lead Director Fee. |
| |
(3)
| Amounts in this column represent the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for financial statement reporting purposes. Assumptions used in the calculation of this amount for the 2017 fiscal year are included in Note 13 to our audited financial statements for the 2017 fiscal year included in this Annual Report on Form 10-K. The grant date fair value of $32.20 per unit is equal to the NYSE closing price of our common units as of the June 10, 2017 grant date. Messrs. Brown, Cox, D'Andrea, Gadd and Spiegel held 1,248, 0, 632, 1,498 and 1,248 outstanding phantom units, respectively, at December 31, 2017. |
| |
(4)
| As of July 2017, Mr. Haddock joined the Board and began receiving compensation as a director at that time. |
Compensation Committee Interlocks and Insider Participation
Messrs. Brown, D'Andrea, Gadd and SpiegelHaddock and Ms. Brillon served on the ConflictsGovernance and Compensation Committee during 20172023, and Mr. YeminMessrs. Soreq and Spiegel, as well as the Board, assisted the committee with respect to compensation matters. There are no interlocking relationships requiring disclosure pursuant to Item 407(e)(4)(iii) of Regulation S-K.
CEOPrincipal Executive Officer Pay Ratio
As discussed above, as a master limited partnership, we have no employees. Rather, all of the employees that conduct our business are employed by our general partner and its non-Partnership affiliates. Moreover, as disclosed above, we did not pay any compensation amounts to our chiefprincipal executive officer in 2017.2023. As a result, we are unable to provide an estimate of the relationship of the median of the annual total compensation of employees that conduct our business and the annual total compensation of our chiefprincipal executive officer.
We expect the CEOprincipal executive officer pay ratio disclosure with respect to employees of Delek Holdings, including our NEOs, to be set forth in Delek’sDelek Holdings’ annual proxy statement.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 26, 201821, 2024 (the "Measurement Date"), (i) the beneficial ownership of our units representing limited partnership interests and Common Stock of Delek US Holdings Inc. by all directors and director nominees of our general partner, our NEOs and all of our executive officers as a group and (ii) the beneficial ownership of our units representing limited partnership interests by each person known by us to own more than five percent of such units or more than five percent of any class of our units. The amounts and percentage of units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect to all units shown as beneficially owned by them, subject to community property laws where applicable. Unless otherwise indicated below, each person or entity has an address in care of our principal executive offices at 7102 Commerce310 Seven Springs Way, Suite 400 and 500, Brentwood, Tennessee 37027.
| | | | | | | | | | | | | | | | |
Name of Beneficial Owner (1) | Amount, Nature and Percentage of Beneficial Ownership of Common Units (2) | | Amount and Nature of Beneficial Ownership of Common Stock (2) |
| Delek Logistics Partners, LP | Delek US Holdings, Inc. |
| (#) | (%) | | | (#) (3) | (%) |
| Beneficial Owners of More Than 5% of Units: | | | | | | |
Delek US Holdings, Inc. (4) | 34,311,278 | 78.7 | | | | n/a | n/a |
| Directors, Director Nominees and NEOs: | | | | | | |
Avigal Soreq (5) | 10,372 | | * | | | 50,254 | | * |
Ezra Uzi Yemin (6) | 198,670 | | * | | | 957,837 | | 1.5 | |
| Sherri A. Brillon | 5,260 | | * | | | — | | * |
| Charles J. Brown, III | 11,879 | | * | | | — | | * |
| Eric D. Gadd | 26,704 | | * | | | — | | * |
| Frederec Charles Green | 74,946 | | * | | | 120,931 | | * |
| Ron W. Haddock | 18,610 | | * | | | 17,517 | | * |
| Gennifer F. Kelly | 8,074 | | * | | | 9,199 | | * |
Reuven Spiegel (7) | 8,088 | | * | | | 20,473 | | * |
Denise McWatters (8) | 4,514 | | * | | | 14,965 | | * |
Joseph Israel (9) | 1,069 | | * | | | 2,250 | | * |
Odely Sakazi (10) | 2,486 | | * | | | 6,444 | | * |
All directors, all director nominees, all NEOs and all executive officers as a group (12 persons) | 370,672 | | * | | | 1,199,870 | | 1.9 | |
|
| | | | | | | | | | | |
Name of Beneficial Owner (1) | Amount, Nature and Percentage of Beneficial Ownership of Common Units (2) | Amount, Nature and Percentage of Beneficial Ownership of Subordinated Units (2) | Amount, Nature and Percentage of Beneficial Ownership of General Partner Units (2) | Amount and Nature of Beneficial Ownership of Common Stock (2) |
| Delek Logistics Partners, LP | Delek US Holdings, Inc. |
| (#) | (%) | (#) | (%) | (#) | (%) | (#) (3) | (%) |
| Beneficial Owners of More Than 5% of Units: | | | | | | | | |
Delek US Holdings, Inc. (4) | 15,294,046 | 62.7 | — | n/a | 497,604 |
| 100.0 | n/a | n/a |
Advisory Research Inc. (5) | 1,643,562 | 6.7 | — | n/a | — | n/a | n/a | n/a |
| Directors, Director Nominees and NEOs: | | | | | | | | |
Ezra Uzi Yemin (6) | 261,570 |
| * | — | n/a | — | n/a | 368,367 | * |
| Charles Brown | 10,919 |
| * | — | n/a | — | n/a | — | n/a |
| Mark Baker Cox | 29,626 |
| * | — | n/a | — | n/a | 39,000 | * |
| Francis C. D'Andrea | 4,768 |
| * | — | n/a | — | n/a | — | n/a |
| Eric Gadd | 8,494 |
| * | — | n/a | — | n/a | — | n/a |
Assi Ginzburg (7) | 16,510 |
| * | — | n/a | — | n/a | 33,872 | * |
Frederec Green (8) | 68,552 |
| * | — | n/a | — | n/a | 78,421 |
| * |
| Ron W. Haddock | — |
| * | — | n/a | — | n/a | — | n/a |
| Reuven Spiegel | 6,494 |
| * | — | n/a | — | n/a | — | n/a |
| Kevin Kremke | — |
| * | — | n/a | — | n/a | — | n/a |
| Melissa Buhrig | — |
| * | — | n/a | — | n/a | — | n/a |
| Alan P. Moret | — |
| * | — | n/a | — | n/a | — | n/a |
| Dan Gordon | 2,181 |
| * | — | n/a | — | n/a | 15,498 | * |
All directors, all director nominees, all NEOs and all executive officers as a group (13 persons) | 409,114 | 1.7 | | | | | 535,158 | * |
| | | | | |
*100 | | Less than 1% of our issued and outstanding common units of Delek Logistics Partners, LP or issued and outstanding shares of Delek US Holdings, Inc. Common Stock, as applicable. |
Directors, Executive Officers, Corporate Governance, and Security Ownership
* Less than 1% of our issued and outstanding common units of Delek Logistics Partners, LP or issued and outstanding shares of Delek US Holdings, Inc. Common Stock, as applicable.
(1) Unless otherwise indicated, the address for all beneficial owners is 310 Seven Springs Way, Suite 400 and 500, Brentwood, Tennessee 37027.
(2) For purposes of this table, a person is deemed to have “beneficial ownership” of any securities when such person has the right to acquire them within 60 days after the Measurement Date. The percentage of our units beneficially owned is based on a total of 43,616,811 common units representing limited partner interests issued and outstanding on the Measurement Date. The percentage ownership of Delek US Holdings, Inc. Common Stock is based on a total of 64,019,267 shares issued and outstanding on the Measurement Date (excluding securities held by or for the account of the registrant or its subsidiaries). For purposes of computing the percentage of outstanding securities held by each person named above, any securities which such person has the right to acquire within 60 days after the Measurement Date are deemed to be outstanding but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
(3) For non-qualified stock options (“NQSOs”) and restricted stock units (“RSUs”) under the Delek US Holdings, Inc. 2016 Long-Term Incentive Plan, we report shares equal to the number of RSUs that are vested or that will vest within 60 days of the Measurement Date.
(4) Subsidiaries of Delek US Holdings, Inc. hold the common limited partner units. Delek US Energy, Inc. and Delek Logistics Services Company directly held 20,745,868 and 13,565,410 common limited partner units, respectively. Delek US Holdings, Inc. is the ultimate parent of each of these entities and may, therefore, be deemed to beneficially own the units held by each such entity. Delek US Holdings, Inc. files information with, or furnishes information to, the SEC pursuant to the information requirements of the Exchange Act, as amended.
(5) The number of our common units owned includes 2,186 phantom units that will vest within 60 days of the Measurement Date. the number of shares of Delek US Holdings, Inc. Common Stock includes 5,624 RSUs that will vest within 60 days of the Measurement Date.
(6) 158,467 of our units and 691,945 shares of Delek US Holdings, Inc. Common Stock are held of record by Yemin Investments, L.P., a limited partnership of which Mr. Yemin is the sole general partner. The number of our common units owned includes 4,906 phantom units that will vest within 60 days of the Measurement Date. The number of shares of Delek US Holdings, Inc. Common Stock includes 16,435 RSUs that will vest within 60 days of the Measurement Date.
(7) The number of our common units owned includes 758 phantom units that will vest within 60 days of the Measurement Date. the number of shares of Delek US Holdings, Inc. Common Stock includes 1,685 RSUs that will vest within 60 days of the Measurement Date.
(8) The number of our common units owned includes 785 phantom units that will vest within 60 days of the Measurement Date. The number of shares of Delek US Holdings, Inc. Common Stock includes 2,297 RSUs that will vest within 60 days of the Measurement Date.
(9) The number of our common units owned includes 425 phantom units that will vest within 60 days of the Measurement Date. the number of shares of Delek US Holdings, Inc. Common Stock includes 895 RSUs that will vest within 60 days of the Measurement Date.
(10) The number of our common units owned includes 244 phantom units that will vest within 60 days of the Measurement Date. The number of shares of Delek US Holdings, Inc. Common Stock includes 701 RSUs that will vest within 60 days of the Measurement Date.
| | |
| (1)
Unless otherwise indicated, the address for all beneficial owners is 7102 Commerce Way, Brentwood, Tennessee 37027. |
| |
(2)
| For purposes of this table, a person is deemed to have “beneficial ownership” of any securities when such person has the right to acquire them within 60 days after the Measurement Date. The percentage of our units beneficially owned is based on a total of 24,382,633 common units representing limited partner interests and 497,604 general partner units issued and outstanding on the Measurement Date. The percentage ownership of Delek US Holdings, Inc. Common Stock is based on a total of 83,919,132 shares issued and outstanding shares on the Measurement Date (excluding securities held by or for the account of the registrant or its subsidiaries). For purposes of computing the percentage of outstanding securities held by each person named above, any securities which such person has the right to acquire within 60 days after the Measurement Date are deemed to be outstanding but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. |
| |
(3)
| For non-qualified stock options (“NQSOs”) and restricted stock units (“RSUs”) under the Delek US Holdings, Inc. 2006 Long-Term Incentive Plan, or 2016 Long-Term Incentive Plan, we report shares equal to the number of NQSOs or RSUs that are vested or that will vest within 60 days of the Measurement Date. For stock appreciation rights (“SARs”) under the Delek US Holdings, Inc. 2006 Long-Term Incentive Plan, or 2016 Long-Term Incentive Plan, we report the shares that would be delivered upon exercise of SARs that are vested or that will vest within 60 days of the Measurement Date (which is calculated by multiplying the number of SARs by the difference between the $33.97 fair market value of Delek US Holdings, Inc. Common Stock on the Measurement Date and the exercise price divided by $33.97). |
| |
(4)
| Subsidiaries of Delek US Holdings, Inc. hold the common units and general partner units. Lion Oil Company and Delek Marketing & Supply, LLC directly hold 12,611,465 and 2,682,581 common units, respectively. Delek Logistics GP, LLC directly holds all general partner units. Delek US Holdings, Inc. is the ultimate parent of each of these entities and may, therefore, be deemed to beneficially own the units held by each such entity. Delek US Holdings, Inc. files information with, or furnishes information to, the United States Securities and Exchange Commission (the "SEC") pursuant to the information requirements of the Securities Exchange Act of 1934, as amended. |
| |
(5)
| According to a Schedule 13G/A filed with the SEC on February 13, 2017 by Advisory Research Inc. with an address of 180 North Stetson Avenue, Suite 5500, Chicago, Illinois 60601 and Piper Jaffray Companies with an address of 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402. The Schedule 13G/A reports that Advisory Research Inc. has sole voting power with respect to 1,639,937 of the reported units and sole dispositive power with respect to all of the reported units and Piper Jaffray Companies has shared voting power with respect to 1,639,937 of the reported units and shared dispositive power with respect to all of the reported units. |
| |
(6)
| 33,500 of our units and 106,802 shares of Delek US Holdings, Inc. Common Stock are held of record by Yemin Investments, L.P., a limited partnership of which Mr. Yemin is the sole general partner. Delek US Holdings, Inc. Common Stock includes 11,654 RSUs that will vest within 60 days of the Measurement Date and 21,261 performance-vesting RSUs for completed performance periods that will vest within 60 days of the Measurement Date. |
| |
(7)
| Delek US Holdings, Inc. Common Stock includes 8,033 RSUs that will vest within 60 days of the Measurement Date. |
| |
(8)
| Delek US Holdings, Inc. Common Stock includes 5,326 RSUs that will vest within 60 days of the Measurement Date. |
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information as of December 31, 20172023 regarding our general partner's equity compensation plans.
| | | | | | | | | | | |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) |
| Equity compensation plans approved by security holders | 842,271 | N/A | 144,750 |
| Equity compensation plans not approved by security holders | — | N/A | — |
| TOTAL | 842,271 | N/A | 144,750 |
(a) The amounts in column (a) of this table reflect only phantom units that have been granted under the LTIP. No Awards (as defined under the LTIP) have been made other than the phantom units, each of which represent rights to receive (upon vesting and payout) one common unit in the Partnership or an amount of cash equal to the fair market value of such unit. These phantom units vest over one- to five-year service periods from the date of grant.
(b) Column (b) of this table is not applicable because phantom units do not have an exercise price.
(c) The LTIP was adopted by our general partner in connection with the closing of the initial public offering and provides for the making of certain awards, including common units, restricted units, phantom units, unit appreciation rights and distribution equivalent rights. The LTIP did not require approval by our limited partners. Additionally, On June 9, 2021, the LTIP was amended to increase the number of units representing limited partner interest in the Partnership (the "Common Units") authorized for issuance by 300,000 Common Units to 912,207 Common Units. Additionally, the term of the LTIP was extended to June 9, 2031.
|
| | | |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | (b) | (c) |
| Equity compensation plans approved by security holders | 546,784 | N/A | 123,031 |
| Equity compensation plans not approved by security holders | — | N/A | — |
| TOTAL | 546,784 | N/A | 123,031 |
| | | | | |
(a) | The amounts in column (a) of this table reflect only phantom units that have been granted under the LTIP. No Awards (as defined under the LTIP) have been made other than the phantom units, each of which represent rights to receive (upon vesting and payout) one common unit in the Partnership or an amount of cash equal to the fair market value of such unit. These phantom units vest over one- to five-year service periods from the date of grant. |
| |
(b) | Column (b) of this table is not applicable because phantom units do not have an exercise price. |
| |
(c)101 | | The LTIP was adopted by the Delek Logistics GP, LLC in connection with the closing of our Offering and provides for the making of certain awards, including common units, restricted units, phantom units, unit appreciation rights and distribution equivalent rights. For information about the LTIP, which did not require approval by our limited partners, refer to Item 11 of this Annual Report on Form 10-K. |
Directors, Executive Officers, Corporate Governance, and Security Ownership
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE
The information required by Item 407(a) of Regulation S-K is included in Item 10. Directors, Executive OfficersCertain Relationships and Corporate Governance above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Transactions
As of February 26, 2018,21, 2024, Delek Holdings and its affiliates owned 15,294,04634,311,278 of our common units and 497,604 generallimited partner units, as well as incentive distribution rights, which collectively represents a 63.5%78.7% ownership interest in the Partnership. Certain transactions with Delek Holdings and its affiliated entities are considered to be related party transactions under Item 404 of Regulation S-K because Delek Holdings and its affiliates including our general partner, own more than five percent of our equity interests. In addition, Messrs. Yemin, Ginzburg, Kremke, Green, Gordon, SerffSoreq, Spiegel, and SoreqYemin and Ms. BuhrigMcWatters serve as executive officers of both Delek Holdings and our general partner.
Distributions and Payments to Delek and Our General PartnerHoldings
OurPursuant to our Partnership Agreement, generally requires uswe are required to make quarterly cash distributions of 98%100% of our "available cash" to limited partners, including Delek and 2.0% to our general partner (assuming it makes any capital contributions necessary to maintain its 2.0% interest in us). In addition, if distributions exceed the minimum quarterly distribution and other higher target distribution levels, the general partner may be entitled to increasing percentages of the distributions, up to 48.0% of the distributions above the highest target distribution level. Our distribution made for the quarter ended December 31, 2017 was made above the highest target distribution level.Holdings. During 2017,2023, we made cash distributions totaling $86.2$180.0 million to our unitholders, of which $60.1$141.5 million was paid to Delek Holdings and our general partner.
Acquisitions
On February 26, 2018, a definitive agreement was entered into between the Partnership and Delek for the Partnership to acquire certain logistics assets primarily located adjacent to Delek's Big Spring, Texas refinery for $315.0 million. In addition, the parties expect to enter into a new wholesale marketing agreement, whereby the Partnership will market certain finished products produced at the Big Spring refinery to various branded and unbranded customers in return for a marketing fee. The Partnership and various of their subsidiaries also expect
to enter into and amend certain existing contracts, such as a new throughput and tankage agreement for the Big Spring Logistics Assets. The transaction and related agreements are to be approved by the Conflicts Committee of Delek Logistics’ general partner. This transaction is described in greater detail in Note 21 to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Commercial Agreements, Omnibus Agreement and Operations and Management Services Agreement
We have entered intoThe 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 andHoldings. In return, Delek Holdings commits to minimum monthly throughput volumes of crude oil, intermediate and refined products. See Note 4 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a discussion of our material commercial agreements with Delek. The amounts paid under those agreements and other non-contractual arrangements with Delek Holdings during 2017 are as follows:
Delek, directly or indirectly, paid us approximately $2.1 million pursuant to the Memphis terminalling agreement and $1.2 million for terminalling services at our Nashville, Tennessee terminal;
Delek paid us approximately $9.3 million pursuant to the East Texas Crude Logistics System pipeline and tankage agreement;
Delek paid us approximately $20.4 million pursuant to the East Texas marketing agreement;
Delek paid us approximately $3.6 million pursuant to the amended and restated services agreement for the Big Sandy terminal and pipeline;
Delek paid us approximately $20.3 million pursuant to the Tyler Terminal and Tank Assets Throughput and Tankage Agreement;
Delek, directly or indirectly, paid us approximately $2.0 million pursuant to the North Little Rock terminalling services agreement;
Delek, directly or indirectly, paid us approximately $19.5 million pursuant to the El Dorado Terminal and Tank Assets Throughput and Tankage Agreement;
Delek paid us approximately $4.3 million related to revenue earned on our Greenville-Mount Pleasant Assets;
Delek paid us approximately $10.8 million related to revenue earned on trucking services;
Delek paid us approximately $6.1 million related to the El Dorado Rail Offloading Racks; and
Delek paid us approximately $2.0 million related to the Tyler Crude Tank.
2023.
For a discussion of a third party's involvement in certain of theseour agreements, see Item 1. "Business—Items 1 and 2. "Business and Properties—Commercial Agreements—Delek'sDelek Holdings' Crude Oil and Refined Products Supply and Offtake Arrangement.Intermediation Agreement."
Omnibus Agreement
Omnibus Agreement.The Omnibus Agreement (as defined in Note 4 to our consolidated financial statements) governs a number of important aspects of the Partnership’s business relationship with Delek.Delek Holdings. For a more extensive summary of this agreement and its amendment history, see ItemItems 1 “Business—and 2. “Business and Properties—Commercial Agreements—Other Agreements with Delek.Delek Holdings.” The Omnibus Agreement addresses, among other things, the following matters:
•an agreement whereby Delek Holdings will not compete with us under certain circumstances;
•our right of first offer to acquire certain of Delek'sDelek Holdings' logistics assets, including certain terminals, storage facilities and other related assets located at the Tyler and El Dorado Refineries and, under specified circumstances, logistics and marketing assets that Delek Holdings may acquire or construct in the future;
Delek's•Delek Holdings' right of first refusal to purchase our assets that serve its refineries;
•our obligation to pay an annual fee to Delek currently in the amount of $3.7 million,Holdings for Delek'sDelek Holdings' provision of centralized corporate services, including executive management services of Delek Holdings employees who devote less than 50% of their time to our business, financial and administrative services, information technology services, legal services, health, safety and environmental services, human resource services, and insurance administration;
Delek's•Delek Holdings' reimbursement to us for certain operating expenses and certain maintenance capital expenditures and Delek'sDelek Holdings' indemnification of us for certain matters, including environmental, title and tax matters;
•reimbursement to us for certain designated periods of time related to the date of acquisition of the relevant asset for any operating expenses in excess of certain thresholds per year that we incur for inspections, maintenance and repairs to any of the storage tanks contributed to us by Delek Holdings that are necessary to comply with the DOT pipeline integrity rules and certain API storage tank standards; and
•reimbursement to us for certain designated periods of time related to the date of acquisition of the relevant asset for all non-discretionary maintenance capital expenditures, other than those required to comply with applicable environmental laws and regulations, in excess of certain thresholds for such 12-month period and per year that we make with respect to the assets contributed to us by Delek Holdings for which we have not been reimbursed as described above.
PursuantSee Note 4 and Note 14 to the termsconsolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a discussion of and the amounts paid under the Omnibus Agreement we paid Delek or our general partner approximately $4.0 million and $21.7 million during the year ended December 31, 2017 for general corporate and administrative services and operational and management services, respectively. Additionally, we paid Delek $12.1 million for various other operational and general and administrative services.2023.
We were reimbursed $0.3 million pursuant to the Omnibus Agreement in relation to expenses incurred in connection with crude oil releases. We were also reimbursed $3.5 million for certain capital improvements pursuant to the terms of the Omnibus Agreement. In addition, we were reimbursed $0.9 million million for tax related to Delek's refining operations.
Other Related Party Transactions
In addition to the agreements described above, we purchased finished product and bulk biofuelsrefined products from Delek Holdings, totaling $41.5$396.3 million and $13.5 million, respectively, during the year ended December 31, 2017.2023. We sold RINs in the amount of approximately $5.6$12.8 million to Delek Holdings during the year ended December 31, 2017. We also sold $0.8 million2023.
Directors, Executive Officers, Corporate Governance, and Security Ownership
Related Party Revolving Credit Facility
On November 6, 2023, the Partnership and certain of finished product in our west Texas operations to Delek and Alon USA, an equity method investee of Delek prior to the Delek/Alon merger during the year ended December 31, 2017.
Weits subsidiaries, as guarantors, entered into a certain Promissory Note (the “Related Party Revolving Credit Facility”) with Delek Holdings. The Related Party Revolving Credit Facility provides for revolving borrowings with aggregate commitments of $70.0 million comprised of a (i) $55.0 million senior secured revolving credittranche and a (ii) $15.0 million subordinated tranche (the “Subordinated Tranche”), with the initial borrowings under the Subordinated Tranche conditioned upon the Partnership and Delek Holdings reaching an agreement on November 7, 2012, with Fifth Third Bank, National Association, as administrative agent under the DKL Credit Facility, on subordination provisions and a syndicateother material terms related to the Subordinated Tranche. The Related Party Revolving Credit Facility will bear interest at Term SOFR (as defined in the Related Party Revolving Credit Facility) plus 3.00% and matures on June 30, 2028. The Related Party Revolving Credit Facility contains certain affirmative covenants, mandatory prepayments and events 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").default that the Partnership considers to be customary for an arrangement of this sort. The obligations under the Second AmendedRelated Party Revolving Credit Facility are unsecured.
DPG Management Agreement
The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and Restated Credit Agreement are secured by first priority liens on substantially alloperating agreement (the "DPG Management Agreement") for the construction of gathering systems in the Permian Basin. The majority of the Partnership'sgathering systems has been constructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and its U.S. subsidiaries' tangible and intangible assets. Additionally, Delek Marketing & Supply, LLC ("Delek Marketing") provides a limited guarantyare still subject to the terms of the Partnership's obligationsDPG Management Agreement. The Partnership is also considered the operator for the project and is responsible for the oversight of the project design, procurement and construction of project segments and for providing other related services. See Note 4 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a discussion of and the amounts paid 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 December 31, 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 CreditDPG Management Agreement the guaranty and the transactions related to it are described in greater detail in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Position and Indebtedness.”
during 2023.
Procedures for Review, Approval or Ratification of Transactions with Related PartiesParty
TheOur Board of Directors of our general partner has adopted a formal written related party transactions policy to establish procedures for the notification, review, approval, ratification and ratificationdisclosure of transactions with related parties.party transactions. The Board of Directors reviews this policy annually. For the purposes of this policy, a related party is defined as (i) follows:
I.any director or executive officer of our general partner, (ii) partner;
II.any unitholder owning in excess of 5% of our common units or an affiliate of our general partner, (iii) partner;
III.any immediate family member of an individual of any such person, (iv) person;
IV.any entity in which we have an investment that is accounted for under the equity method of accounting,accounting; and (v)
V.any entity that is owned or controlled by someone listed in (i)I - (iv)IV above or any entity in which someone listed in (i)I - (iv)IV above has a substantial ownership interest or control of such entity. A
Other transactions that are undertaken pursuant to existing agreements and the ongoing performance of which meet criteria prior to filing or approval requirements, a related party transaction under the policy is generally expected to be a transaction in which we are a participant with a related party and which requires disclosure under Item 404 of Regulation S-K, other than transactions that are undertaken pursuant to existing agreements and the ongoing performance of which meet certain prior filing or approval requirements.S-K. Transactions that are otherwise resolved under Section 7.9 of the Partnership Agreement are not required to be reviewed or approved under the policy.
Subject to certain exceptions, the policy requires that related party transactions, as defined by the policy, be approved by the Board of Directors of the general partner or an authorized committee of the Board, of Directors, subject to the guidelines of the policy. Pursuant to the policy, the Conflicts Committee of the Board of Directors of our general partner is generally considered the best suited to review related party transactions and has been authorized by the Board of Directors to do so. If a related party transaction, that would otherwise require approval under the policy, is not approved prior to entry into such transaction, management may enter into such transaction, subject to ratification by the Board or an authorized committee of the Board.
The policy further sets forth certain categories of transactions between the Partnership and its subsidiaries on one hand and Delek Holdings and its subsidiaries on the other hand that are deemed to be approved by the Board of Directors and are therefore able to be effected by management of the general partner under the relevant general authorization policies and procedures and after taking into account all relevant facts and circumstances. Additionally, the policy effectively requires that all related party transactions that (i) that:
I.involve the purchase and sale of products or services that are effected at either (x) cost (including, when relevant, a nominal fee for services) or (y) the then-prevailing market prices that we would pay or charge to third parties ("Market Based Transactions") undertaken outside the ordinary course of business and involve an aggregate amount of more than $2.5 million annuallyannually; or (ii)
II.are not Market Based Transactions and are undertaken outside the ordinary course of business,business; or (iii)
III.are not Market Based Transactions and are undertaken within the ordinary course of business and involve an aggregate amount of more than $2.5 million annually be approved by the Board of Directors or an authorized committee thereof. Pursuant to the policy, the Conflicts Committee is generally the best suited to review these transactions and it is expected they will be the committee that does so.
The Board of Directors of our general partner has also adopted a written code of business conduct and ethics, under which a director or officer of the general partner or of any of our subsidiaries would be expected to bring to the attention of the Audit Committee ofor the Board of Directors of the general partner or the general partner's General Counsel, any conflict or potential conflict of interest that may arise between such party, on the one hand, and us, on the other hand.
Principal Accountant Fees and Services
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees
Audit fees.Audit fees of $709,573$968,600 and $631,199$1,141,600 paid for the services of Ernst & Young LLP during fiscal years 20172023 and 2016,2022, respectively, include services related to the audits of our consolidated financial statements and internal controls over financial reporting, reviews of our quarterly condensed consolidated financial statements and audit services provided in connection with acquisitions, and investments and regulatory filings. Fees and expenses are for services in connection with the audit of our fiscal years ended December 31, 20172023 and December 31, 2016,2022, regardless of when the fees and expenses were paid.
Audit-related fees.Audit-related fees of $70,300
No audit-related fees were paid for the services of Ernst & Young LLP during fiscal year 2016 include services related to agreed upon procedures for usyears 2023 and our subsidiaries related to acquisition due diligence services. No audit-related fees were paid in 2017.2022.
Tax Fees and All Other Fees.Fees
No tax fees or other fees were paid for the services of Ernst & Young LLP during fiscal years 20172023 and 2016.2022.
TheAll of the fees described above were approved in accordance with the Audit Committee has considered and determined that the provision of non-audit services by our independent registered public accounting firm is compatible with maintaining auditor independence.pre-approval policy described below.
Pre-Approval Policies and Procedures. Procedures
In general, all engagements performed by our independent registered public accounting firm, whether for auditing or non-auditing services, must be pre-approved by the Audit Committee. The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other non-audit services that may be provided by the independent registered public accounting firm to the Partnership. The policy (a) identifies the guiding principles that must be considered by the Audit Committee in approving services to ensure that the independent registered public accounting firm’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth pre-approval requirements for all permitted services. During the years ended December 31, 20172023 and 2016,2022, all of the services performed for us by Ernst & Young LLP were pre-approved by the Audit Committee.
Exhibits and Financial Statement Schedules
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Certain Documents Filed as Part of this Annual Report on Form 10-K:
| |
1. | Financial Statements. The accompanying Index to Financial Statements and Schedule on page F-1 of this Annual Report on Form 10-K is provided in response to this item. |
| |
2. | List of Financial Statement Schedules. All schedules are omitted because the required information is either not present, not present in material amounts or included within the Consolidated Financial Statements. |
1.Financial Statements. The accompanying Index to Financial Statements on page F-1 of this Annual Report on Form 10-K is provided in response to this item.
2.List of Financial Statement Schedules. All schedules are omitted because the required information is either not present, not present in material amounts or included within the Consolidated Financial Statements.
EXHIBITS
3.Exhibits - See below.
EXHIBITS
| | | | | | | | | | | |
| Exhibit No. | | Description |
| 1.1 | | | |
Exhibit No. | | Description |
1.1 | | | PurchaseEquity Distribution Agreement, dated as of May 18, 2017,November 14, 2022, by and among the Partnership, Finance Corp., the Guarantors named thereinDelek Logistics GP, LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the Initial Purchasers named thereinRBC Capital Markets, LLC (incorporated by reference to Exhibit 1.1 toof the Partnership’s Form 8-K filed on May 24, 2017)November 14, 2022). |
3.12.1 | | | |
| 2.2 | | | |
| 2.3 | | | |
| 2.4 | | | |
| 2.5 | | | |
| 3.1 | | |
|
3.2(a)3.2 | | |
|
3.2(b)3.3 | | # | |
3.33.4 | | |
|
3.43.5 | | |
|
| 4.1 | # | | |
| 4.2 | | | |
4.24.3 | | | |
4.34.4 | | | Registration Rights Agreement,Supplemental Indenture, dated as of May 23, 2017,March 22, 2018, among DKL Big Spring, LLC, Delek Logistics Partners, LP, Delek Logistics Finance Corp., the Guarantors named thereinother guarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the initial purchasersU.S. Bank, National Association (incorporated by reference to Exhibit 4.3 to the Partnership's Form 8-K filed on May 24, 2017).
|
10.1 | * | |
|
10.2 | * | |
|
10.3 | * | |
|
10.44.5 | | *# | Executive Employment Agreement,Second Supplemental Indenture, dated as of February 27, 2018, by28, 2020, among DKL Pipeline, LLC, Delek Logistics Partners, LP, Delek Logistics Finance Corp., the other guarantors and between Alan P. Moret and Delek US Energy, Inc.
|
10.5 | * | |
|
10.64.6 | | | Third Supplemental Indenture, dated March 26, 2020, among DKL Permian Gathering, LLC, Delek Logistics Partners, LP, Delek Logistics Finance Corp., the other guarantors and U.S. Bank, N.A. (incorporated by reference to Exhibit 4.2 of the Partnership's Form 8-K filed on April 6, 2020). |
| 4.7 | | | |
| 4.8 | | | |
| 4.9 | | | |
| 4.10 | | | |
| 4.11 | | | |
| 4.12 | | | |
| 10.1 | ++ | | |
10.710.2 | | | |
|
| 10.4 | | | Marketing Agreement, dated as of March 20, 2018 and effective as of March 1, 2018, by and among Alon USA, LP, DKL Big Spring, LLC, and for the limited purposes specified therein, Delek US Holdings, Inc. (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 8-K filed on March 26, 2018). |
10.910.5 | | | |
10.1010.6 | | | |
10.1110.7 | | * | |
| 10.8 | | | |
| 10.9 | | | |
| 10.10 | | | |
| 10.11 | | | Pipelines, Storage and Throughput Facilities Agreement (Big Spring Refinery Logistics Assets and Duncan Terminal), dated March 20, 2018 and effective as of March 1, 2018, by and among Alon USA, LP, DKL Big Spring, LLC, for the limited purposes specified therein, Delek US Holdings, Inc., and for the limited purposes specified therein, J. Aron & Company LLC (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K filed on March 26, 2018). |
| 10.12 | | | |
| 10.13 | | | |
| 10.14 | | | |
| 10.15 | | | |
| 10.16 | | | Pipelines and Storage Facilities Agreement, dated November 7, 2012, by and among Lion Oil Company, Delek Logistics Partners, LP, SALA Gathering Systems, LLC, El Dorado Pipeline Company, LLC, Magnolia Pipeline Company, LLC and J. Aron & Company (incorporated by reference to Exhibit 10.9 to the Partnership's Form 8-K filed on November 7, 2012, SEC File No. 001-35721). |
| 10.17 | | | First Amendment to Pipelines and Storage Facilities Agreement, dated as of December 14, 2018, by and among Lion Oil Company, Delek Logistics Partners, LP, SALA Gathering Systems, LLC, El Dorado Pipeline Company, LLC, Magnolia Pipeline Company, LLC and J. Aron & Company (incorporated by reference to Exhibit 10.23 to the Partnership's Form 10-K filed on March 1, 2019). |
| 10.18 | | |
|
10.1210.19 | | | |
| 10.20 | | | Big Spring Asphalt Services Agreement, dated March 20, 2018 and effective as of March 1, 2018, by and among Alon USA, LP, DKL Big Spring, LLC, for the limited purposes specified therein, Delek US Holdings, Inc., and for the limited purposes specified therein, J. Aron & Company LLC (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K filed on March 26, 2018). |
| 10.21 | | | Third Amended and Restated Omnibus Agreement, dated as of March 31, 2015, by and among Delek US Holdings, Inc., Lion Oil Company, Delek Logistics Operating, LLC, Delek Marketing & Supply, LP, Delek Refining, Ltd., Delek Logistics Partners, LP, Paline Pipeline Company, LLC, SALA Gathering Systems, LLC, Magnolia Pipeline Company, LLC, El Dorado Pipeline Company, LLC, Delek Crude Logistics, LLC, Delek Marketing-Big Sandy, LLC, DKL Transportation, LLC and Delek Logistics GP, LLC (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 8-K filed on April 6, 2015).
|
| | | | | | | | | | | |
| 10.22 | | | First Amendment to Third Amended and Restated Omnibus Agreement, dated as of August 3, 2015, by and among Delek US Holdings, Inc., Lion Oil Company, Delek Logistics Operating, LLC, Delek Marketing & Supply, LP, Delek Refining, Ltd., Delek Logistics Partners, LP, Paline Pipeline Company, LLC, SALA Gathering Systems, LLC, Magnolia Pipeline Company, LLC, El Dorado Pipeline Company, LLC, Delek Crude Logistics, LLC, Delek Marketing-Big Sandy, LLC, DKL Transportation, LLC and Delek Logistics GP, LLC (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 10-Q filed on August 6, 2015). |
10.1410.23 | | | SecondThird Amendment and Restatement to Schedules to Third Amended and Restated CreditOmnibus Agreement, dated and effective as of December 30, 2014, by and among Delek Logistics Partners, LP, Delek Logistics Operating, LLC, Delek Marketing GP, LLC, Delek Marketing & Supply, LP, Delek Crude Logistics, LLC, Delek Marketing-Big Sandy, LLC, Magnolia Pipeline Company, LLC, El Dorado Pipeline Company, LLC, SALA Gathering Systems, LLC, Paline Pipeline Company, LLC, DKL Transportation, LLC and Fifth Third Bank, as administrative agent, and a syndicate of lendersMay 15, 2020 (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K filed on January 6, 2015).
|
10.15 | | | Contribution, Conveyance and Assumption Agreement, dated November 7, 2012, by and among Delek Logistics Partners, LP, Delek Logistics GP, LLC, Delek Logistics Operating, LLC, Delek Crude Logistics, LLC, Delek US Holdings, Inc., Delek Marketing & Supply, LLC, Delek Marketing and Supply, LP, Lion Oil Company and Delek Logistics Services Company (incorporated by reference to Exhibit 10.4 to10.2 of the Partnership's Form 8-K filed on November 7, 2012, SEC File No. 001-35721)May 18, 2020). |
10.1610.24 | *++ | | |
10.17 | * | | |
10.18 | | | |
10.19 | | |
|
10.20 | | | Pipelines and Storage Facilities Agreement, dated November 7, 2012, by and among Lion Oil Company, Delek Logistics Partners, LP, SALA Gathering Systems, LLC, El Dorado Pipeline Company, LLC, Magnolia Pipeline Company, LLC and J. Aron & Company (incorporated by reference to Exhibit 10.9 to the Partnership's Form 8-K filed on November 7, 2012, SEC File No. 001-35721). |
10.21 | * | |
|
10.22 | * | |
|
10.23 | * | |
|
10.24 | | |
|
10.25 | | | |
|
| | | |
10.26 | | | |
10.27 | | | |
10.28 | | | |
10.29 | | | |
10.30 | | | |
10.31 | ++ | | |
10.3210.25 | ++ | | |
21.110.26 | | # | |
| 10.27 | | | Third Amended and Restated Credit Agreement, dated as of September 28, 2018, among Delek Logistics Partners, LP and each other borrower referenced therein, as borrowers; Fifth Third Bank, as administrative agent; a syndicate of lenders; Bank of America, N.A., BBVA Compass, MUFG Bank, Ltd. And Royal Bank of Canada as co-syndication agents; and Barclays Bank PLC, Citizens Bank, N.A., PNC Bank, National Association, U.S. Bank National Association, Bank Hapoalim B.M., Regions Bank and SunTrust Bank as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K filed on October 4, 2018). |
| 10.28 | | | First Amendment to Third Amended and Restated Credit Agreement, dated August 12, 2020, by and among Delek Logistics Partners, LP and each other borrower referenced therein, as borrowers, Fifth Third Bank, N.A., as Administrative Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.1 of the Partnership's Form 8-K filed on August 14, 2020). |
| 10.29 | | | |
| 10.30 | | | |
| 10.31 | | | |
| 10.32 | | | Fourth Amended and Restated Senior Secured Revolving Credit Facility, dated October 13, 2022, by and among the Partnership, Fifth Third Bank, National Association, as administrative agent; a syndicate of lenders; Fifth Third, BofA Securities Inc., PNC Bank Capital Markets LLC, MUFG Bank, Ltd., Wells Fargo Bank, N.A., Citizens Bank, N.A. and Royal Bank of Canada, as co-syndication agents; and Barclays Bank PLC, U.S. Bank National Association, Regions Bank and Truist Bank as co-documentation agents (incorporated by reference to Exhibit 10.1 of the Partnership’s Form 8-K filed on October 17, 2022). |
| 10.33 | | | Assignment and Assumption Agreement and Guaranty, dated as of March 22, 2022, by and among Lion Oil Trading & Transportation, LLC, DK Trading & Supply, LLC, Delek Logistics Operating, LLC, Lion Oil Company, LLC, and Delek US Energy, Inc. (incorporated by reference to Exhibit 10.1 of the Partnership’s Form 10-Q filed on November 8, 2022). |
| 10.34 | | | |
| 10.35 | | | |
| 10.36 | | | |
| 10.37 | | | |
| 10.38 | | | |
| 10.39 | * | | |
| 10.40 | * | | |
| 10.41 | * | | |
| 10.42 | * | | |
| | | | | | | | | | | |
| 10.43 | * | | |
| 10.44 | | | |
| 10.45 | # | | |
| 10.46 | | | First Amendment to the Fourth Amended and Restated Senior Secured Revolving Credit Facility, dated November 6, 2023, by and among the Partnership, Fifth Third Bank, National Association, as administrative agent; a syndicate of lenders; Fifth Third, BofA Securities Inc., PNC Bank Capital Markets LLC, MUFG Bank, Ltd., Wells Fargo Bank, N.A., Citizens Bank, N.A. and Royal Bank of Canada, as co-syndication agents; and Barclays Bank PLC, U.S. Bank National Association, Regions Bank and Truist Bank as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 10-Q filed on November 8, 2023). |
| 10.47 | | | Second Amendment to the Fourth Amended and Restated Senior Secured Revolving Credit Facility, dated November 6, 2023, by and among the Partnership, Fifth Third Bank, National Association, as administrative agent; a syndicate of lenders; Fifth Third, BofA Securities Inc., PNC Bank Capital Markets LLC, MUFG Bank, Ltd., Wells Fargo Bank, N.A., Citizens Bank, N.A. and Royal Bank of Canada, as co-syndication agents; and Barclays Bank PLC, U.S. Bank National Association, Regions Bank and Truist Bank as co-documentation agents (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 10-Q filed on November 8, 2023). |
| 10.48 | | | Third Amendment to the Fourth Amended and Restated Senior Secured Revolving Credit Facility, dated November 6, 2023, by and among the Partnership, Fifth Third Bank, National Association, as administrative agent; a syndicate of lenders; Fifth Third, BofA Securities Inc., PNC Bank Capital Markets LLC, MUFG Bank, Ltd., Wells Fargo Bank, N.A., Citizens Bank, N.A. and Royal Bank of Canada, as co-syndication agents; and Barclays Bank PLC, U.S. Bank National Association, Regions Bank and Truist Bank as co-documentation agents (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 10-Q filed on November 8, 2023). |
| 10.49 | | | |
| 21.1 | # | | |
23.122.1 | # | | |
| 23.1 | # | | |
24.123.2 | # | | |
| 31.1 | # | | |
| 31.2 | # | | |
| 32.1 | ## | |
|
| 32.2 | ## | |
|
10197 | ^# | | |
| 99.1 | # | | |
| Weaver and Tidwell, L.L.P. (PCAOB ID: 410) - Houston, Texas |
| 101 | < | | The following materials from Delek Logistics Partners, LP's Annual Report on Form 10-K for the annual period ended December 31, 2017,2023, formatted in XBRL (eXtensible(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 20172023 and 2016;2022; (ii) Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 20162023, 2022 and 2015;2021; (iii) Consolidated Statements of Changes in Partners’ Equity for the years ended December 31, 2017, 20162023, 2022 and 2015;2021; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162023, 2022 and 2015;2021; and (v) Notes to Consolidated Financial Statements.
|
| 104 | | | The cover page from Delek Logistics Partners, LP's Annual Report on Form 10-K for the annual period ended December 31, 2023, has been formatted in Inline XBRL. |
| | | |
| | | | | | | | | | | |
| * | | | Management contract or compensatory plan or arrangement. |
| # | | | Filed herewith. |
| ## | | | Furnished herewith. |
| ++ | | | Confidential treatment has been requested and granted with respect to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. Omitted portions have been filed separately with the Securities and Exchange Commission. |
^< | | | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
Exhibits and Financial Statement Schedules
Delek Logistics Partners, LP
Consolidated Financial Statements
As of December 31, 20172023 and 20162022 and
For Each of the Three Years Ended December 31, 2017, 20162023, 2022 and 2015
2021
INDEX TO FINANCIAL STATEMENTS
|
| | | | |
| |
| Audited Financial Statements: | |
| |
| |
| |
| |
| |
All other financial schedules are not required under related instructions, or are inapplicable and therefore have been omitted.
Report of Independent Registered Public Accounting Firm
TheTo the Unitholders of Delek Logistics Partners, LP and
the Board of Directors of Delek Logistics GP, LLC and
Unitholders of Delek Logistics Partners, LP
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Delek Logistics Partners, LP (the Partnership) as of December 31, 20172023 and 2016, and2022, the related consolidated statements of income, and comprehensive income, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Partnership at December 31, 20172023 and 2016,2022, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with U.S. generally accepted accounting principles.
We did not audit the financial statements of Red River Pipeline Company LLC, an entity in which the Partnership has a 33% interest. In the consolidated financial statements, the Partnership’s investment in Red River Pipeline Company LLC is stated at $141.1 million and $149.6 million as of December 31, 2023 and 2022, respectively, and the Partnership’s equity in the net income of Red River Pipeline Company LLC is stated at $18.7 million in 2023, $20.5 million in 2022 and $14.4 million in 2021. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Red River Pipeline Company LLC, is based solely on the report of other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 20182024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on thesethe Partnership’s financial statements based on our audits.We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| | Evaluation of goodwill for impairment |
| Description of the Matter | | At December 31, 2023, the Partnership’s goodwill was $12.2 million. As discussed in Notes 2 and 8 of the consolidated financial statements, goodwill is reviewed at the reporting unit level for impairment at least annually or more frequently if events or changes in circumstances indicate the goodwill might be impaired. The Partnership performs its annual goodwill impairment assessment in the fourth quarter of each year. The Partnership evaluates the recoverability of goodwill by comparing the carrying amount of each reporting unit to its estimated fair value. For the Delaware Gathering reporting unit, management performed a quantitative assessment which estimated fair value using primarily a discounted cash flow analysis based upon projected financial information.
Auditing management’s annual goodwill impairment analysis for the Delaware Gathering reporting unit required significant judgment, as the valuation includes subjective estimates and assumptions in determining the estimated fair value. In particular, the discounted cash flow analysis is sensitive to significant assumptions such as the weighted average cost of capital and the estimate of future cash flows, including the related EBITDA projections.
|
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls relating to the valuation of the Delaware Gathering reporting unit in the goodwill impairment analysis process. For example, we tested controls over management’s review of the significant inputs and assumptions, discussed above, used in determining the reporting unit fair value.
To test the estimated fair value of the Company’s Delaware Gathering reporting unit, our audit procedures included, among others, assessing valuation methodologies, performing recalculations, and testing the significant assumptions discussed above. We compared the significant assumptions in the prospective financial data used by management to current industry trends, historical performance, prior forecasted amounts and other relevant factors. We performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the significant assumptions. We also involved our valuation specialists to assist in evaluating the fair value methodologies used and testing certain assumptions used, including the determination of the weighted average cost of capital. |
/s/ Ernst & Young LLP
We have served as the Partnership’s auditor since 2012.
Nashville, Tennessee
February 28, 20182024
Report of Independent Registered Public Accounting Firm
To the Unitholders of Delek Logistics Partners, LP and
Thethe Board of Directors of Delek Logistics GP, LLC and
Unitholders of Delek Logistics Partners, LP
Opinion on Internal Control over Financial Reporting
We have audited Delek Logistics Partners, LP’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Delek Logistics Partners, LP (the Partnership) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Delek Logistics Partners, LP as of December 31, 20172023 and 2016,2022, the related consolidated statements of income and comprehensive income, partners’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes, and our report dated February 28, 20182024 expressed an unqualified opinion thereon.
Basis for Opinion
The Partnership’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit.We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the CompanyPartnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
DefinitionsDefinition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 28, 20182024
Delek Logistics Partners, LP
Consolidated Balance Sheets
(in thousands, except unit and per unit data)
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 3,755 | | | $ | 7,970 | |
| Accounts receivable | 41,131 | | | 53,314 | |
| Accounts receivable from related parties | 28,443 | | | — | |
| Inventory | 2,264 | | | 1,483 | |
| Other current assets | 676 | | | 2,463 | |
| Total current assets | 76,269 | | | 65,230 | |
| Property, plant and equipment: | | | |
| Property, plant and equipment | 1,320,510 | | | 1,240,684 | |
| Less: accumulated depreciation | (384,359) | | | (316,680) | |
| Property, plant and equipment, net | 936,151 | | | 924,004 | |
| Equity method investments | 241,337 | | | 257,022 | |
| Customer relationship intangible, net | 181,336 | | | 199,440 | |
| Marketing contract intangible, net | 102,155 | | | 109,366 | |
| Rights-of-way, net | 59,536 | | | 55,990 | |
| Goodwill | 12,203 | | | 27,051 | |
| Operating lease right-of-use assets | 19,043 | | | 24,788 | |
| Other non-current assets | 14,216 | | | 16,408 | |
| Total assets | $ | 1,642,246 | | | $ | 1,679,299 | |
| LIABILITIES AND DEFICIT | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 26,290 | | | $ | 57,403 | |
| Accounts payable to related parties | — | | | 6,055 | |
| Current portion of long-term debt | 30,000 | | | 15,000 | |
| Interest payable | 5,805 | | | 5,308 | |
| Excise and other taxes payable | 10,321 | | | 8,230 | |
| Current portion of operating lease liabilities | 6,697 | | | 8,020 | |
| Accrued expenses and other current liabilities | 11,477 | | | 6,202 | |
| Total current liabilities | 90,590 | | | 106,218 | |
| Non-current liabilities: | | | |
| Long-term debt, net of current portion | 1,673,789 | | | 1,646,567 | |
| Operating lease liabilities, net of current portion | 8,335 | | | 12,114 | |
| Asset retirement obligations | 10,038 | | | 9,333 | |
| Other non-current liabilities | 21,363 | | | 15,767 | |
| Total non-current liabilities | 1,713,525 | | | 1,683,781 | |
| Equity (Deficit): | | | |
| Common unitholders - public; 9,299,763 units issued and outstanding at December 31, 2023 (9,257,305 at December 31, 2022) | 160,402 | | | 172,119 | |
| Common unitholders - Delek Holdings; 34,311,278 units issued and outstanding at December 31, 2023 (34,311,278 at December 31, 2022) | (322,271) | | | (282,819) | |
| Total deficit | (161,869) | | | (110,700) | |
| Total liabilities and deficit | $ | 1,642,246 | | | $ | 1,679,299 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2017 |
| 2016 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 4,675 |
|
| $ | 59 |
|
| Accounts receivable | | 23,013 |
|
| 19,202 |
|
| Accounts receivable from related parties | | 1,124 |
|
| 2,834 |
|
| Inventory | | 20,855 |
|
| 8,875 |
|
| Other current assets | | 783 |
|
| 1,071 |
|
| Total current assets | | 50,450 |
| | 32,041 |
|
| Property, plant and equipment: | | | | |
| Property, plant and equipment | | 367,179 |
| | 342,407 |
|
| Less: accumulated depreciation | | (112,111 | ) | | (91,378 | ) |
| Property, plant and equipment, net | | 255,068 |
| | 251,029 |
|
| Equity method investments | | 106,465 |
| | 101,080 |
|
| Goodwill | | 12,203 |
| | 12,203 |
|
| Intangible assets, net | | 15,917 |
| | 14,420 |
|
| Other non-current assets | | 3,427 |
| | 4,774 |
|
| Total assets | | $ | 443,530 |
| | $ | 415,547 |
|
| LIABILITIES AND DEFICIT | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 19,147 |
| | $ | 10,853 |
|
| Excise and other taxes payable | | 4,700 |
| | 4,841 |
|
| Tank inspection liabilities | | 902 |
| | 1,013 |
|
| Pipeline release liabilities | | 1,000 |
| | 1,097 |
|
| Accrued expenses and other current liabilities | | 6,033 |
| | 2,925 |
|
| Total current liabilities | | 31,782 |
| | 20,729 |
|
| Non-current liabilities: | | | | |
| Long-term debt | | 422,649 |
| | 392,600 |
|
| Asset retirement obligations | | 4,064 |
| | 3,772 |
|
| Other non-current liabilities | | 14,260 |
| | 11,730 |
|
| Total non-current liabilities | | 440,973 |
| | 408,102 |
|
| Deficit: | | | | |
| Common unitholders - public; 9,088,587 units issued and outstanding at December 31, 2017 (9,263,415 at December 31, 2016) | | 174,378 |
| | 188,013 |
|
| Common unitholders - Delek; 15,294,046 units issued and outstanding at December 31, 2017 (15,065,192 at December 31, 2016) | | (197,206 | ) | | (195,076 | ) |
| General partner - 497,604 units issued and outstanding at December 31, 2017 (496,502 at December 31, 2016) | | (6,397 | ) | | (6,221 | ) |
| Total deficit | | (29,225 | ) | | (13,284 | ) |
| Total liabilities and deficit | | $ | 443,530 |
| | $ | 415,547 |
|
See accompanying notes to the consolidated financial statements
Delek Logistics Partners, LP
Consolidated Statements of Income and Comprehensive Income
(In thousands, except unit and per unit data)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | | 2023 | | 2022 | | 2021 |
| Net revenues | | | | | | | | | |
Affiliate (1) | | | | | $ | 563,803 | | | $ | 479,411 | | | $ | 418,826 | |
| Third Party | | | | | 456,606 | | | 556,996 | | | 282,076 | |
| Net revenues | | | | | 1,020,409 | | | 1,036,407 | | | 700,902 | |
| Cost of sales: | | | | | | | | | |
Cost of materials and other - affiliate (1) | | | | | 396,333 | | | 496,184 | | | 321,939 | |
| Cost of materials and other - third party | | | | | 136,294 | | | 145,179 | | | 62,470 | |
| Operating expenses (excluding depreciation and amortization presented below) | | | | | 115,682 | | | 85,438 | | | 59,483 | |
| Depreciation and amortization | | | | | 87,136 | | | 60,210 | | | 40,945 | |
| Total cost of sales | | | | | 735,445 | | | 787,011 | | | 484,837 | |
| Operating expenses related to wholesale business (excluding depreciation and amortization presented below) | | | | | 2,419 | | | 2,869 | | | 2,337 | |
| General and administrative expenses | | | | | 24,766 | | | 34,181 | | | 21,460 | |
| Depreciation and amortization | | | | | 5,248 | | | 2,778 | | | 1,825 | |
| Impairment of goodwill | | | | | 14,848 | | | — | | | — | |
| Gain on disposal of assets | | | | | (1,266) | | | (114) | | | (59) | |
| Total operating costs and expenses | | | | | 781,460 | | | 826,725 | | | 510,400 | |
| Operating income | | | | | 238,949 | | | 209,682 | | | 190,502 | |
| Interest expense, net | | | | | 143,244 | | | 82,304 | | | 50,221 | |
| Income from equity method investments | | | | | (31,433) | | | (31,683) | | | (24,575) | |
| Other income, net | | | | | (303) | | | (373) | | | (119) | |
| Total non-operating expenses, net | | | | | 111,508 | | | 50,248 | | | 25,527 | |
| Income before income tax expense | | | | | 127,441 | | | 159,434 | | | 164,975 | |
| Income tax expense | | | | | 1,205 | | | 382 | | | 153 | |
| Net income attributable to partners | | | | | $ | 126,236 | | | $ | 159,052 | | | $ | 164,822 | |
| Comprehensive income attributable to partners | | | | | $ | 126,236 | | | $ | 159,052 | | | $ | 164,822 | |
| | | | | | | | | |
| Net income per limited partner unit: | | | | | | | | | |
| Basic | | | | | $ | 2.90 | | | $ | 3.66 | | | $ | 3.79 | |
| Diluted | | | | | $ | 2.89 | | | $ | 3.66 | | | $ | 3.79 | |
| | | | | | | | | |
| Weighted average limited partner units outstanding: | | | | | | | | | |
| Basic | | | | | 43,583,938 | | | 43,487,910 | | | 43,447,739 | |
| Diluted | | | | | 43,611,314 | | | 43,511,650 | | | 43,460,470 | |
| | | | | | | | | |
| Cash distributions per common limited partner unit | | | | | $ | 4.160 | | | $ | 3.975 | | | $ | 3.785 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net sales: | | | | | | |
Affiliate (1) | | $ | 156,280 |
| | $ | 149,564 |
| | $ | 152,564 |
|
| Third party | | 381,795 |
| | 298,495 |
| | 437,105 |
|
| Net sales | | 538,075 |
| | 448,059 |
| | 589,669 |
|
| | | | | | | |
| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 372,890 |
| | 302,158 |
| | 436,304 |
|
| Operating expenses | | 43,274 |
| | 37,198 |
| | 44,923 |
|
| General and administrative expenses | | 11,840 |
| | 10,256 |
| | 11,384 |
|
| Depreciation and amortization | | 21,914 |
| | 20,813 |
| | 19,692 |
|
| (Gain) loss on asset disposals | | (20 | ) | | (16 | ) | | 104 |
|
| Total operating costs and expenses | | 449,898 |
| | 370,409 |
| | 512,407 |
|
| Operating income | | 88,177 |
| | 77,650 |
| | 77,262 |
|
| Interest expense, net | | 23,944 |
| | 13,587 |
| | 10,658 |
|
| (Income) loss from equity method investments | | (4,953 | ) | | 1,178 |
| | 588 |
|
| Other income, net | | (1 | ) | | — |
| | — |
|
| Total non-operating expenses | | 18,990 |
| | 14,765 |
| | 11,246 |
|
| Income before income tax (benefit) expense | | 69,187 |
| | 62,885 |
| | 66,016 |
|
| Income tax (benefit) expense | | (222 | ) | | 81 |
| | (195 | ) |
| Net income | | 69,409 |
| | 62,804 |
| | 66,211 |
|
| Less: loss attributable to Predecessors | | — |
| | — |
| | (637 | ) |
| Net income attributable to partners | | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
|
| Comprehensive income attributable to partners | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
|
| | | | | | | |
| Less: General partner's interest in net income, including incentive distribution rights | | 18,429 |
| | 12,193 |
| | 5,163 |
|
| Limited partners' interest in net income | | $ | 50,980 |
| | $ | 50,611 |
| | $ | 61,685 |
|
| | | | | | | |
Net income per limited partner unit (2): | | | | | | |
| Common units - (basic) | | $ | 2.09 |
| | $ | 2.08 |
| | $ | 2.55 |
|
| Common units - (diluted) | | $ | 2.09 |
| | $ | 2.07 |
| | $ | 2.52 |
|
| Subordinated units - Delek (basic and diluted) | | $ | — |
| | $ | 2.19 |
| | $ | 2.54 |
|
| | | | | | | |
Weighted average limited partner units outstanding (2): | | | | | | |
| Common units - (basic) | | 24,348,063 |
| | 22,490,264 |
| | 12,237,154 |
|
| Common units - (diluted) | | 24,376,972 |
| | 22,558,717 |
| | 12,356,914 |
|
| Subordinated units - Delek (basic and diluted) | | — |
| | 1,803,167 |
| | 11,999,258 |
|
| | | | | | | |
| Cash distributions per limited partner unit | | $ | 2.835 |
| | $ | 2.575 |
| | $ | 2.240 |
|
(1)See Note 4 for a description of our material affiliate revenue and purchases transactions.
(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 reflect the conversion of the subordinated units to common units on February 25, 2016. See Notes 5 and 12 for further discussion.
See accompanying notes to the consolidated financial statements
Delek Logistics Partners, LP
Consolidated Statements of Partners' Equity (Deficit)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Partnership | | |
| | | Equity of Predecessors | | Common - Public | | Common - Delek | | Subordinated - Delek | | General Partner - Delek | | Total |
| | | (In thousands) |
| Balance at December 31, 2014 | $ | 19,726 |
| | $ | 194,737 |
| | $ | (241,112 | ) | | $ | 73,515 |
| | $ | (7,085 | ) | | $ | 39,781 |
|
| Sponsor contributions of equity to the Predecessor | 115 |
| | — |
| | — |
| | — |
|
| — |
| | 115 |
|
| Loss attributable to Predecessor | (637 | ) | | — |
| | — |
| | — |
| | — |
| | (637 | ) |
| Allocation of net assets acquired by the unitholders | (19,204 | ) | | — |
| | 18,820 |
| | — |
| | 384 |
| | — |
|
Cash distributions (1) | — |
| | (20,755 | ) | | (66,698 | ) | | (25,919 | ) | | (5,156 | ) | | (118,528 | ) |
| Sponsorship contribution of fixed assets | — |
| | — |
| | 573 |
| | — |
| | 11 |
| | 584 |
|
| Net income attributable to partners | — |
| | 24,039 |
| | 7,121 |
| | 30,525 |
| | 5,163 |
| | 66,848 |
|
| Unit-based compensation | — |
| | 740 |
| | 219 |
| | 940 |
| | (1,493 | ) | | 406 |
|
| Other | — |
| | (360 | ) | | 249 |
| | (460 | ) | | 984 |
| | 413 |
|
| Balance at December 31, 2015 | — |
| | 198,401 |
| | (280,828 | ) | | 78,601 |
| | (7,192 | ) | | (11,018 | ) |
| Sponsor contributions of equity to the Predecessor | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Loss attributable to Predecessor | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Allocation of net assets acquired by the unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cash distributions (2) | — |
| | (23,847 | ) | | (25,271 | ) | | (11,503 | ) | | (10,244 | ) | | (70,865 | ) |
| Sponsorship contribution of fixed assets | — |
| | — |
| | 5,063 |
| | — |
| | 104 |
| | 5,167 |
|
| Net income attributable to partners | — |
| | 19,667 |
| | 27,002 |
| | 3,942 |
| | 12,193 |
| | 62,804 |
|
| Unit-based compensation | — |
| | 664 |
| | 1,046 |
| | — |
| | (1,111 | ) | | 599 |
|
| Subordinated unit conversion | — |
| | — |
| | 71,040 |
| | (71,040 | ) | | — |
| | — |
|
| Delek unit repurchases from public | — |
| | (6,872 | ) | | 6,872 |
| | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
| | 29 |
| | 29 |
|
| Balance at December 31, 2016 | — |
| | 188,013 |
| | (195,076 | ) | | — |
| | (6,221 | ) | | (13,284 | ) |
Cash distributions (3) | — |
| | (25,978 | ) | | (42,490 | ) | | — |
| | (17,691 | ) | | (86,159 | ) |
| Sponsor contribution of fixed assets | — |
| | — |
| | 65 |
| | — |
| | 2 |
| | 67 |
|
| Net income attributable to partners | — |
| | 19,015 |
| | 31,965 |
| | — |
| | 18,429 |
| | 69,409 |
|
| Unit-based compensation | — |
| | 619 |
| | 1,039 |
| | — |
| | (937 | ) | | 721 |
|
| Delek unit repurchases from public | — |
| | (7,291 | ) | | 7,291 |
| | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | — |
| | 21 |
| | 21 |
|
| Balance at December 31, 2017 | $ | — |
| | $ | 174,378 |
| | $ | (197,206 | ) | | $ | — |
| | $ | (6,397 | ) | | $ | (29,225 | ) |
| | | | | | | | | | | | | | | | | |
| Partnership |
| Common - Public | | Common - Delek Holdings | | Total |
| |
| Balance at December 31, 2020 | $ | 164,614 | | | $ | (272,915) | | | (108,301) | |
| Cash distributions | (32,462) | | | (129,255) | | | (161,717) | |
| Net income attributable to partners | 33,086 | | | 131,736 | | | 164,822 | |
| Delek Holdings unit sale to public | 650 | | | (650) | | | — | |
| Other | 179 | | | 1,025 | | | 1,204 | |
| Balance at December 31, 2021 | $ | 166,067 | | | $ | (270,059) | | | $ | (103,992) | |
| Cash distributions | (35,868) | | | (135,219) | | | (171,087) | |
| Net income attributable to partners | 33,617 | | | 125,435 | | | 159,052 | |
| Delek Holdings unit sale to public | 5,110 | | | (5,110) | | | — | |
| Issuance of units pursuant to the Equity Distribution Agreement | 3,096 | | | — | | | 3,096 | |
| Other | 97 | | | 2,134 | | | 2,231 | |
| Balance at December 31, 2022 | $ | 172,119 | | | $ | (282,819) | | | $ | (110,700) | |
| Cash distributions | (38,491) | | | (141,534) | | | (180,025) | |
| Net income attributable to partners | 26,857 | | | 99,379 | | | 126,236 | |
| Other | (83) | | | 2,703 | | | 2,620 | |
| Balance at December 31, 2023 | $ | 160,402 | | | $ | (322,271) | | | $ | (161,869) | |
(1) Cash distributions include $61.9 million in cash payments for the El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition. As an entity under common control with Delek, we record the assets that we acquire from Delek on our balance sheet at Delek's historical book basis instead of fair value. Additionally, any excess of cash paid over the historical book basis of the assets acquired from Delek is recorded within equity. As a result of the El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition, our equity balance decreased $42.7 million during the year ended December 31, 2015. Distributions also include $0.4 million related to distribution equivalents on vested phantom units.
(2) Cash distributions include $0.3 million related to distribution equivalents on vested phantom units.
(3) Cash distributions include $0.5 million related to distribution equivalents on vested phantom units.
.
See accompanying notes to the consolidated financial statements
Delek Logistics Partners, LP -
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 126,236 | | | $ | 159,052 | | | $ | 164,822 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 92,384 | | | 62,988 | | | 42,770 | |
| Non-cash lease expense | 9,549 | | | 16,254 | | | 9,652 | |
| Amortization of marketing contract intangible | 7,211 | | | 7,211 | | | 7,211 | |
| Amortization of deferred revenue | (1,755) | | | (1,775) | | | (1,953) | |
| Amortization of deferred financing costs and debt discount | 6,327 | | | 3,872 | | | 3,016 | |
| Impairment of Goodwill | 14,848 | | | — | | | — | |
| Income from equity method investments | (31,433) | | | (31,683) | | | (24,575) | |
| Dividends from equity method investments | 28,729 | | | 22,954 | | | 20,831 | |
| Other non-cash adjustments | 2,697 | | | 2,718 | | | 1,959 | |
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | 21,570 | | | (9,071) | | | 292 | |
| Inventories and other current assets | (131) | | | 2,233 | | | 55 | |
| Accounts payable and other current liabilities | (20,729) | | | 18,564 | | | (1,913) | |
| Accounts receivable/payable to related parties | (34,498) | | | (58,368) | | | 67,161 | |
| Non-current assets and liabilities, net | 4,314 | | | (2,781) | | | (14,166) | |
| Net cash provided by operating activities | 225,319 | | | 192,168 | | | 275,162 | |
| Cash flows from investing activities: | | | | | |
| | | | | |
| Purchases of property, plant and equipment | (96,101) | | | (141,098) | | | (23,052) | |
| Proceeds from sales of property, plant and equipment | 1,717 | | | 143 | | | 275 | |
| Purchases of intangible assets | (4,247) | | | (5,597) | | | (964) | |
| Business Combination, net of cash acquired | — | | | (625,622) | | | — | |
| Distributions from equity method investments | 9,002 | | | 1,737 | | | 8,774 | |
| Equity method investment contributions | — | | | — | | | (1,393) | |
| Net cash used in investing activities | (89,629) | | | (770,437) | | | (16,360) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of common units, net of underwriters' discount | — | | | 3,096 | | | — | |
| Distributions to common unitholders - public | (38,491) | | | (35,868) | | | (32,462) | |
| Distributions to common unitholders - Delek Holdings | (141,534) | | | (135,219) | | | (129,255) | |
| Proceeds from term facility | — | | | 298,511 | | | — | |
| Proceeds from revolving facility | 431,800 | | | 1,752,300 | | | 341,000 | |
| Payments on revolving facility | (371,800) | | | (1,289,800) | | | (829,601) | |
| Payments on term loan debt | (18,750) | | | — | | | — | |
| Proceeds from issuance of senior notes | — | | | — | | | 400,000 | |
| Proceeds from other financing agreements | 6,214 | | | — | | | — | |
| Deferred financing costs paid | (4,468) | | | (8,206) | | | (6,216) | |
| Payments on financing lease liabilities | (2,876) | | | (2,867) | | | (2,219) | |
| Net cash (used in) provided by financing activities | (139,905) | | | 581,947 | | | (258,753) | |
| Net (decrease) increase in cash and cash equivalents | (4,215) | | | 3,678 | | | 49 | |
| Cash and cash equivalents at the beginning of the period | 7,970 | | | 4,292 | | | 4,243 | |
| Cash and cash equivalents at the end of the period | $ | 3,755 | | | $ | 7,970 | | | $ | 4,292 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,211 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 21,914 |
| | 20,813 |
| | 19,692 |
|
| Amortization of deferred revenue | | (1,234 | ) | | (1,085 | ) | | (596 | ) |
| Amortization of deferred financing costs and debt discount | | 2,048 |
| | 1,460 |
| | 1,460 |
|
| Accretion of asset retirement obligations | | 292 |
| | 266 |
| | 251 |
|
| Loss (gain) on asset disposals | | (20 | ) | | (16 | ) | | 104 |
|
| Deferred income taxes | | (111 | ) | | (173 | ) | | 14 |
|
| (Income) loss from equity method investments | | (4,953 | ) | | 1,178 |
| | 588 |
|
| Dividends from equity method investments | | 3,099 |
| | — |
| | — |
|
| Unit-based compensation expense | | 721 |
| | 599 |
| | 406 |
|
| Changes in assets and liabilities: | | | | | | |
| Accounts receivable | | (3,811 | ) | | 15,847 |
| | (7,197 | ) |
| Inventories and other current assets | | (11,692 | ) | | 2,045 |
| | (907 | ) |
| Accounts payable and other current liabilities | | 10,859 |
| | 3,551 |
| | (13,734 | ) |
| Accounts receivable/payable to related parties | | 1,682 |
| | (6,983 | ) | | 1,737 |
|
| Non-current assets and liabilities, net | | (500 | ) | | 401 |
| | (5 | ) |
| Net cash provided by operating activities | | 87,703 |
| | 100,707 |
| | 68,024 |
|
| Cash flows from investing activities: | | | | | | |
| Asset acquisitions | | (9,003 | ) | | — |
| | (400 | ) |
| Purchases of property, plant and equipment | | (18,184 | ) | | (11,287 | ) | | (19,956 | ) |
| Proceeds from sales of property, plant and equipment | | 46 |
| | 175 |
| | 1,198 |
|
| Equity method investments | | (3,531 | ) | | (61,580 | ) | | (37,434 | ) |
| Net cash used in investing activities | | (30,672 | ) | | (72,692 | ) | | (56,592 | ) |
| Cash flows from financing activities: | | | | | | |
| Proceeds from issuance of additional units to maintain 2% General Partner interest | | 21 |
| | 29 |
| | 50 |
|
| Distributions to general partner | | (17,691 | ) | | (10,244 | ) | | (3,918 | ) |
| Distributions to common unitholders - public | | (25,978 | ) | | (23,847 | ) | | (20,755 | ) |
| Distributions to common unitholders - Delek | | (42,490 | ) | | (25,271 | ) | | (6,046 | ) |
| Distributions to subordinated unitholders - Delek | | — |
| | (11,503 | ) | | (25,919 | ) |
| Distributions to Delek for acquisitions | | — |
| | — |
| | (61,890 | ) |
| Proceeds from revolving credit facility | | 277,100 |
| | 314,750 |
| | 396,400 |
|
| Payments of revolving credit facility | | (489,800 | ) | | (273,750 | ) | | (296,550 | ) |
| Proceeds from issuance of senior notes | | 248,112 |
| | — |
| | — |
|
| Deferred financing costs paid | | (5,951 | ) | | — |
| | — |
|
| Predecessor division equity contribution | | — |
| | — |
| | 115 |
|
| Reimbursement of capital expenditures by Delek | | 4,262 |
| | 1,880 |
| | 5,220 |
|
| Net cash used in financing activities | | (52,415 | ) | | (27,956 | ) | | (13,293 | ) |
| Net increase (decrease) in cash and cash equivalents | | 4,616 |
| | 59 |
| | (1,861 | ) |
| Cash and cash equivalents at the beginning of the period | | 59 |
| | — |
| | 1,861 |
|
| Cash and cash equivalents at the end of the period | | $ | 4,675 |
| | $ | 59 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the period for: | | | | | |
| Interest | $ | 136,420 | | | $ | 78,148 | | | $ | 44,633 | |
| Income taxes | $ | 20 | | | $ | 43 | | | $ | 34 | |
| Non-cash investing activities: | | | | | |
| (Decrease) increase in accrued capital expenditures and other | $ | (14,765) | | | $ | (10,428) | | | $ | 3,850 | |
| | | | | |
| Non-cash financing activities: | | | | | |
| | | | | |
| Non-cash lease liability arising from obtaining right of use assets during the period | $ | 4,966 | | | $ | 12,717 | | | $ | 9,457 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | | $ | 19,441 |
| | $ | 12,206 |
| | $ | 9,009 |
|
| Income taxes | | $ | 60 |
| | $ | 224 |
| | $ | 4 |
|
| Non-cash investing activities: | | |
| | |
| | |
| Equity method investments | | $ | — |
| | $ | — |
| | $ | 3,832 |
|
| Increase in accrued capital expenditures | | $ | 194 |
| | $ | 480 |
| | $ | 2,471 |
|
| Non-cash financing activities: | | | | | | |
| Sponsor contribution of fixed assets | | $ | 67 |
| | $ | 5,167 |
| | $ | 584 |
|
See accompanying notes to the consolidated financial statements
Notes to Consolidated Financial Statements
Delek Logistics Partners, LP
Notes to the Consolidated Financial Statements
1. General
Organization
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)US Holdings, Inc. ("Delek Holdings") and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner'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 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, as amended (the "Exchange Act"). 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 the Partnership and its subsidiaries and its general partner.
On March 31, 2015, the Partnership, through its wholly owned subsidiary Delek Logistics Operating, LLC ("OpCo"), acquired from Delek two crude oil rail offloading racks, which are designed to receive up to 25,000 barrels per day (“bpd”) of light crude oil or 12,000 bpd of heavy crude oil, or any combination of the two, delivered by rail to the El Dorado Refinery and related ancillary assets (the “El Dorado Assets”) (such transaction, the "El Dorado Rail Offloading Racks Acquisition").
On March 31, 2015, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Delek a crude oil storage tank ("the Tyler Crude Tank") located adjacent to Delek's Tyler, Texas refinery (the "Tyler Refinery") and certain ancillary assets (collectively, with the Tyler Crude Tank, the "Tyler Assets") (such transaction, the "Tyler Crude Tank Acquisition"). The Tyler Crude Tank has approximately 350,000 barrels of shell capacity and primarily supports the Tyler Refinery. The Tyler Assets, together with the El Dorado Assets, are hereinafter collectively referred to as the "Logistics Assets."
The El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition are hereinafter collectively referred to as the "Acquisitions from Delek." The Acquisitions from Delek were accounted for as transfers between entities under common control. As entities under common control with Delek, we record the assets that Delek has contributed to us on our balance sheet at Delek's historical basis instead of fair value. Transfers between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes of the Partnership have been retrospectively adjusted to include, (i) the historical results of the El Dorado Assets, as owned and operated by Delek, for all periods presented through March 31, 2015 (the "El Dorado Assets Predecessor") and (ii) the historical results of the Tyler Assets, as owned and operated by Delek, for all periods presented through March 31, 2015 (the "Tyler Assets Predecessor"). The El Dorado Assets Predecessor, together with the Tyler Assets Predecessor, are hereinafter collectively referred to as our "Predecessors." See Note 3 for further information regarding the Acquisitions from Delek.
Description of Business
The Partnership primarily ownsprovides gathering, pipeline and operates logistics and marketing assetsother transportation services primarily for crude oil and natural gas customers, storage, wholesale marketing and terminalling services primarily for intermediate and refined products.product customers, and water disposal and recycling services through its owned assets and joint ventures located primarily in the Permian Basin (including the Delaware sub-basin) and other select areas in the Gulf Coast region. A substantial majority of our existing assets are both integral to and dependent onupon the success of Delek’sDelek Holdings' refining and marketing operations. We gather, transport and store crude oil and market, wholesale market, distribute, transport and store refined products in select regions of the southeastern United States and west Texas for Delek and third parties.
The Partnership generates revenue by charging fees for gathering, transporting, offloading and storing crude oil and for marketing, wholesale marketing, distributing, transporting and storing refined products. A substantial majorityoperations, as many of our contribution margin, which we define as net sales less costassets are contracted exclusively to Delek Holdings in support of goods soldits Tyler, Texas (the "Tyler Refinery"), El Dorado, Arkansas (the "El Dorado Refinery") and operating expenses, is derived from commercial agreements with Delek with initial terms ranging from five to ten years.Big Spring, Texas (the "Big Spring Refinery").
2. Accounting Policies
Basis of Presentation
Our consolidated financial statements include the accounts of the Partnership and its subsidiaries as well as our Predecessors. All intercompany accounts and transactions have been eliminated. The financial statements of our Predecessors have been prepared from the separate records maintained by Delek and may not necessarily be indicative of the conditions that would have existed or the results of operations if our Predecessors had been operated as an unaffiliated entity. Our Predecessors did not record all revenues for intercompany gathering, pipeline transportation, terminalling and storage services. Transfers between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retrospectively adjusted to furnish comparative information. As an entity under common control with Delek, we record the assets that Delek has contributed to us on our balance sheet at Delek's historical basis instead of fair value.
subsidiaries. We have evaluated subsequent events through the filing of this Annual Report on Form 10-K. Any material subsequent events that occurred during this time have been properly recognized or disclosed in our financial statements.
Use of Estimates
The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”(the “SEC”) 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.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the current period presentation.
Segment Reporting
We are an energy business focused on crude oil, natural gas, intermediate and refined products pipeline and storage activities and wholesale marketing, terminalling and offloading activities.activities as well as water disposal and recycling. Management reviews operating results in twofour reportable segments: (i) pipelines gathering and transportation and processing; (ii) wholesale marketing and terminalling. terminalling; (iii) storage and transportation; and (iv) investments in pipeline joint ventures.
•The pipelinesassets and transportationinvestments reported in the gathering and processing segment providesprovide crude oil gathering transportation and storagecrude oil, intermediate and refined products transportation services to Delek'sDelek Holdings' refining operations and independent third parties.
•The wholesale marketing and terminalling segment provides marketing services for the refined products output of the Delek Holdings' refineries, engages in wholesale marketingactivity at our terminals and terminals owned by third parties, whereby we purchase light product for sale and exchange to third parties, and provides terminalling services at our refined products terminals to Delek'sindependent third parties and Delek Holdings.
•The storage and transportation segment provides crude oil, intermediate and refined products transportation and storage services to Delek Holdings' refining operations and independent third parties. Decisions concerning
•The investments in pipeline joint ventures segment include 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 the segment contribution margin. Segment contribution margin is defined as net sales less cost of goods sold and operating expenses, excluding depreciation and amortization. Partnership's joint ventures investments discussed in Note 12.
Segment reporting is more fully discussed in more detail in Note 15.13.
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
We maintain cash and cash equivalents in accounts with large U.S. financial institutions. Any highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consists of trade receivables generated in the ordinary course of business. We perform on-going credit evaluations of our customers and generally do not require collateral on accounts receivable. All accounts receivable amounts are considered to be fully collectible. Accordingly, no allowanceAllowance for doubtful accounts has been established asis based on a combination of December 31, 2017historical experience and 2016. One third-party customerspecific identification methods. Delek Holdings accounted for approximately 22.0%more than 10% of theour consolidated accounts receivable balance as of December 31, 2017. Two2023 and 2022. One third-party customerscustomer accounted for approximately 36.6%more than 10% of theour consolidated accountsaccount receivable balance as of December 31, 2016.
2022.
Inventory
Inventory consists of refined products, which are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out ("FIFO") basis. One third party vendor and Delek accounted for approximately 65.8% and 11.6%, respectively, ofWe are not subject to concentration risk with specific suppliers, since our refined products inventory purchases in our wholesale marketing and terminalling segment during the year ended December 31, 2017. Two third party vendors in our wholesale marketing and terminalling segment accounted for approximately 72.0%are commodities that are readily available from a large selection of our inventory purchases during the year ended December 31, 2016. One third party vendor and Delek accounted for approximately 62.6% and 24.9%, respectively, of our inventory purchases in our wholesale marketing and terminalling segment during the year ended December 31, 2015.
suppliers.
Property, Plant and Equipment
Property, plant and equipment primarily consists of crude oil pipelines, tanks, terminals and gathering systems, and trucking assets. We also capitalize interest on capital projects. Property and equipment is stated at the lower of historical cost less accumulated depreciation, or fair value, if impaired. Assets acquired in conjunction with business acquisitions are recorded at estimated fair market value in accordance with the purchase method of accounting as prescribed in Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"). Other acquisitions of property and equipment are carried at cost. Acquisitions of net assets that do not constitute a business are accounted for by allocating the cost of the acquisition to individual assets acquired and liabilities assumed on a relative fair value basis and shall not give rise to goodwill as prescribed in ASC 805.
Betterments, renewals and extraordinary repairs that extend the life of an asset are capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation is computed using the straight-line method over management’s estimated useful lives of the related assets, except for automotive equipment, which is depreciated using a declining-balance method.assets. The estimated useful lives are as follows:
| | | | | |
| Years |
| |
| Years |
| Buildings and building improvements | 15-40 |
| Pipelines, tanks and terminals | 15-4010-40 |
| Asset retirement obligation assets | 15-50 |
| Other equipment | 3-15 |
Other Intangible Assets
IntangibleOther intangible assets consist ofacquired in a long-term supply contractbusiness combination and indefinite-lived rights of way. We amortize the definite-lived long-term supply contractdetermined to be finite-lived are amortized over their respective estimated useful lives. The finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lifelives of 11.58 to 35 years. The amortization expense, with the exception of the marketing contract intangible, is included in depreciation and amortization in the accompanying consolidated financial statements.
statements of income. The marketing contract intangible is amortized on a straight-line basis over a 20-year period as a component of net revenues from affiliates. Acquired intangible assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment in connection with our evaluation of long-lived assets as events and circumstances indicate that the asset might be impaired.
Property, Plant and Equipment and Intangibles Impairment
Property, plant and equipment and definite life intangibles are evaluated for impairment whenever indicators of impairment exist. In accordance with ASC 360, Property, Plant and Equipment and ASC 350, Intangibles - Goodwill and Other, we evaluate the realizability of these long-lived assets as events occur that might indicate potential impairment. In doing so, we assess whether the carrying amount of the asset is unrecoverablerecoverable by estimating the sum of the future cash flows expected to result from the use of the asset, undiscounted and without interest charges. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the fair value of the asset.
Notes to Consolidated Financial Statements
Goodwill and Potential Impairment
Goodwill in an acquisition represents the excess of the aggregate purchase price over the fair value of the identifiable net assets. Our goodwill is recorded at original fair value and is not amortized. Goodwill is subject to annual assessment to determine if an impairment of value has occurred and we perform this reviewreviewed at least annually induring the fourth quarter. We could also be required to evaluate our goodwillquarter for impairment, or more frequently if prior to our annual assessment, we experienceindicators of impairment exist, such as disruptions in our business, have unexpected significant declines in operating results or sustain a permanentsustained market capitalization decline. If an asset’sGoodwill is evaluated for impairment by comparing the carrying amount of the reporting unit to its estimated fair value. In accordance with Accounting Standards Updates ("ASU") 2017-04, Goodwill and Other (Topic 350);Simplifying the Test for Goodwill Impairment, goodwill impairment charge is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, the impairment assessment leadslimited to the testingtotal amount of goodwill allocated to that reporting unit. In assessing the impliedrecoverability of goodwill, assumptions are made with respect to future business conditions and estimated expected future cash flows to determine the fair value of a reporting unit. We may consider inputs such as a market participant weighted average cost of capital, gross margin, capital expenditures and long-term growth rates based on historical information and our best estimate of future forecasts, all of which are subject to significant judgment and estimates. We may also consider a market approach in determining or corroborating the asset’sfair values of the reporting units using a multiple of expected future cash flows, such as those used by third-party analysts, which is also subject to significant judgment and estimates. If these estimates and assumptions change in the future, due to factors such as a decline in general economic conditions, competitive pressures on sales and margins and other economic and industry factors beyond management's control, an impairment charge may be required. A significant risk to our future results and the potential future impairment of goodwill is the volatility of the crude oil and the refined product markets which is often unpredictable and may negatively impact our results of operations in ways that cannot be anticipated and that are beyond management's control.
We may also elect to perform a qualitative impairment assessment of goodwill balances. The qualitative assessment permits companies to assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If a company concludes that, based on the impliedqualitative assessment, it is more likely than not that the fair value of a reporting unit is less than theits carrying amount, the company is required to perform the quantitative impairment test. Alternatively, if a company concludes based on the qualitative assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it has completed its goodwill impairment charge is recorded. test and does not need to perform the quantitative impairment test.
Our annual assessment of goodwill did not resultresulted in an impairment chargeof $14.8 million during the year ended December 31, 2023. There was no impairment during the years ended December 31, 2017, 20162022 and 2021. Details of remaining goodwill balances by segment are included in Note 8.
Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date in accordance with the provisions of ASC 805. Any excess or 2015.
surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
Equity Method Investments
For equity investments that are not required to be consolidated under the variable or voting interest model, we evaluate the level of influence we are able to exercise over an entity’s operations to determine whether to use the equity method of accounting. Our judgment regarding the level of controlinfluence over an equity method investment includes considering key factors such as our ownership interest, participation in policy-making and other significant decisions and material intercompany transactions. Equity investments for which we determine we have significant influence are accounted for as equity method investments. Amounts recognized for equity method investments are included in equity method investments in our consolidated balance sheetsheets and adjusted for our sharesshare of the net earnings and losses of the investee, dividends received and cash distributions from the investee, which are separately presentedstated in our consolidated statements of income and comprehensive income and our consolidated statements of cash flows. We evaluate ourThe carrying value of each equity method investmentsinvestment is evaluated for impairment whenever eventswhen conditions exist that indicate it is more likely than not that an impairment may have occurred, which may include the loss of a key contract, lack of sustained earnings or changes in circumstances indicate thata deterioration of market conditions, among others. When impairment triggers are present, the carrying amountsfair value of such investments may be impaired. Athe equity method investment is estimated using the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management’s expectations of the investee’s future revenue (including the throughput barrel per day sold and related reduced tariff rates), operating expenses and earnings before interest, taxes, depreciation and amortization, capital expenditures and an anticipated tax rate (“EBITDA”), the estimated long term growth rate and weighted average cost of capital (“WACC”) as the discount rate. The market approach uses estimated EBITDA multiples for guideline comparable companies to estimate the fair value of the equity method investment. An impairment loss is recorded in earnings in the current period if a decline in the value of an equity method investment is determined to be other than temporary.
Derivatives
We record all derivative financial instruments, including forward fuel contracts, at estimated fair value in accordance with the provisions of ASC 815, Derivatives and Hedging ("ASC 815"). Changes in the fair value of the derivative instruments are recognized in operations, unless we elect to apply the hedge accounting treatment permitted under the provisions of ASC 815 allowing such changes to be classified as other comprehensive income There were no impairment losses recorded on equity method investments for cash flow hedges. We validate the fair value of all derivative financial instruments on a periodic basis, utilizing exchange pricing and/or price index developers, such as Platts or Argus. During the years ended December 31, 2017, 2016 and 2015, we did not elect to apply hedge accounting treatment to our derivative positions and, therefore, all changes2023, 2022 or 2021. Equity method investments are reported as part of the investments in fair value are reflected in the statements of income and comprehensive income.
Our policy under the guidance of ASC 815-10-45, Derivatives and Hedging—Other Presentation Matters ("ASC 815-10-45"), is to net the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and offset these values against any cash collateral associated with these derivative positions.pipeline joint ventures segment. See Note 1712 for further discussion.information on our equity method investments.
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
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 ("ASC 825").
We apply, with the provisions of ASC 820, Fair Value Measurements and Disclosure ("ASC 820"), in our presentation and disclosures regarding fair value, which pertain to certain financial assets and liabilities measured at fair value in the balance sheet on a recurring basis. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about such measurements that are permitted or required under other accounting pronouncements. See Note 16 for further discussion.
We apply the provisions of ASC 825 as it pertains to the fair value option. This standard permits the election to carry financial instruments and certain other items similar to financial instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. By electing the fair value option in conjunction with a derivative, an entity can achieve an accounting result similar to a fair value hedge without having to comply with complex hedge accounting rules. As of December 31, 2017 and 2016, we did not make the fair value election for any financial instruments not already carried at fair value in accordance with other standards.
Self-Insurance Reserves
We have no employees. Rather, we are managed by the directors and officersexception of our general partner. However, Delek employees providing services to the Partnership are covered under Delek’s insurance programs. Delek has workers' compensation and liability insurance with varying retentions and deductibles with limits that management considers adequate.
fixed rate debt.
Environmental Expenditures
We have historically accruedIt is our policy to accrue environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been incurred and the amount can be reasonably estimated. Environmental liabilities represent the current estimated costs to investigate and remediate contamination at our properties.sites where we have environmental exposure. This estimate is based on internal and third-party assessments of the extent of the contamination, the selected remediation technology and review of applicable environmental regulations, typically considering estimated activities and costs for the next 15 years, unlessand up to 30 years if a specific longer range estimateperiod is practicable.believed reasonably necessary. Such estimates may require judgment with respect to costs, time frame and extent of required remedial and clean-up activities. Accruals for estimated costs from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study and include, but are not limited to, costs to perform remedial actions and costs of machinery and equipment that are dedicated to the remedial actions and that doesdo not have an alternative use. Such accruals are adjusted as further information develops or circumstances change. We discount environmental liabilities to their present value if payments are fixed andor reliably determinable. Expenditures for equipment necessary for environmental issues relating to ongoing operations are capitalized. Estimated recoveries of costs from other parties are recorded on an undiscounted basis as assets when their realization is deemed probable.
See Note 14 for further information on crude oil releases impacting our properties and related accruals.
Asset Retirement Obligations
We recognize liabilities which represent the fair value of a legal obligation to perform asset retirement activities, including those that are conditional on a future event, when the amount can be reasonably estimated. These obligations are related to the required cleanout of our pipelines and terminal tanks and removal of certain above-grade portions of our pipelines situated on right-of-way property.
The reconciliation of the beginning and ending carrying amounts of asset retirement obligations as of December 31, 20172023 and 20162022 is as follows (in thousands):
| | December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| Beginning balance | |
| Liabilities acquired | |
| | | | December 31, |
| | | 2017 | | 2016 |
| Beginning balance | | $ | 3,772 |
| | $ | 3,506 |
|
| Accretion expense | |
| Accretion expense | |
| Accretion expense | | 292 |
| | 266 |
|
| Ending balance | | $ | 4,064 |
| | $ | 3,772 |
|
In order to determine fair value, management must make certain estimates and assumptions including, among other things, projected cash flows, a credit-adjusted risk-free rate and an assessment of market conditions that could significantly impact the estimated fair value of the asset retirement obligation.
Revenue Recognition
Revenue is measured based on consideration specified in a contract with a customer. The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or by providing services to a customer.
Service, Product and Lease Revenues.Revenues for products sold are recorded at the point of salegenerally recognized upon delivery of product, which is the point at whichwhen title toand control of the product is transferred, and when payment has either been received or collection is reasonably assured.transferred. Transaction prices for these products are typically at market rates for the product at the time of delivery. Service revenues are recognized as crude oil, intermediate and refined products are shipped through, delivered by or stored in our pipelines, trucks, terminals and storage facility assets, as applicable. We do not recognize product sales revenues for these services, as title on the product never passes to us.does not represent a promised good in the context of ASC 606, Revenue from Contracts with Customers ("ASC 606"). All service revenues are based on regulated tariff rates or contractual rates. Payment terms require customers to pay shortly after delivery and do not contain significant financing components. We exclude from revenue all taxes assessed by a governmental authority, including sales, use and excise taxes, that are both imposed on and concurrent with a specific revenue-producing transaction and collected on behalf of a customer.
Certain agreements for gathering, transportation, storage, terminalling, and offloading with Delek Holdings were considered operating leases under ASC 840, Leases ("ASC 840"). As part of the adoption of 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. Refer to Note 5 for further information.
Notes to Consolidated Financial Statements
Up-Front payments to Customers. We record up-front payments to customers in accordance with ASC 606. We evaluate the nature of each payment, the rights and obligations under the related contract, and whether the payment meets the definition of an asset. When an asset is recognized for an up-front payment to a customer, the asset is amortized, as a reduction of revenue, in a manner that reflects the pattern and period over which the asset is expected to provide benefit.
Revenues Related to Reimbursements. In addition to the agreements noted above, we have cost reimbursement provisions in certain of our agreements with Delek Holdings and third-parties that provide for reimbursement to the Partnership for certain costs, including certain capital expenditures. Such reimbursements are recorded in other long-term liabilities and are amortized to revenue over the life of the underlying revenue agreement corresponding to the asset.
Cost of Goods SoldMaterials and Other and Operating Expenses
Cost of goods soldmaterials and other includes(i) all costs of purchased refined products, additives and related transportation. It also includes transportation of such products, (ii) costs associated with the operation of our trucking assets. We do not recognize productassets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance, (iii) the cost of goods soldpipeline capacity leased from a third-party, and (iv) gains and losses related to our shipping, delivering and storage services, as title to the product never passes to us. commodity hedging activities.
Operating expenses include the costs associated with the operation of owned terminals and other logistics assets,pipelines and terminalling expense at third-party locations, excluding depreciation and pipelineamortization. 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.
Sales, UseDepreciation and Excise Taxes
Our policyamortization is to exclude sales, useseparately presented in our consolidated statement of income and excise taxes from revenue when we are an agent of the taxing authority,disclosed by reportable segment in accordance with ASC 605-45, Revenue Recognition—Principal Agent Considerations.
Note 13.
Deferred Financing Costs
Deferred financing costs are included in other non-current assets in the accompanying consolidated balance sheets and represent expenses related to issuing and amending our revolving credit facility. Deferred financing costs associated with our 6.750% Senior Notesterm loan facilities are included as a reduction to the associated debt balance in the accompanying consolidated balance sheets. These costs represent expenses related to issuing the senior notes.our long-term debt and obtaining our lines of credit. These amounts are amortized ratably over the remaining term of the respective financing and are included in interest expense in the accompanying consolidated statements of income and comprehensive income.
Operating Leases
In accordance with ASC 842-20, Leases - Lessee ("ASC 842-20"), we evaluate if a contract is or contains a lease at the inception of the contract. We classify leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that are highly specialized or allow us to substantially utilize or pay for the entire asset over its useful life. All other leases are classified as operating leases.
We have noncancellable operating leases primarily associated with certain pipeline and transportation equipment. Our leases do not have any outstanding renewal options. Certain leases also include options to purchase the leased equipment. Certain of our lease certainagreements include rates based on equipment and have surfaceusage. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases under various operatingon a straight-line basis over the lease arrangements, most of which provide the option, after the initial lease term, to renew the leases. None of these lease arrangementsterm.
For all leases that include fixed rental rate increases.increases, these are included in our fixed lease payments. Our leases may include variable payments, based on changes on price or other indices, which are expensed as incurred.
We calculate the total lease expense for the entire noncancelable lease period, considering renewals for all periods for which it is reasonably certain to be exercised, and record lease expense on a straight-line basis in the accompanying consolidated statements of income. Accordingly, a lease liability is recognized for these leases and is calculated to be the present value of the fixed lease payments, as defined by ASC 842-20, using a discount rate based on our incremental borrowing rate. A corresponding right-of-use asset is recognized based on the lease liability and adjusted for certain costs and prepayments. For substantially all classes of underlying assets, 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.
Income Taxes
We are not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. Instead, for purposes of these income taxes, each partner of the Partnership is required to take into account its share of items 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 and financial reporting basis of assets and liabilities, the acquisition price of such partner's units and the taxable income allocation requirements under the FirstPartnership's Second Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement").
Notes to Consolidated Financial Statements
We are subject to income taxes in certain states that do not follow the federal tax treatment of Partnerships.partnerships. These taxes are accounted for under the provisions of ASC 740, Income Taxes (ASC 740) ("ASC 740"). This statement generally requires DKLthe Partnership to record deferred income taxes for
the differences between the book and tax bases of its assets and liabilities, which are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax expense or benefit represents the net change during the year in our deferred income tax assets and liabilities, exclusive of the amounts held in other comprehensive income.
U.S. GAAP requires management to evaluate uncertain tax positions taken by the Partnership. The financial statement effects of a tax position are recognized when the position is more likely than not, based on the technical merits, to be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Partnership, and has concluded that there are no uncertain positions taken or expected to be taken. The Partnership is subject to routine audits by taxing jurisdictions.
Equity Based Compensation
Allocations of Net Income
Our generalPartnership Agreement contains provisions for the allocation of net income and loss to the unitholders. For purposes of maintaining partner provides equity-based compensation to officers, directorscapital accounts, the Partnership Agreement specifies that items of income and employees of our general partner or its affiliates, and certain consultants, affiliates of our general partner or other individuals who perform services for us, which includes unit options, restricted units, phantom units, unit appreciation rights, distribution equivalent rights, other unit-based awards and unit awards. The fair value of our phantom units is determined based onloss shall be allocated among the closing market price of our common 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 amendedpartners in accordance with the LTIP. It is our practice to issue new units when phantom units vest.
their respective percentage interest.
Net Income per Limited Partner 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 incentive distribution rights ("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 units. Refer to Notes 6 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 to our general partner, which is the holder of the IDRs pursuant to our Partnership Agreement. The weighted-average number of common units reflects the conversion of the subordinated units to common units on February 25, 2016. See Notes 5 and 1211 for further discussion.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. At present,As of December 31, 2023, 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.
Comprehensive Income
Comprehensive income for the years ended December 31, 2017, 20162023, 2022 and 20152021 was equivalent to net income.
New Accounting Pronouncements Adopted During 2023
ASU 2023-03 , Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)
In August 2017,July 2023, the Financial Accounting Standards Board (the "FASB"(“FASB”) issued Accounting Standards Update (“ASU”) 2023-03, Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718) (“ASU 2023-03”). This ASU amends or supersedes various SEC paragraphs within the FASB Accounting Standards Codification to conform to past SEC announcements and guidance issued by the SEC. ASU 2023-03 does not provide any new guidance, so there is no transition or effective date. We adopted ASU 2023-03 in July 2023. There was no material impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
ASU 2023-06, Codification Amendments in Response to refinethe SEC's Disclosure Update and expand hedgeSimplification Initiative
In October 2023, the FASB issued ASU 2023-06 Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative ("ASU 2023-06"). The main provision of ASU 2023-06 is to clarify or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC's regulations. The effective date for both financial and commodity risks. Itseach amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Partnership is currently evaluating the provisions create more transparency around how economic results are presented, both on the face of the amendments and the impact on its future consolidated statements, but does not currently expect adopting this new guidance will have a material impact on its consolidated financial statements and inrelated disclosures.
Notes to Consolidated Financial Statements
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the footnotesFASB issued ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 expands reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the chief decision maker ("CODM") and align the recognitionincluded within each reported measure of a segment's profit or loss, an amount and presentationdescription of its composition for other segment items, and interim disclosures of a reportable segment's profit or loss and assets. The ASU also requires disclosure of the effectstitle and position of the hedging instrumentindividual identified as the CODM and an explanation of how the hedged itemCODM uses the reported measures of a segment's profit or loss in the financial statements. It also makes certain targeted improvementsassessing segment performance and deciding how to simplify the application of hedge accounting guidance. This guidanceallocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2018,2023 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 years2024, and should be applied prospectively. Earlyretrospectively to all prior periods presented in the financial statements. The adoption is permitted under certain circumstances. We early adopted this guidance as of July 1, 2017 and the adoption didASU 2023-07 should not have a material impact on our business,consolidated financial condition or results of operations.statements. See Note 13 for further information.
In March 2016, the FASB issued guidance that simplifies several aspects
3. Acquisitions
Delaware Gathering (formerly 3 Bear)
On April 8, 2022, DKL Delaware Gathering, LLC, a subsidiary of the accountingPartnership ("Delaware Gathering"), entered into a Membership Interest Purchase Agreement (the “3 Bear Purchase Agreement”) with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (“3 Bear”) (subsequently renamed to DKL Delaware Holding - NM, LLC), related to the Seller’s crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin of New Mexico (the “Delaware Gathering Acquisition”). We completed the Delaware Gathering Acquisition on June 1, 2022. The purchase price 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 statementDelaware Gathering Acquisition was $628.3 million. The Delaware Gathering Acquisition was financed through a combination of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016,on hand 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 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 previously accounted for as operating leases. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact adopting this new guidance will have on our business, financial condition and 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 expect to adopt the new standard in the first quarter of 2018 using the modified retrospective transition method. Based on the analysis performed to date, we do not expect the adoption of the standard to have a material impact on the timing or pattern of revenue recognition.
3. Acquisitions
Acquisitions from Delek
During the year ended December 31, 2015, the Partnership acquired the assets listed below from Delek:
the El Dorado Assets effective March 31, 2015 for approximately $42.5 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility; and
the Tyler Assets effective March 31, 2015 for approximately $19.4 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility.
Financial Results of the Acquisitions from Delek
DKL Credit Facility.
The Acquisitions from Delek were considered transfers of businesses between entities under common control. Accordingly, the Acquisitions from Delek were recorded at amounts based on Delek's historical carrying value as of each respective acquisition date, which were $7.6 million and $11.6 million as of March 31, 2015, for the El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank
Acquisition, respectively. Our historical financial statements have been retrospectively adjusted to reflect the results of operations, financial position, cash flows and equity attributable to the Acquisitions from Delek as if we owned the assets for all periods presented. The results of the El Dorado Assets and the Tyler Assets are included in the pipelines and transportation segment.
Acquisitions from Third Parties
On September 15, 2017, the Partnership, through its wholly owned subsidiary, Delek Marketing & Supply, LP acquired from Plains Pipeline, L.P. an approximately 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 SpringDelaware Gathering Acquisition was accounted for using the acquisition method of accounting, whereby the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their fair values. The excess of the consideration paid over the fair value of the net assets acquired was recorded as an asset acquisition. goodwill.
Determination of Purchase Price
The table below presents the purchase price (in thousands):
| | | | | |
| Base purchase price: | $ | 624,700 | |
Add: closing net working capital (as defined in the 3 Bear Purchase Agreement) | 3,600 | |
Less: closing indebtedness (as defined in the 3 Bear Purchase Agreement) | (80,618) | |
| Cash paid for the adjusted purchase price | 547,682 | |
| Cash paid to payoff 3 Bear credit agreement (as defined in the 3 Bear Purchase Agreement) | 80,618 | |
| Purchase price | $ | 628,300 | |
Notes to Consolidated Financial Statements
Purchase Price Allocation
The following table summarizes the allocationfinal fair values of assets acquired and liabilities assumed in the relative fair value assigned to the asset groups for the Big Spring PipelineDelaware Gathering Acquisition as of June 1, 2022 (in thousands):
| | | | | | | | |
| Assets acquired: | | |
| Cash and cash equivalents | | $ | 2,678 | |
| Accounts receivables, net | | 28,859 | |
| Inventories | | 1,836 | |
| Other current assets | | 986 | |
| Property, plant and equipment | | 382,799 | |
| Operating lease right-of-use assets | | 7,427 | |
| Goodwill | | 14,848 | |
| Customer relationship intangible, net | | 210,000 | |
| Rights-of-way | | 13,490 | |
| Other non-current assets | | 500 |
| Total assets acquired | | 663,423 | |
| | |
| Liabilities assumed: | | |
| Accounts payable | | 8,020 | |
| Accrued expenses and other current liabilities | | 22,382 | |
| | |
| Current portion of operating lease liabilities | | 1,029 | |
| Asset retirement obligations | | 2,261 | |
| Operating lease liabilities, net of current portion | | 1,431 | |
| Total liabilities assumed | | 35,123 | |
| Fair value of net assets acquired | | $ | 628,300 | |
|
| | | | |
| 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.
4. 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.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. In November 2017, Delek 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, the initial term has been extended through 2026.Holdings. 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 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. In most circumstances, if Delek or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek, 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 is prevented by our failure
Notes to maintain such capacities from throughputting or storing such specified volumes for more than 30 days per year, Delek's 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.Consolidated Financial Statements
Our materialMaterial commercial agreements with Delek include the following:Holdings:
|
| | | | | | | | | | | |
| Asset/Operation | | Initiation Date | | Initial/Maximum Term (years) (1) | Service | | Minimum Throughput Commitment (bpd) | | Fee (/bbl) |
| Lion Pipeline System and SALA Gathering System: | | | | | | | | | |
| Crude Oil Pipelines (non-gathered) | | November 2012 | | 5 / 15 | Crude oil and refined products transportation | | 46,000 (2) | | $ 0 .95 (3) |
|
| Refined Products Pipelines | | November 2012 | | 5 / 15 | | | 40,000 | | $ | 0.11 |
|
| SALA Gathering System | | November 2012 | | 5 / 15 | Crude oil gathering | | 14,000 | | $ 2.55 (3) |
|
| East Texas Crude Logistics System: | | | | | | | | | |
| Crude Oil Pipelines | | November 2012 | | 5 / 15 | Crude oil transportation and storage | | 35,000 | | $ 0.45 (4) |
|
| Storage | | November 2012 | | 5 / 15 | | | N/A | | $ 278,923/month |
| East Texas Marketing | | November 2012 | | 10 (5) | Marketing products for Tyler Refinery | | 50,000 | | $ 0.777 (5) |
|
Big Sandy Terminal: (6) | | | | | | | | | |
| Refined Products Transportation | | November 2012 | | 5 / 15 | Refined products transportation, dedicated terminalling services and storage for the Tyler Refinery | | 5,000 | | $ | 0.56 |
|
| Terminalling | | November 2012 | | 5 / 15 | | | 5,000 | | $ | 0.56 |
|
| Storage | | November 2012 | | 5 / 15 | | | N/A | | $ 55,735/month |
| Tyler Throughput and Tankage: | | | | | | | | | |
| Refined Products Throughput | | July 2013 | | 8 / 16 | Dedicated Terminalling and storage | | 50,000 | | $ | 0.36 |
|
| Storage | | July 2013 | | 8 / 16 | | | N/A | | $ 832,530/month |
| Memphis Pipeline | | October 2013 | | 5 | Refined Products Transportation | | 10,959 | | $ | 1.35 |
|
| El Dorado Throughput and Tankage: | | | | | | | | | |
| Refined Products Throughput | | February 2014 | | 8 / 16 | Dedicated terminalling and storage | | 11,000 | | $ | 0.51 |
|
| Storage | | February 2014 | | 8 / 16 | | | N/A | | $1,319,135/month |
| El Dorado Assets Throughput: | | | | | | | | | |
| Light Crude Throughput | | March 2015 | | 9/15 | Dedicated Offloading Services | | N/A (7) | | $ 1.11 |
| Heavy Crude Throughput | | March 2015 | | 9/15 | Dedicated Offloading Services | | N/A (7) | | $ 2.28 |
| | | | | | | | | | | | | | |
| Asset/Operation | | Contract End Date (1) | | Service |
| (1)
| Maximum term gives effect to the extension of the commercial agreement pursuant to the terms thereof. | | |
| Pipelines and Storage Facilities Agreement (El Dorado Assets and El Dorado Gathering System): |
(2)
Crude Oil Pipelines (non-gathered) | | Excludes volumes gathered on the SALA Gathering System.
| March 31, 2024 | | Crude oil and refined products transportation |
(3)
Refined Products Pipelines | | Volumes gathered on the SALA |
El Dorado Gathering System will not be subject to an additional fee | | | Crude oil gathering |
| | | | |
| Pipeline and Tankage Agreement (East Texas Crude Logistics System): |
| Crude Oil Pipelines | | March 31, 2024 | | Crude oil transportation and storage |
| Storage | | |
| | | | |
| Marketing Agreement (East Texas Marketing): |
| East Texas Marketing | | October 1, 2026 | | Marketing products for transportation on our Lion Pipeline System to theTyler Refinery |
| | | | |
| Throughput and Tankage Agreement (Tyler Throughput and Tankage): |
| Refined Products Throughput | | March 31, 2024 | | Dedicated Terminalling and storage |
| Storage | | |
| | | | |
| Throughput and Tankage Agreement (El Dorado Throughput and Tankage): |
| Refined Products Throughput | | March 31, 2024 | | Dedicated terminalling and storage |
| Storage | | |
| | | | |
Throughput and Tankage Agreement - El Dorado Refinery. |
| Rail Offloading Facility (El Dorado Assets Throughput): |
(4)
Light Crude and Heavy Crude Throughput | | For any volumes in excess of 50,000 bpd, the throughput fee will be $0.670/bbl.
| March 31, 2024 | | Dedicated Offloading Services |
| (5)
| For any volumes in excess of 50,000 bpd, the throughput fee will be $0.738/bbl. Following the primary term, the marketing agreement automatically renews for successive one-year terms, unless either party provides notice of non-renewal 10 months prior to the expiration of the then-current term. The initial primary term for the marketing agreement has been extended through 2026. | | |
| Pipelines, Storage and Throughput Facilities Agreement (Big Spring Logistics Assets): |
(6)
Crude Oil and Refined Products Throughput | | On July 19, 2013, we acquired the Hopewell February 28, 2028 | | Pipeline in order to effectively connect it with the Big Sandy Pipeline and thereby return the Big Sandy Terminal to operation. In connection with the acquisition, on July 25, 2013, we and Delek entered into the Amended and Restatedthroughput |
| Rail Offloading | | | Offloading services |
| Terminalling | | | Dedicated Terminalling |
| Storage | | | Storage |
| | | | |
Asphalt Services Agreement (Big Sandy Terminal and Pipeline), which amended and restated the terminalling services agreement for the Big Sandy Terminal originally entered into in November 2012. |
| Spring Logistics Assets): |
(7)
Terminalling | | The throughput agreement provides for a minimum throughput fee of $1.5 million per quarter for throughput of a combination of lightFebruary 28, 2028 | | Dedicated Asphalt Terminalling and heavy crude.Storage |
| Storage | | |
| | | | |
| Marketing Agreement (Big Spring Logistics Assets): |
| Marketing Services | | February 28, 2028 | | Dedicated Marketing and Selling |
| | | | |
| Throughput and Deficiency Agreement (Midland Gathering Assets) |
| Gathering System | | March 31, 2030 | | Gathering and Transportation Services |
| Re-delivery System | | |
| | | | |
| Pipelines, Throughput and Offloading Facilities Agreement (Big Spring Logistics Assets) |
| Fintex / Magellen Pipeline | | April 1, 2030 | | Refined Products |
| Crude Oil Offloading | | January 1, 2030 | | Crude Oil Offloading |
| Storage | | April 1, 2030 | | Storage |
| LPG Rack | | January 1, 2030 | | Truck Unloading Facility |
| | | | |
| Transportation Services Agreement |
| Trucking Services | | December 31, 2030 | | Transportation Services |
Pursuant to an arrangement with Delek(1) Expired contracts and Lion Oil Company ("Lion Oil"), to which we are not a party, J. Aron & Company ("J. Aron") acquires and holds title to substantially all crude oil, intermediate and refined products transported on our Lion Pipeline System, SALA Gathering System and on pipeline capacity we lease from Enterprise TE Products Pipeline Company LLCcontracts that runs from the El Dorado Refinery to our Memphis Terminal (the "Memphis Pipeline"). J. Aron is therefore considered the shipper for the liquid it owns on the Lion Pipeline System, the SALA Gathering System and the Memphis Pipeline. J. Aron also has title to the refined products stored at our Memphis, North Little Rock and El Dorado terminals andwill expire in the El Dorado storage tanks. Under (i) our pipelines and storage agreement with Lion Oil relatingnext 12 months will continue to the Lion Pipeline System and the SALA Gathering System, (ii) our terminalling agreements with Lion Oil relating to the Memphis and North Little Rock terminals and (iii) our throughput and tankage agreement relating to the terminal and tank assets at and adjacent to the El Dorado Refinery, Lion Oil has assigned to J. Aron certain of its rights under these agreements, including the right to have J. Aron's crude oil and intermediate and refined products stored in or transportedoperate on or through these systems, Memphis and North Little Rock terminals and the terminal and tank assets at and adjacent to the El Dorado Refinery, with Lion Oil acting as J. Aron's agent for scheduling purposes. Accordingly, even though this is effectively a financing arrangement for Delek whereby J. Aron sells the product back to Delek, J. Aron is technically our primary customer under each of these agreements. J. Aron retains these storage and transportation rights for the term of its arrangement with Delek and Lion Oil, which currently runs through April 30, 2020, and J. Aron pays us for the transportation, throughput and storage services we provide to it. The rights assigned to J. Aron do not alter Lion Oil's obligations to meet certain throughput minimum volumes under our agreements with respect to the transportation, throughputting and storage of crude oil, intermediate and refined products through our facilities, but J. Aron's throughput is credited toward Lion Oil's minimum throughput commitments. Accordingly, Lion Oil is responsible for making any shortfall payments incurred under the pipelines and storage agreement or the terminalling agreement which may result from minimum throughputs or volumes not being met.month-to-month basis until new contracts are negotiated.
Other Agreements with Delek
Holdings
In addition to the commercial agreements described above, the Partnership has entered into the following agreements with Delek:
Delek Holdings:
Omnibus Agreement
Omnibus Agreement.The Partnership entered into an omnibus agreement with Delek Holdings, our general partner, OpCo,Delek Logistics Operating, LLC, Lion Oil Company, LLC and certain of the Partnership’s and Delek’sDelek Holdings' other subsidiaries on November 7, 2012, which was subsequentlyhas been amended and restated on July 26, 2013, February 10, 2014 and March 31, 2015 and further amended on August 3, 2015from time to time in connection with acquisitions from Delek Holdings (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.Delek Holdings, and obligates us to pay an annual fee of $4.4 million to Delek Holdings for its provision of centralized corporate services to the Partnership.
Notes to Consolidated Financial Statements
Pursuant to the terms of the Omnibus Agreement, we were reimbursed by Delek Holdings for certain capital expenditures in the amount of $4.3 million, $1.9 million and $5.2 million, during the years ended December 31, 2017, 2016 and 2015, respectively.expenditures. 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. We were reimbursed a nominal amount during the years ended December 31, 2023 and 2021. There were no reimbursements by Delek Holdings during the year ended December 31, 2022. Additionally, we wereare 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 Agreement. WeAs of December 31, 2023 and 2022, there was no receivable from related parties for these matters. These reimbursements are recorded as reductions to operating expenses. There were reimbursed $0.3 million and $1.2 millionno reimbursements for these matters during the years ended December 31, 20172023 and 2016, respectively, for these matters.2022. We were reimbursed a nominal amount for the costs incurred in connection with an asset failure near Fouke, Arkansas and the subsequent repair of the assetthese matters during the year ended December 31, 2015 pursuant to the Omnibus Agreement. These reimbursements are recorded as a reduction to operating expense.2021.
Other Agreements
Our general partner operates our business on our behalf and is entitled under our Partnership Agreement to be reimbursed for the cost of providing those services, which include certain labor related costs. We and our subsidiaries paid Delek Holdings approximately $18.8$31.0 million, $15.7$34.6 million and $22.8$21.8 million pursuant to the Partnership Agreement during the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively. These amounts are included in operating expenses in the accompanying consolidated statements of income and comprehensive income.
Other Transactions
Predecessors' Transactions
Related-party transactionsThe Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of gathering systems in the Permian Basin. The majority of the Predecessors were settled through division equity. Costs related specifically to usgathering systems have been identifiedconstructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and includedare still subject to the terms of the DPG Management Agreement. 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 provides 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 2024. Total fees paid to the Partnership were $1.6 million, $1.5 million and $1.6 million for the years ended December 31, 2023, 2022 and 2021, respectively, which are recorded in the accompanyingaffiliate revenue in our consolidated statements of income and comprehensive income. Prior toAdditionally, the Acquisitions from Delek, we were not allocated certain corporate costs. These costs were primarily allocated based on a percentage of salaries expense and property, plant and equipment costs. In the opinion of management, the methods for allocating these costs are reasonable. It is not practicable to estimatePartnership 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.
We executed a series of agreements, effective January 1, 2022, with DK Trading & Supply, LLC (“DKT&S”) and Alon Refining Krotz Springs, Inc. whereby the Partnership will operate and maintain a facility, located within the Krotz Springs, Louisiana refinery, to process slurry for DKT&S. Using a process that wouldincorporates horizontal and vertical centrifuges, we remove metals, ash, and other solids from the slurry. The clarified product can then be sold to DKT&S or one of its affiliates. As consideration for the processing services, we will receive a fixed rate per barrel processing fee in addition to a margin-based payment. The Partnership and DKT&S have been incurredagreed to a minimum delivery commitment volume to be processed in the facility. The initial term of the agreement is for a period of three years, and thereafter, will continue a year-to-year basis unless canceled by us ifeither party.
Delek Holdings Unit Sale to Public
On December 22, 2021, Delek Holdings issued a press release regarding a program to sell up to 434,590 common limited partner units representing limited partner interests in the Partnership. We will not sell any securities under this program and we had been operated on a stand-alone basis.
will not receive any proceeds from the sale of the securities by Delek Holdings. For the years ended December 31, 2022 and 2021, Delek Holdings sold 385,522 and 49,068 units, respectively, for gross proceeds of $16.4 million ($13.6 million, net of taxes) and $2.1 million ($1.7 million, net of taxes).
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 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 services.expenses. In addition to these transactions, we purchase finishedrefined products and bulk biofuels from Delek Holdings, the costs of which are included in cost of goods sold.materials and other.
Notes to Consolidated Financial Statements
A summary of revenue, purchases from affiliates and expense transactions with Delek Holdings and its affiliates including expenses directly charged and allocated to our Predecessors, are as follows (in thousands):
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| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Revenues | | | | | $ | 563,803 | | | $ | 479,411 | | | $ | 418,826 | |
| Purchases from Affiliates | | | | | $ | 396,333 | | | $ | 496,184 | | | $ | 321,939 | |
Operating and maintenance expenses | | | | | $ | 64,636 | | | $ | 53,803 | | | $ | 40,854 | |
General and administrative expenses | | | | | $ | 14,908 | | | $ | 13,565 | | | $ | 9,330 | |
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| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Revenues | | $ | 156,280 |
| | $ | 149,564 |
| | $ | 152,564 |
|
| Cost of Goods Sold | | $ | 54,982 |
| | $ | 32,514 |
| | $ | 105,461 |
|
Operating and maintenance expenses (1) | | $ | 29,483 |
| | $ | 27,668 |
| | $ | 31,636 |
|
General and administrative expenses (2) | | $ | 7,492 |
| | $ | 6,254 |
| | $ | 6,356 |
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| (1)
Operating and maintenance expenses include costs allocated to our Predecessors for operating support provided by Delek, including certain labor related costs, property and liability insurance costs and certain other operating expenses. Costs allocated to our Predecessors by Delek were $0.2 million for the year ended December 31, 2015. |
| |
(2)
| No general and administrative expenses were allocated to our Predecessors by Delek for the year ended December 31, 2015. |
Quarterly Cash Distribution
| | | | | | | | |
| Date of Distribution | | Distributions paid to Delek Holdings (in thousands) |
| February 9, 2023 | | $ | 34,998 | |
| May 15, 2023 | | $ | 35,169 | |
| August 14, 2023 | | $ | 35,512 | |
| November 13, 2023 | | $ | 35,855 | |
| Total | | $ | 141,534 | |
| | |
| February 8, 2022 | | $ | 33,829 | |
| May 12, 2022 | | $ | 33,625 | |
| August 11, 2022 | | $ | 33,797 | |
| November 10, 2022 | | $ | 33,968 | |
| Total | | $ | 135,219 | |
| | |
| February 9, 2021 | | $ | 31,619 | |
| May 14, 2021 | | $ | 31,966 | |
| August 11, 2021 | | $ | 32,661 | |
| November 10, 2021 | | $ | 33,009 | |
| Total | | $ | 129,255 | |
| | |
Notes to Consolidated Financial Statements
5. Revenues
We generate revenue by charging fees for gathering, transporting, offloading and general partner unitholdersstoring crude oil and natural gas; for storing intermediate products and feed stocks; for recycling and disposal of wastewater; for distributing, transporting and storing refined products; for marketing refined products output of Delek Holdings' Tyler and Big Spring refineries; for wholesale marketing in the holders of IDRs are entitled to receive quarterly distributions of available cash as it is determined by the board of directorsWest Texas area. A significant portion of our general partnerrevenue is derived from long-term commercial agreements with Delek Holdings, which provide for annual fee adjustments for increases or decreases in accordancethe CPI, PPI or the FERC index (refer to Note 4 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 thethird parties. Payment terms require customers to pay shortly after delivery and provisionsdo not contain significant financing components. Delek Holdings, directly or indirectly, accounted for 55.3%, 46.3% and 59.8% of our Partnership Agreement. Duringtotal revenues for the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively.
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.
The following table represents a disaggregation of revenue for the gathering and processing, wholesale marketing and terminalling, and storage and transportation segments for the periods indicated (in thousands):
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| Year Ended December 31, 2023 |
| Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | | | | | Consolidated |
| Service Revenue - Third Party | $ | 60,471 | | | $ | — | | | $ | 11,329 | | | | | | | $ | 71,800 | |
Service Revenue - Affiliate (1) | 9,730 | | | 48,618 | | | 55,691 | | | | | | | 114,039 | |
| Product Revenue - Third Party | 98,102 | | | 286,704 | | | — | | | | | | | 384,806 | |
| Product Revenue - Affiliate | 15,699 | | | 122,969 | | | — | | | | | | | 138,668 | |
| Lease Revenue - Affiliate | 187,108 | | | 47,410 | | | 76,578 | | | | | | | 311,096 | |
| Total Revenue | $ | 371,110 | | | $ | 505,701 | | | $ | 143,598 | | | | | | | $ | 1,020,409 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Consolidated |
| Service Revenue - Third Party | $ | 29,199 | | | $ | — | | | $ | 21,614 | | | $ | 50,813 | |
Service Revenue - Affiliate (1) | 16,458 | | | 32,593 | | | — | | | 49,051 | |
| Product Revenue - Third Party | 90,383 | | | 415,800 | | | — | | | 506,183 | |
| Product Revenue - Affiliate | 52,692 | | | 90,298 | | | — | | | 142,990 | |
| Lease Revenue - Affiliate | 116,695 | | | 50,193 | | | 120,482 | | | 287,370 | |
| Total Revenue | $ | 305,427 | | | $ | 588,884 | | | $ | 142,096 | | | $ | 1,036,407 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
| Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Consolidated |
| Service Revenue - Third Party | $ | 4,670 | | | $ | 490 | | | $ | 11,942 | | | $ | 17,102 | |
Service Revenue - Affiliate (1) | 13,723 | | | 34,033 | | | — | | | 47,756 | |
| Product Revenue - Third Party | — | | | 264,974 | | | — | | | 264,974 | |
| Product Revenue - Affiliate | — | | | 76,074 | | | — | | | 76,074 | |
| Lease Revenue - Affiliate | 143,459 | | | 37,686 | | | 113,851 | | | 294,996 | |
| Total Revenue | $ | 161,852 | | | $ | 413,257 | | | $ | 125,793 | | | $ | 700,902 | |
(1) Net of $7.2 million of amortization expense for each of the years ended December 31, 2023, 2022 and 2021, related to the marketing contract intangible recorded in the wholesale marketing and terminalling segment.
As of December 31, 2023, we paid quarterly cash distributions,expect to recognize approximately $1.1 billion in 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 $60.1 million, $47.0 million and $35.9 million, respectively, were paidmay be extended for various renewal terms. We disclose information about remaining performance obligations that have original expected durations of greater than one year.
Notes to Delek and our general partner. On January 23, 2018, our general partner's board of directors declared a quarterly cash distribution totaling $22.8 million based on the available cashConsolidated Financial Statements
Our unfulfilled performance obligations as of the date of determination for the end of the fourth quarter of 2017, which was paid on February 12, 2018 to unitholders of record on February 2, 2018. The distribution included $16.2 million paid to both Delek and our general partner, including the distributionDecember 31, 2023 were as holder of the IDRs.follows (in thousands):
| | | | | |
| 2024 | $ | 238,152 | |
| 2025 | 208,949 | |
| 2026 | 199,857 | |
| 2027 | 183,694 | |
| 2028 and thereafter | 315,253 | |
| Total expected revenue on remaining performance obligations | $ | 1,145,905 | |
5.
6. Net Income Perper 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 applicableattributable to limited partners (including subordinated unitholders) is computed by dividing limited partners’partners' interest in net income after deducting our general partner’s 2.0% 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 applicableattributable to common limited partners includes the effects of potentially dilutive units on our common units. DuringFor the years ended December 31, 2017, 20162023, 2022 and 2015, the only2021, 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 calculation of net income per unit is as follows (dollars in(in thousands, except unit and per unit amounts):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Net income attributable to limited partners | | | | | $ | 126,236 | | | $ | 159,052 | | | 164,822 | |
| Weighted average limited partner units outstanding, basic | | | | | 43,583,938 | | | 43,487,910 | | | 43,447,739 | |
| Dilutive effect of unvested phantom units | | | | | 27,376 | | | 23,740 | | | 12,731 | |
| Weighted average limited partner units outstanding, diluted | | | | | 43,611,314 | | | 43,511,650 | | | 43,460,470 | |
| Net income per limited partner unit: | | | | | | | | | |
| Basic | | | | | $ | 2.90 | | | $ | 3.66 | | | $ | 3.79 | |
Diluted (1) | | | | | $ | 2.89 | | | $ | 3.66 | | | $ | 3.79 | |
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| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net income attributable to partners | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
|
Less: General partner's distribution (including IDRs) (1) | | 18,797 |
| | 12,437 |
| | 5,013 |
|
| Less: Limited partners' distribution | | 69,057 |
| | 58,158 |
| | 27,439 |
|
| Less: Subordinated partner's distribution | | — |
| | 4,424 |
| | 26,878 |
|
| (Distributions) earnings excess | | $ | (18,445 | ) | | $ | (12,215 | ) | | $ | 7,518 |
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| General partner's earnings: | | | | | | |
Distributions (including IDRs) (1) | | $ | 18,797 |
| | $ | 12,437 |
| | $ | 5,013 |
|
| Allocation of (distributions) earnings excess | | (368 | ) | | (244 | ) | | 150 |
|
| Total general partner's earnings | | $ | 18,429 |
| | $ | 12,193 |
| | $ | 5,163 |
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| Limited partners' earnings on common units: | | | | | | |
| Distributions | | $ | 69,057 |
| | $ | 58,158 |
| | $ | 27,439 |
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| Allocation of (distributions) earnings excess | | (18,077 | ) | | (11,489 | ) | | 3,721 |
|
| Total limited partners' earnings on common units | | $ | 50,980 |
| | $ | 46,669 |
| | $ | 31,160 |
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| Limited partners' earnings on subordinated units: | | | | | | |
| Distributions | | $ | — |
| | $ | 4,424 |
| | $ | 26,878 |
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| Allocation of (distributions) earnings excess | | — |
| | (482 | ) | | 3,647 |
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| Total limited partner's earnings on subordinated units | | $ | — |
| | $ | 3,942 |
| | $ | 30,525 |
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Weighted average limited partner units outstanding (2): | | | | | | |
| Common units - (basic) | | 24,348,063 |
| | 22,490,264 |
| | 12,237,154 |
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| Common units - (diluted) | | 24,376,972 |
| | 22,558,717 |
| | 12,356,914 |
|
Subordinated units - Delek (basic and diluted) (3) | | — |
| | 1,803,167 |
| | 11,999,258 |
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Net income per limited partner unit (2): | | | | | | |
| Common - (basic) | | $ | 2.09 |
| | $ | 2.08 |
| | $ | 2.55 |
|
Common - (diluted) (4) | | $ | 2.09 |
| | $ | 2.07 |
| | $ | 2.52 |
|
| Subordinated - (basic and diluted) | | $ | — |
| | $ | 2.19 |
| | $ | 2.54 |
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(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 12 for further discussion related to IDRs.
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(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. |
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(3)
| On February 25, 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. Distributions and the Partnership's net income were allocated to the subordinated units through February 24, 2016. |
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(4)
| There were no outstanding(1) There were 41,790, 7,511 and 4,458 anti-dilutive common unit equivalents excluded from the diluted earnings per unit calculation during the year ended December 31, 2017. Outstanding common unit equivalents totaling 4,240 and 6,200 were excluded from the diluted earnings per |
unit calculation for the years ended December 31, 2016 and 2015, respectively, as these common unit equivalents did not have a dilutive effect under the treasury stock method.
6. Major Customers
Delek, directly or indirectly, accounted for 28.9%, 32.8% and 25.9% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. Sunoco LP accounted for 9.0%, 10.5% and 16.2% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively.
7. Inventory
Inventories consisted of $20.9 million and $8.9 million of refined petroleum products as of December 31, 2017 and 2016, respectively. Inventory is stated at the lower of cost or net realizable value, with cost determined on a FIFO 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 a nominal amount and $0.3 million during the years ended December 31, 20172023, 2022 and 2015,2021, respectively. There was no lower of cost or net realizable value charge during the year ended December 31, 2016.
8.
7. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Land | $ | 17,367 | | | $ | 17,367 | |
| Building and building improvements | 5,072 | | | 5,072 | |
| Pipelines, tanks and terminals | 1,228,676 | | | 1,103,857 | |
| Asset retirement obligation assets | 2,073 | | | 2,073 | |
| Other equipment | 27,604 | | | 30,849 | |
| Construction in process | 39,718 | | | 81,466 | |
| Property, plant and equipment | 1,320,510 | | | 1,240,684 | |
| Less: accumulated depreciation | (384,359) | | | (316,680) | |
| Property, plant and equipment, net | $ | 936,151 | | | $ | 924,004 | |
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| | | December 31, |
| | | 2017 | | 2016 |
| | | | | |
| Land and land improvements | | $ | 4,440 |
| | $ | 4,435 |
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| Building and building improvements | | 2,804 |
| | 2,236 |
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| Pipelines, tanks and terminals | | 314,251 |
| | 305,302 |
|
| Asset retirement obligation assets | | 2,073 |
| | 2,073 |
|
| Other equipment | | 14,650 |
| | 12,925 |
|
| Construction in process | | 28,961 |
| | 15,436 |
|
| | | 367,179 |
| | 342,407 |
|
| Less: accumulated depreciation | | (112,111 | ) | | (91,378 | ) |
| | | $ | 255,068 |
| | $ | 251,029 |
|
Property, plant and equipment, accumulated depreciation and depreciation expense by reporting segment as of and for the years ended December 31, 2017 and 2016 are as follows (in thousands):
Notes to Consolidated Financial Statements
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| | | As of and For the Year Ended December 31, 2017 |
| | | Pipelines and Transportation | | Wholesale Marketing and Terminalling | | Consolidated |
| Property, plant and equipment | | $ | 300,134 |
| | $ | 67,045 |
| | $ | 367,179 |
|
| Less: accumulated depreciation | | (84,435 | ) | | (27,676 | ) | | (112,111 | ) |
| Property, plant and equipment, net | | $ | 215,699 |
| | $ | 39,369 |
| | $ | 255,068 |
|
| Depreciation expense | | $ | 17,268 |
| | $ | 3,583 |
| | $ | 20,851 |
|
|
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| | | As of and For the Year Ended December 31, 2016 |
| | | Pipelines and Transportation | | Wholesale Marketing and Terminalling | | Consolidated |
| Property, plant and equipment | | $ | 279,155 |
| | $ | 63,252 |
| | $ | 342,407 |
|
| Less: Accumulated depreciation | | (67,032 | ) | | (24,346 | ) | | (91,378 | ) |
| Property, plant and equipment, net | | $ | 212,123 |
| | $ | 38,906 |
| | $ | 251,029 |
|
| Depreciation expense | | $ | 16,133 |
| | $ | 3,617 |
| | $ | 19,750 |
|
9.8. Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the identifiable net assets acquired. Goodwill acquired in a business combination is recorded at fair value and is not amortized. Our goodwill relates to the west Texas assets contributed to us by Delek Marketing & Supply, LLC ("Delek Marketing"), a direct wholly owned subsidiary of Delek, in connection with our initial public offering (the "Offering") and to the purchase price allocation of certain of our third party acquisitions.
We perform an annual assessment of whether goodwill retains its value. This assessment is done more frequently if indicators of potential impairment exist. We performed our annual goodwill impairment review in the fourth quarter of 2017, 20162023, 2022, and 2015. 2021.
For the year ended December 31, 2023, we performed a quantitative assessment for our Delaware Gathering reporting unit and a qualitative assessment for our other reporting units. Our 2023 testing of goodwill did not identify any impairments other than our Delaware Gathering reporting unit, which reported a goodwill impairment charge of $14.8 million. The impairment was primarily driven by the significant increases in interest rates and timing of system connections with our producer customers.
For the quantitative assessment, the discounted cash flow fair value estimate is based on known or knowable information at the measurement date. The significant assumptions that were used to develop the estimates of the fair values under the discounted cash flow method included management’s best estimates of the discount rate of 16% as well as estimates of future cash flows, which are impacted primarily by future volumes and EBITDA projections. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the interim goodwill impairment test will prove to be an accurate prediction of the future. The fair value measurements for the individual reporting units represent Level 3 measurements.
We performed a discounted cash flows test, using a market participant weighted average cost of capital,qualitative assessment for the years ended December 31, 2022, and estimated minimal growth rates for revenue, gross profitDecember 31, 2021. In 2022 and capital expenditures based on history and our best estimate of future forecasts. We also estimated the fair values using a multiple of expected future cash flows, such as those used by third party analysts. In 2017, 2016 and 2015,2021, the annual impairment review resulted in the determination that no indicators of impairment of goodwill had occurred.
Ourwere present. Accumulated goodwill accounts in our wholesale marketing and terminalling segment amounted to $7.5impairment was $14.8 million as of December 31, 2017, 2016 and 2015. Our2023. There was no accumulated goodwill accounts in our pipelines and transportation segment amounted to $4.7 million as ofimpairment at December 31, 2017, 2016 and 2015. During the year ended December 31, 2015, we recorded2022.
A summary of our goodwill of $0.5 million in our pipelines and transportationby segment in connection with the acquisition of certain trucks and trailers acquired in 2014.is as follows (in thousands):
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| | | Gathering and Processing | | Wholesale Marketing and Terminalling | | | | Storage and Transportation | | | | Total |
| Balance, | December 31, 2021 | | $ | 4,155 | | | $ | 7,499 | | | | | $ | 549 | | | | | $ | 12,203 | |
| Acquisition | | 14,848 | | | — | | | | | — | | | | | 14,848 | |
| | | | | | | | | | | | |
| Balance, | December 31, 2022 | | 19,003 | | | 7,499 | | | | | 549 | | | | | 27,051 | |
| Goodwill Impairment | | (14,848) | | | — | | | | | — | | | | | (14,848) | |
| Balance, | December 31, 2023 | | $ | 4,155 | | | $ | 7,499 | | | | | $ | 549 | | | | | $ | 12,203 | |
10.
9. Other Intangible Assets
Our identifiable intangible assets are as follows (in thousands):
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| | | As of December 31, 2023 | | As of December 31, 2022 |
| Useful Life | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Intangible assets subject to amortization: | | | | | | | | | | | | | |
| Customer relationships | 11.6 years | | $ | 210,000 | | | $ | (28,664) | | | $ | 181,336 | | | $ | 210,000 | | | $ | (10,560) | | | $ | 199,440 | |
| Marketing contract | 20 years | | 144,219 | | | (42,064) | | | 102,155 | | | 144,219 | | | (34,853) | | | 109,366 | |
| Rights-of-way assets | 8 - 35 years | | 14,892 | | | (1,078) | | | 13,814 | | | 13,490 | | | (377) | | | 13,113 | |
| Intangible assets not subject to amortization: | | | | | | | | | | | | | |
| Rights-of-way assets | Indefinite | | 45,722 | | | | | 45,722 | | | 42,877 | | | | | 42,877 | |
| Total | | | $ | 414,833 | | | $ | (71,806) | | | $ | 343,027 | | | $ | 410,586 | | | $ | (45,790) | | | $ | 364,796 | |
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| | | Useful | | | | Accumulated | | |
| As of December 31, 2017 | | Life | | Gross | | Amortization | | Net |
| Intangible assets subject to amortization: | | | | | | | | |
| Supply contract | | 11.5 | | $ | 12,227 |
| | $ | (12,138 | ) | | $ | 89 |
|
| Intangible assets not subject to amortization: | | | | | | | | |
| Rights-of-way assets | | Indefinite | | 15,828 |
| | | | 15,828 |
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| Total | | | | $ | 28,055 |
| | $ | (12,138 | ) | | $ | 15,917 |
|
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| | | | | | | | | | | | | | |
| | | Useful | | | | Accumulated | | |
| As of December 31, 2016 | | Life | | Gross | | Amortization | | Net |
| Intangible assets subject to amortization: | | | | | | | | |
| Supply contract | | 11.5 | | $ | 12,227 |
| | $ | (11,075 | ) | | $ | 1,152 |
|
| Intangible assets not subject to amortization: | | | | | | | | |
| Rights-of-way assets | | Indefinite | | 13,268 |
| | | | 13,268 |
|
| Total | | | | $ | 25,495 |
|
| $ | (11,075 | ) | | $ | 14,420 |
|
Amortization of the rights-of-way assets and customer relationships intangible assetsasset was $1.1$18.7 million during each offor the yearsyear ended December 31, 2017, 2016 and 2015,2023, and is included in depreciation and amortization on the accompanying consolidated statements of income and comprehensive income. Amortization of the marketing contract was $7.2 million during the years ended December 31, 2023, 2022 and 2021, and is included as a reduction of net revenue on the accompanying consolidated statements of income and comprehensive income.
Amortization expense is estimated to be $0.1$0.6 million $7.2 million and $18.1 million for the yearrights-of-way assets, marketing contract intangible and the customer relationship intangible, respectively, for each of the years ended December 31, 2018, at which point our supply contract will be fully amortized.
2024 through 2028.
10. Long-Term Obligations
Outstanding borrowings under the Partnership’s debt instruments are as follows (in thousands):
Second Amended and Restated | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| DKL Revolving Facility | $ | 780,500 | | | $ | 720,500 | |
| DKL Term Facility | 281,250 | | | 300,000 | |
| 2028 Notes | 400,000 | | | 400,000 | |
| 2025 Notes | 250,000 | | | 250,000 | |
| Principal amount of long-term debt | 1,711,750 | | | 1,670,500 | |
| Less: Unamortized discount and deferred financing costs | 7,961 | | | 8,933 | |
| Total debt, net of unamortized discount and deferred financing costs | 1,703,789 | | | 1,661,567 | |
| Less: Current portion of long-term debt and notes payable | 30,000 | | | 15,000 | |
| Long-term debt, net of current portion | $ | 1,673,789 | | | $ | 1,646,567 | |
DKL Credit AgreementFacility
WeOn October 13, 2022, the Partnership entered into a senior secured revolving credit agreement on November 7, 2012,fourth amended and restated DKL Credit Facility (the "2022 DKL Credit Facility") with Fifth Third, Bank, as administrative agent and a syndicate of lenders. The agreement was amended2022 DKL Credit Facility, among other things, (i) increased total aggregate commitments to $1.20 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and restated on July 9, 2013$25.0 million for swing line loans (the "Amended and Restated Credit Agreement"“DKL Revolving Facility”) and was most recently amended and restated on December 30, 2014 (the "Second Amended and Restated Credit Agreement"). Underwith an extended maturity date of October 13, 2027, which will accelerate to 180 days prior to the termsstated maturity date of the Second Amended2025 Notes if any of the 2025 Notes remain outstanding on that date, and Restated Credit Agreement,(B) a new senior secured term loan in the lender commitments were increased from $400.0original principal amount of $300.0 million to $700.0 million. The Second Amended and Restated Credit Agreement also contains an(the “DKL Term Facility”), (ii) reset the accordion feature wherebyunder the DKL Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of the Partnership can increaseand one or more existing or new lenders and (iii) provided for the sizeDKL Term Facility be drawn in full on October 13, 2022, with a maturity date of April 15, 2025 and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances. As of December 31, 2023, the DKL Revolving Facility was classified as long-term in the accompanying consolidated balance sheets as the Partnership currently has the ability and intent to refinance the 2025 Notes on a long-term basis through available capacity under the DKL Revolving Facility and Related Party Revolving Credit Facility (as defined below). The DKL Term Facility requires four quarterly amortization payments of $3.8 million in 2023 and four quarterly amortization payments of $7.5 million in 2024.
Borrowings under the DKL Revolving Facility bear interest at the election 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 interestPartnership at either a U.S. dollar prime rate, plus an applicable margin ranging from 1.00% to 2.00% depending on the Partnership’s Total Leverage Ratio (as defined in the DKL Credit Agreement), or the London Interbank Offered Rate ("LIBOR"),a SOFR rate plus a credit spread adjustment of 0.10% for one-month interest periods and 0.25% for three-month interest periods plus an applicable margin ranging from 2.00% to 3.00% depending on the Partnership’s Total Leverage Ratio. Unused revolving commitments under the DKL Revolving Facility incur a commitment fee that ranges from 0.30% to 0.50% depending on the Partnership’s Total Leverage Ratio. As of December 31, 2023 and December 31, 2022, the weighted average interest rate was 8.46% and 7.55%, respectively.
Borrowings under the DKL Term Facility bear interest at the election of the borrowers. Borrowings denominated in Canadian dollars bear interestPartnership at either a CanadianU.S. dollar prime rate, plus an applicable margin of 2.50% for the first year of the DKL Term Facility and 3.00% for the second year of the DKL Term Facility, or the Canadian Dealer Offered Rate,a SOFR rate plus a credit spread adjustment of 0.10% for one-month interest periods and 0.25% for three-month interest periods plus an applicable margin atof 3.50% for the electionfirst year of the borrowers. The applicable margin in each case varies based uponTerm Facility and 4.00% for the Partnership's most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the termssecond year of the credit facility.DKL Term Facility. At December 31, 2017,2023 and December 31, 2022, the weighted average borrowing rate was approximately 9.46% and 7.92%, respectively. The effective interest rate forwas 9.93% as of December 31, 2023.
The 2022 DKL Credit Facility contains affirmative and negative covenants and events of default, which the Partnership considers customary and are similar to those in our borrowings underpredecessor DKL Credit Facility. We believe we were in compliance with all covenant requirements as of December 31, 2023. Under the credit facility was approximately 4.3%. Additionally,financial covenants in the 2022 DKL Credit Facility, the Partnership cannot:
•permit, as of the last day of each fiscal quarter, the Total Leverage Ratio (as defined in the DKL Credit Facility) to be greater than 5.25 to 1.00; provided, that during any Temporary Increase Period (as defined in the DKL Credit Facility, the Partnership cannot permit the foregoing ratio to be greater than 5.50 to 1.00 (a Temporary Increase Period with respect to the 3 Bear Acquisition (as defined in the DKL Credit Facility) is in effect through March 31, 2023);
•permit, as of the last day of each fiscal quarter, the Senior Leverage Ratio (as defined in the DKL Credit Facility) to be greater than 3.75 to 1.00; and
•permit, as of the last day of each fiscal quarter, the interest coverage ratio to be equal to or less than 2.00 to 1.00.
On November 6, 2023, the Partnership entered into a First Amendment, a Second AmendedAmendment and Restateda Third Amendment to the 2022 DKL Credit Agreement requires usFacility (together, the “Amendments”) to payextend the maturity of the DKL Term Facility to April 15, 2025. In addition, the Amendments added a leverage-ratio dependent quarterly feematurity acceleration clause which will accelerate the maturity of the DKL Term Facility to 180 days prior to the stated maturity date of the 2025 Notes if any of the 2025 Notes remain outstanding on the average unused revolving commitment.that date. As of December 31, 2017, this fee2023, the DKL Term Facility was 0.50% per year.classified as long-term in the accompanying consolidated balance sheets as the Partnership currently has the ability and intent to refinance the 2025 Notes on a long-term basis through available capacity under the DKL Revolving Facility and Related Party Revolving Credit Facility. The DKL Term Facility requires four quarterly amortization payments of $3.8 million in 2023, four quarterly amortization payments of $7.5 million in 2024 and one quarterly amortization payment of $7.5 million in 2025 with final maturity and principal due on April 15, 2025.
The DKL Revolving Facility has a total capacity of $1.05 billion, including up to $115.0 million for letters of credit and $25.0 million in swing line loans. This facility has a maturity date of October 13, 2027 which will accelerate to 180 days prior to the stated maturity date of the Delek Logistics 2025 Notes if any of the Delek Logistics 2025 Notes remain outstanding on that date. On November 6, 2023, the Partnership entered into the Amendments which among other things: (i) increased the U.S. Revolving Credit Commitments (as defined in the DKL Credit Facility) by an amount equal to $150.0 million, resulting in aggregate lender commitments under the DKL Revolving Credit Facility in an amount of $1.05 billion and (ii) increased the limit allowed for general unsecured debt (as defined in the DKL Credit Facility) by an amount equal to $95.0 million, resulting in an unsecured general debt limit of $150.0 million. There were no letters of credit outstanding as of December 31, 2023 or December 31, 2022.
The obligations under the Second Amended and Restated2022 DKL Credit Agreement remainFacility are secured by first priority liens on substantially all of the Partnership'sPartnership’s and its subsidiaries'subsidiaries’ tangible and intangible assets. Additionally,The carrying values of outstanding borrowings under the 2022 DKL Credit Facility as of December 31, 2023 and December 31, 2022 approximate their fair values.
Related Party Revolving Credit Facility
On November 6, 2023, the Partnership and certain of its subsidiaries, as guarantors, entered into a certain Promissory Note (the “Related Party Revolving Credit Facility”) with Delek Marketing continuesHoldings. The Related Party Revolving Credit Facility provides for revolving borrowings with aggregate commitments of $70.0 million comprised of a (i) $55.0 million senior tranche and a (ii) $15.0 million subordinated tranche (the “Subordinated Tranche”), with the initial borrowings under the Subordinated Tranche conditioned upon the Partnership and Delek Holdings reaching an agreement with Fifth Third Bank, National Association, as administrative agent under the DKL Credit Facility, on subordination provisions and other material terms related to provide a limited guarantythe Subordinated Tranche. The Related Party Revolving Credit Facility will bear interest at Term SOFR (as defined in the Related Party Revolving Credit Facility) plus 3.00%. The Related Party Revolving Credit Facility proceeds will be used for the Partnership’s working capital purposes and other general corporate purposes. The Related Party Revolving Credit Facility will mature on June 30, 2028. The Related Party Revolving Credit Facility contains certain affirmative covenants, mandatory prepayments and events of default that the Partnership'sPartnership considers to be customary for an arrangement of this sort. The obligations under the Second AmendedRelated Party Revolving Credit Facility are unsecured. There were no borrowings outstanding under the Related Party Revolving Credit Facility as of December 31, 2023.
2028 Notes
On May 24, 2021, the Partnership and Restated Credit Agreement.our wholly owned subsidiary Delek Marketing's guaranty is (i) limitedLogistics Finance Corp. ("Finance Corp." and together with the Partnership, the "Issuers") issued $400.0 million in aggregate principal amount of 7.125% senior notes due 2028 (the "2028 Notes") at par, pursuant to an indenture with U.S. Bank, National Association as trustee. The 2028 Notes are general unsecured senior obligations of the Issuers and are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's subsidiaries other than Finance Corp., and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2028 Notes rank equal in right of payment with all existing and future senior indebtedness of the Issuers, and senior in right payment to any future subordinated indebtedness of the Issuers. The 2028 Notes will mature on June 1, 2028, and interest on the 2028 Notes is payable semi-annually in arrears on each June 1 and December 1, commencing December 1, 2021.
At any time prior to June 1, 2024, the Issuers may redeem up to 35% of the aggregate principal amount equalof the 2028 Notes with the net cash proceeds of one or more equity offerings by the Partnership at a redemption price of 107.13% of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to June 1, 2024, the Issuers may also redeem all or part of the 2028 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 June 1, 2024, the Issuers may, subject to certain conditions and limitations, redeem all or part of the 2028 Notes, at a redemption price of 103.56% of the redeemed principal for the twelve-month period beginning on June 1, 2024, 101.78% for the twelve-month period beginning on June 1, 2025, and 100.00% beginning on June 1, 2026 and thereafter, plus accrued and unpaid interest, if any.
In the event of a promissory note madechange of control, accompanied or followed by Delek US in favora ratings downgrade within a certain period of Delek Marketing (the "Holdings Note")time, subject to certain conditions and (ii) secured by Delek Marketing's pledgelimitations, the Issuers will be obligated to make an offer for the purchase of the Holdings Note2028 Notes from holders at a price equal to our lenders under101.00% of the Second Amendedprincipal amount thereof, plus accrued and Restated Credit Agreement. unpaid interest.
As of December 31, 2017,2023, the principal amounteffective interest rate was 7.39%. The estimated fair value of the Holdings Note2028 Notes was $102.0$380.4 million plus unpaid interest accrued since the issuance date. The Second Amended and Restated Credit Agreement matures on December 30, 2019.
As of December 31, 2017, we had $179.9$359.7 million in outstanding borrowings under the Second Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling $9.0 million, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at December 31, 2017. Unused credit commitments under the Second Amended and Restated Credit Agreement as of December 31, 2017 were $511.1 million.2023and December 31, 2022, respectively, measured based upon quoted market prices in an active market, defined as Level 1 in the fair value hierarchy.
2025 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%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 payment with all existing and future senior indebtedness of the Issuers, and senior in right of payment to anyfuture subordinated indebtedness of the Issuers. The 2025 Notes will mature on May 15, 2025, and Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.15.
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, theThe Issuers may, subject to certain conditions and limitations, redeem all or part of the 2025 Notes at a redemption price of 105.063% for100.00% of the redeemed principal during 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 inIn 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 withlimitations, the issuanceIssuers will be obligated to make an offer for the purchase of the 2025 Notes from holders at a price equal to 101.00% of the Issuersprincipal amount thereof, plus accrued 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.unpaid interest.
As of December 31, 2017, we had $250.0 million in outstanding principal amount2023, the effective interest rate was 7.19%. The estimated fair value of the 2025 Notes. Outstanding borrowings under the 2025 Notes are net of deferred financing costs and debt discount of $5.5was $248.7 million and $1.7$243.4 million respectively, as of December 31, 2017.
2023 and December 31, 2022, respectively, measured based upon quoted market prices in an active market, defined as Level 1 in the fair value hierarchy.
Principal maturities of the Partnership's existing third partythird-party debt instruments for the next five years and thereafter are as follows as of December 31, 20172023 (in thousands):
| | | | | | | | |
| Year Ended December 31, | | Total |
| 2024 | | $ | 30,000 | |
| 2025 | | 501,250 | |
| 2026 | | — | |
| 2027 | | 780,500 | |
| 2028 | | 400,000 | |
| Thereafter | | — | |
| Total | | $ | 1,711,750 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Second Amended and Restated Credit Agreement | | $ | — |
| | $ | 179,900 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 179,900 |
|
| 2025 Notes | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 250,000 |
| | $ | 250,000 |
|
12.11. Equity
We had 9,088,5879,299,763 common limited partner units held by the public outstanding as of December 31, 2017.2023. Additionally, as of December 31, 2017,2023, Delek Holdings owned a 61.5%an 78.7% limited partner interest in us, consisting of 15,294,04634,311,278 common limited partner units.
On November 14, 2022, we entered into an Equity Distribution Agreement with RBC Capital Markets, LLC (the “Manager”) under which we may issue and sell, from time to time, to or through the Manager, as sales agent and/or principal, as applicable, common units representing limited partner interests, having an aggregate offering price of up to $100.0 million. The Equity Distribution Agreement provides us the right, but not the obligation, to sell common units in the future, at prices we deem appropriate. The net proceeds from any sales under this agreement will be used for general partnership purposes. For the year ended December 31, 2022, we sold 59,192 common units under the Equity Distribution Agreement for net proceeds of $3.1 million. Underwriting discounts were immaterial.
On April 14, 2022, we filed a shelf registration statement with the SEC, which was declared effective on April 29, 2022, which provides the Partnership the ability to offer up to $200.0 million of our common limited partner units from time to time and a 94.6% interest inthrough one or more methods of distribution, subject to market conditions and our general partner, which owns the entire 2.0% general partner interest consisting of 497,604 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.capital needs.
Equity Activity
On February 25, 2016, the requirements under the Partnership Agreement for the conversion of all subordinated units into common units were satisfied, and 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 table below summarizes the changes in the number of units outstanding from December 31, 20142021 through December 31, 2017 (in units).2023.
| | | | | | | | | | | | | | | | | |
| Common - Public | | Common - Delek Holdings | | Total |
| Balance at December 31, 2020 | 8,697,468 | | | 34,745,868 | | | 43,443,336 | |
| Delek Holdings resale of units | 49,068 | | | (49,068) | | | — | |
Unit-based compensation awards (1) | 27,517 | | | — | | | 27,517 | |
| Balance at December 31, 2021 | 8,774,053 | | | 34,696,800 | | | 43,470,853 | |
| Delek Holdings resale of units | 385,522 | | | (385,522) | | | — | |
Unit-based compensation awards (1) | 38,538 | | | — | | | 38,538 | |
| Issuance of units pursuant to the Equity Distribution Agreement | 59,192 | | | — | | | 59,192 | |
| Balance at December 31, 2022 | 9,257,305 | | | 34,311,278 | | | 43,568,583 | |
Unit-based compensation awards (1) | 42,458 | | | — | | | 42,458 | |
| Balance at December 31, 2023 | 9,299,763 | | | 34,311,278 | | | 43,611,041 | |
|
| | | | | | | | | | | | | | | |
| | | Common - Public | | Common - Delek | | Subordinated | | General Partner | | Total |
| Balance at December 31, 2014 | | 9,417,189 |
| | 2,799,258 |
| | 11,999,258 |
| | 494,197 |
| | 24,709,902 |
|
| GP units issued to maintain 2% interest | | — |
| | — |
| | — |
| | 1,248 |
| | 1,248 |
|
Unit-based compensation awards (1) | | 61,084 |
| | — |
| | — |
| | — |
| | 61,084 |
|
| Balance at December 31, 2015 | | 9,478,273 |
| | 2,799,258 |
| | 11,999,258 |
| | 495,445 |
| | 24,772,234 |
|
| GP units issued to maintain 2% interest | | — |
| | — |
| | — |
| | 1,057 |
| | 1,057 |
|
Unit-based compensation awards (1) | | 51,818 |
| | — |
| | — |
| | — |
| | 51,818 |
|
| Delek unit repurchases from public | | (266,676 | ) | | 266,676 |
| | — |
| | — |
| | — |
|
| Subordinated unit conversion | | — |
| | 11,999,258 |
| | (11,999,258 | ) | | — |
| | — |
|
| Balance at December 31, 2016 | | 9,263,415 |
| | 15,065,192 |
| | — |
| | 496,502 |
| | 24,825,109 |
|
| GP units issued to maintain 2% interest | | — |
| | — |
| | — |
| | 1,102 |
| | 1,102 |
|
| Unit-based compensation awards | | 54,026 |
| | — |
| | — |
| | — |
| | 54,026 |
|
| Delek unit repurchases from public | | (228,854 | ) | | 228,854 |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2017 | | 9,088,587 |
| | 15,294,046 |
| | — |
| | 497,604 |
| | 24,880,237 |
|
(1) Unit-based compensation awards are presented net of 14,053, 17,27618,694, 12,224 and 21,1445,315 units withheld for taxes as of December 31, 2017, 20162023, 2022 and 2015,2021, respectively.
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.
The following table presents the allocation of the general partner's interest in net income (in thousands, except percentage of ownership interest):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net income attributable to partners | | $ | 69,409 |
| | $ | 62,804 |
| | $ | 66,848 |
|
| Less: General partner's IDRs | | (17,389 | ) | | (11,160 | ) | | (3,904 | ) |
| Net income available to partners | | $ | 52,020 |
| | $ | 51,644 |
| | $ | 62,944 |
|
| General partner's ownership interest | | 2.0 | % | | 2.0 | % | | 2.0 | % |
| General partner's allocated interest in net income | | 1,040 |
| | 1,033 |
| | 1,259 |
|
| General partner's IDRs | | 17,389 |
| | 11,160 |
| | 3,904 |
|
| Total general partner's interest in net income | | $ | 18,429 |
| | $ | 12,193 |
| | $ | 5,163 |
|
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 and (ii) our general partner has not transferred its IDRs.
|
| | | | | | | | | | | |
| | | | 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 Cash Distribution (in thousands) |
| March 31, 2021 | | $ | 0.920 | | | $ | 39,968 | |
| June 30, 2021 | | $ | 0.940 | | | $ | 40,846 | |
| September 30, 2021 | | $ | 0.950 | | | $ | 41,286 | |
| December 31, 2021 | | $ | 0.975 | | | $ | 42,384 | |
| March 31, 2022 | | $ | 0.980 | | | $ | 42,604 | |
| June 30, 2022 | | $ | 0.985 | | | $ | 42,832 | |
| September 30, 2022 | | $ | 0.990 | | | $ | 43,057 | |
| December 31, 2022 | | $ | 1.020 | | | $ | 44,440 | |
| March 31, 2023 | | $ | 1.025 | | | $ | 44,664 | |
| June 30, 2023 | | $ | 1.035 | | | $ | 45,112 | |
| September 30, 2023 | | $ | 1.045 | | | $ | 45,558 | |
| December 31, 2023 | | $ | 1.055 | | | $ | 46,010 | |
|
| | | | | | | | | | | | | | | | |
| 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 |
| December 31, 2015 | | $ | 0.590 |
| | $ | 2.36 |
| | $ | 16,124 |
| | February 12, 2016 | | February 5, 2016 |
| March 31, 2016 | | $ | 0.610 |
| | $ | 2.44 |
| | $ | 17,095 |
| | May 13, 2016 | | May 5, 2016 |
| June 30, 2016 | | $ | 0.630 |
| | $ | 2.52 |
| | $ | 18,085 |
| | August 12, 2016 | | August 5, 2016 |
| 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 | | November 7, 2017 |
| December 31, 2017 | | $ | 0.725 |
| | $ | 2.90 |
| | $ | 22,777 |
| | February 12, 2018 | | February 2, 2018 |
12. Equity Method Investments
The allocationPartnership owns a 33% membership interest in Red River Pipeline Company LLC ("Red River"), a joint venture operated with Plains Pipeline, L.P. Red River owns a 16-inch crude oil pipeline running from Cushing, Oklahoma to Longview, Texas with capacity of total quarterly cash distributions made to general and limited partners for235,000 bpd. During the years ended December 31, 2017, 20162023 and 2015 is set forth in2022, we made no additional capital contributions. During 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):
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| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| General partner's distributions: | | | | | | |
| General partner's distributions | | $ | 1,408 |
| | $ | 1,277 |
| | $ | 1,109 |
|
| General partner's IDRs | | 17,389 |
| | 11,160 |
| | 3,904 |
|
| Total general partner's distributions | | 18,797 |
| | 12,437 |
| | 5,013 |
|
| | | | | | | |
| Limited partners' distributions: | | | | | | |
| Common | | 69,057 |
| | 58,158 |
| | 27,439 |
|
| Subordinated | | — |
| | 4,424 |
| | 26,878 |
|
| Total limited partners' distributions | | 69,057 |
| | 62,582 |
| | 54,317 |
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| Total cash distributions | | $ | 87,854 |
| | $ | 75,019 |
| | $ | 59,330 |
|
| | | | | | | |
| Cash distributions per limited partner unit | | $ | 2.835 |
| | $ | 2.575 |
| | $ | 2.240 |
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13. Equity Based Compensation
The Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") was adopted by the Delek Logistics GP, LLC board of directors in connection with the completion of the Offering in November 2012. The LTIP provides for officers, directors and employees of our general partner or its affiliates, and any consultants, affiliates of our general partner or other individuals who perform services for us. The LTIP consists of unit options, restricted units, phantom units, unit appreciation rights, distribution equivalent rights, other unit-based awards and unit awards. The LTIP limits the number of common units that may be delivered pursuant to awards under the plan to 612,207 units. The LTIP is administered by the Conflicts Committee of the board of directors of our general partner.
We incurred approximately $0.7 million, $0.6 million and $0.4 million of unit-based compensation expense related to the Partnership during the yearsyear ended December 31, 2017, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in the accompanying consolidated statements2021, we made capital contributions of income and comprehensive income. The fair value of phantom unit awards under the LTIP is determined$1.4 million 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. The total fair value of phantom units vested was $1.7 million, $1.7 million and $1.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.capital calls received.
As of December 31, 2017, there was $0.4 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 0.7 years.
A summary of our unit award activity for the years ended December 31, 2017, 2016 and 2015, is set forth below:
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| | | | | | | |
| | | Number of Phantom Units | | Weighted-Average Grant Price |
| Non-vested | December 31, 2014 | 215,464 |
| | $ | 23.48 |
|
| Granted | | 11,836 |
| | $ | 39.73 |
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| Vested | | (82,228 | ) | | $ | 23.55 |
|
| Non-vested | December 31, 2015 | 145,072 |
| | $ | 24.76 |
|
| Granted | | 12,475 |
| | $ | 26.05 |
|
| Vested | | (69,094 | ) | | $ | 24.66 |
|
| Forfeited | | (14,500 | ) | | $ | 22.65 |
|
| Non-vested | December 31, 2016 | 73,953 |
| | $ | 25.49 |
|
| Granted | | 10,090 |
| | $ | 32.20 |
|
| Vested | | (68,079 | ) | | $ | 24.60 |
|
| Non-vested | December 31, 2017 | 15,964 |
| | $ | 33.54 |
|
14. Equity Method Investments
In March 2015, we entered intoWe have two additional pipeline joint ventures, that have constructed separate crude oil pipeline systems and related ancillary assets,in which are serving third parties and subsidiaries of Delek. Wewe 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,Andeavor Logistics RIO Pipeline LLC ("Rangeland RIO"Andeavor Logistics") 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 December 31, 2017, the Partnership's investment balance in these joint ventures was $106.5 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 investeeson a 100% basis is shown below (in thousands):
| | | | | | | | | | | |
| As of December 31, 2023 | | As of December 31, 2022 |
| Current Assets | $ | 55,948 | | | $ | 52,253 | |
| Non-current Assets | $ | 607,002 | | | $ | 626,165 | |
| Current liabilities | $ | 8,994 | | | $ | 7,117 | |
| Non-current liabilities | $ | 63 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Revenues | | | | | $ | 139,699 | | | $ | 140,634 | | | $ | 114,392 | |
| Gross profit | | | | | $ | 89,132 | | | $ | 88,575 | | | $ | 67,809 | |
| Operating income | | | | | $ | 84,349 | | | $ | 85,096 | | | $ | 65,023 | |
| Net income | | | | | $ | 85,636 | | | $ | 85,311 | | | $ | 64,979 | |
The Partnership's investment balances in these joint ventures were as follows (in thousands):
| | | | | | | | | | | |
| As of December 31, 2023 | | As of December 31, 2022 |
| Red River | $ | 141,091 | | | $ | 149,635 | |
| CP LLC | 61,273 | | | 64,056 | |
| Andeavor Logistics | 38,973 | | | 43,331 | |
| Total Equity Method Investments | $ | 241,337 | | | $ | 257,022 | |
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| | | Year Ended | | Year Ended |
| | | December 31, 2017 | | December 31, 2016 |
| Current assets | | $ | 12,671 |
| | $ | 7,760 |
|
| Non-current assets | | $ | 244,329 |
| | $ | 237,516 |
|
| Current liabilities | | $ | 1,798 |
| | $ | 4,512 |
|
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| | | | | | | | | | | | |
| | | Year Ended | | Year Ended | | Year Ended |
| | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Revenues | | $ | 28,805 |
| | $ | 2,217 |
| | $ | — |
|
| Gross profit | | $ | 28,805 |
| | $ | 2,217 |
| | $ | — |
|
| Net Income/loss | | $ | 10,714 |
| | $ | (3,641 | ) | | $ | (1,967 | ) |
15.13. Segment Data
We aggregate our operating segments into twofour reportable segments: (i) pipelines gathering and transportation and processing; (ii) wholesale marketing and terminalling:
The assetsterminalling; (iii) storage and investments reportedtransportation; and (iv) investment in pipeline joint ventures. Operations that are not specifically included 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, as described in Note 2. 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.
During the year ended December 31, 2015, we acquired the Logistics Assets from Delek. Our historical financial statements have been retrospectively adjusted as appropriate to reflect the results of operations attributable to the Logistics Assets as if we owned the assets for all periods presented. The results of the Logistics Assets are included in Corporate and other segment.
The CODM evaluates performance based on EBITDA for planning and forecasting purposes. EBITDA is an important measure used by management to evaluate the pipelinesfinancial performance of our core operations. EBITDA is not a GAAP measure, but the components of EBITDA are computed using amounts that are determined in accordance with GAAP. A reconciliation of EBITDA to Net Income is included in the tables below. We define EBITDA as net income (loss) before net interest expense, income tax expense, depreciation and transportation segment.amortization expense, including amortization of marketing contract intangible, which is included as a component of net revenues in our accompanying consolidated statements of income.
Assets by segment are not a measure used to assess the performance of the Partnership by the CODM and thus is not disclosed.
The following is a summary of business segment operating performance as measured by contribution marginEBITDA for the periodperiods indicated (in thousands):
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| | Year Ended December 31, 2023 |
| (In thousands) | | Gathering and Processing (1) | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Investments in Pipeline Joint Ventures | | Corporate and Other | | Consolidated |
| Net revenues: | | | | | | | | | | | | |
Affiliate (2) | | $ | 212,537 | | | $ | 218,997 | | | $ | 132,269 | | | $ | — | | | $ | — | | | $ | 563,803 | |
| Third party | | 158,573 | | | 286,704 | | | 11,329 | | | — | | | — | | | 456,606 | |
| Total revenue | | $ | 371,110 | | | $ | 505,701 | | | $ | 143,598 | | | $ | — | | | $ | — | | | $ | 1,020,409 | |
| | | | | | | | | | | | |
| Segment EBITDA | | $ | 199,463 | | | $ | 106,512 | | | $ | 63,850 | | | $ | 31,424 | | | $ | (30,969) | | | $ | 370,280 | |
| Depreciation and amortization | | 72,181 | | | 7,055 | | | 9,839 | | | — | | | 3,309 | | | 92,384 | |
| Amortization of marketing contract intangible | | — | | | 7,211 | | | — | | | — | | | — | | | 7,211 | |
| Interest expense, net | | — | | | — | | | — | | | — | | | 143,244 | | | 143,244 | |
| Income tax expense | | | | | | | | | | | | 1,205 | |
| Net income | | | | | | | | | | | | $ | 126,236 | |
| | | | | | | | | | | | |
Capital spending (3) | | $ | 74,683 | | | $ | 2,111 | | | $ | 4,548 | | | $ | — | | | $ | — | | | $ | 81,342 | |
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| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Pipelines and Transportation | | | | | | |
| Net sales: | | | | | | |
| Affiliate | | 109,298 |
| | $ | 103,749 |
| | 102,551 |
|
| Third party | | 12,431 |
| | 18,423 |
| | 28,828 |
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| Total pipelines and transportation | | 121,729 |
| | 122,172 |
| | 131,379 |
|
| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 18,210 |
| | 19,425 |
| | 19,607 |
|
| Operating expenses | | 33,240 |
| | 29,235 |
| | 33,751 |
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| Segment contribution margin | | $ | 70,279 |
| | $ | 73,512 |
| | $ | 78,021 |
|
| Capital spending (excluding business combinations) | | $ | 14,262 |
| | $ | 8,478 |
| | $ | 16,030 |
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| Wholesale Marketing and Terminalling | | | | | | |
| Net sales: | | | | | | |
| Affiliate | | 46,982 |
| | 45,815 |
| | 50,013 |
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| Third party | | 369,364 |
| | 280,072 |
| | 408,277 |
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| Total wholesale marketing and terminalling | | 416,346 |
| | 325,887 |
| | 458,290 |
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| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 354,680 |
| | 282,733 |
| | 416,697 |
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| Operating expenses | | 10,034 |
| | 7,963 |
| | 11,172 |
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| Segment contribution margin | | $ | 51,632 |
| | $ | 35,191 |
| | $ | 30,421 |
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| Capital spending (excluding business combinations) | | $ | 4,141 |
| | $ | 3,289 |
| | $ | 6,397 |
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| Consolidated | | | | | | |
| Net sales: | | | | | | |
| Affiliate | | $ | 156,280 |
| | $ | 149,564 |
| | $ | 152,564 |
|
| Third party | | 381,795 |
| | 298,495 |
| | 437,105 |
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| Total Consolidated | | 538,075 |
| | 448,059 |
| | 589,669 |
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| Operating costs and expenses: | | | | | | |
| Cost of goods sold | | 372,890 |
| | 302,158 |
| | 436,304 |
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| Operating expenses | | 43,274 |
| | 37,198 |
| | 44,923 |
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| Contribution margin | | 121,911 |
| | 108,703 |
| | 108,442 |
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| General and administrative expenses | | 11,840 |
| | 10,256 |
| | 11,384 |
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| Depreciation and amortization | | 21,914 |
| | 20,813 |
| | 19,692 |
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| (Gain) loss on asset disposals | | (20 | ) | | (16 | ) | | 104 |
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| Operating income | | $ | 88,177 |
| | $ | 77,650 |
| | $ | 77,262 |
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| Capital spending (excluding business combinations) | | $ | 18,403 |
| | $ | 11,767 |
| | $ | 22,427 |
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| | Year Ended December 31, 2022 |
| (In thousands) | | Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Investments in Pipeline Joint Ventures | | Corporate and Other | | Consolidated |
| Net revenues: | | | | | | | | | | | | |
Affiliate (2) | | $ | 185,845 | | | $ | 173,084 | | | $ | 120,482 | | | $ | — | | | $ | — | | | $ | 479,411 | |
| Third party | | 119,582 | | | 415,800 | | | 21,614 | | | — | | | — | | | 556,996 | |
| Total revenue | | $ | 305,427 | | | $ | 588,884 | | | $ | 142,096 | | | $ | — | | | $ | — | | | $ | 1,036,407 | |
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| Segment EBITDA | | $ | 175,250 | | | $ | 83,098 | | | $ | 56,269 | | | $ | 31,683 | | | $ | (34,363) | | | $ | 311,937 | |
| Depreciation and amortization | | 47,206 | | | 6,308 | | | 8,591 | | | — | | | 883 | | | 62,988 | |
| Amortization of marketing contract intangible | | — | | | 7,211 | | | — | | | — | | | — | | | 7,211 | |
| Interest expense, net | | — | | | — | | | — | | | — | | | 82,304 | | | 82,304 | |
| Income tax expense | | | | | | | | | | | | 382 | |
| Net income | | | | | | | | | | | | $ | 159,052 | |
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Capital spending (3) | | $ | 122,594 | | | $ | 1,548 | | | $ | 6,528 | | | $ | — | | | $ | — | | | $ | 130,670 | |
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| | Year ended December 31, 2021 |
| (In thousands) | | Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Investments in Pipeline Joint Ventures | | Corporate and Other | | Consolidated |
| Net revenues: | | | | | | | | | | | | |
Affiliate (2) | | $ | 157,182 | | | $ | 147,793 | | | $ | 113,851 | | | $ | — | | | $ | — | | | $ | 418,826 | |
| Third party | | 4,670 | | | 265,464 | | | 11,942 | | | — | | | — | | | 282,076 | |
| Total revenue | | $ | 161,852 | | | $ | 413,257 | | | $ | 125,793 | | | $ | — | | | $ | — | | | $ | 700,902 | |
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| Segment EBITDA | | $ | 126,818 | | | $ | 79,597 | | | $ | 56,929 | | | $ | 24,575 | | | $ | (22,742) | | | $ | 265,177 | |
| Depreciation and amortization | | 22,394 | | | 5,547 | | | 8,588 | | | — | | | 6,241 | | | 42,770 | |
| Amortization of marketing contract intangible | | — | | | 7,211 | | | — | | | — | | | — | | | 7,211 | |
| Interest expense, net | | — | | | — | | | — | | | — | | | 50,221 | | | 50,221 | |
| Income tax expense | | | | | | | | | | | | 153 | |
| Net income | | | | | | | | | | | | $ | 164,822 | |
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Capital spending (3) | | $ | 22,262 | | | $ | 3,622 | | | $ | 1,567 | | | $ | — | | | $ | — | | | $ | 27,451 | |
The following table summarizes(1) EBITDA includes $14.8 million of goodwill impairment expense for the total assets for each segment as ofyear ended December 31, 2017 and 2016 (in thousands).2023. Refer to Note 8 - Goodwill for further information.
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| | | Year Ended December 31, |
| | | 2017 | | 2016 |
| Pipelines and transportation | | $ | 349,351 |
| | $ | 337,349 |
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| Wholesale marketing and terminalling | | 94,179 |
| | 78,198 |
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| Total Assets | | $ | 443,530 |
| | $ | 415,547 |
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16. Fair Value Measurements
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices(2) Affiliate revenue for the same or similar instruments. Management estimates thatwholesale marketing and terminalling segment is presented net of amortization expense pertaining to the carrying value approximates fair valuemarketing contract intangible.
(3) Capital spending includes additions on an accrual basis. Capital spending for all of our assets and liabilities that fall under the scope of ASC 825.
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 ofyear ended December 31, 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 degree2021 excludes contributions 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 December 31, 2017 and 2016 was as follows: (in thousands):
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| | | As of December 31, 2017 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities | | | | | | | | |
| OTC commodity swaps | | — |
| | (1,087 | ) | | — |
| | (1,087 | ) |
| Net liabilities | | $ | — |
| | $ | (1,087 | ) | | $ | — |
| | $ | (1,087 | ) |
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| | | As of December 31, 2016 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| OTC commodity swaps | | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 9 |
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| Total assets | | — |
| | 9 |
| | — |
| | 9 |
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| Liabilities | | | | | | | | |
| OTC commodity swaps | | — |
| | (82 | ) | | — |
| | (82 | ) |
| Net assets | | $ | — |
| | $ | (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 electedequity method investments amounting 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 December 31, 2017 and 2016, we had cash collateral of $0.3 million and a cash deficit of $0.6 million, respectively, netted with the net derivative position of our counterparty. See Note 17 for further information regarding derivative instruments.
17. 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 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 $1.4 million. There were 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. 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 December 31, 2017 and 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. Duringcontributions made during the years ended December 31, 20172023 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 consolidated statements of income and comprehensive income. See Note 16 for further information regarding the fair value of derivative instruments.2022.
|
| | | | | | | | | | | | | | | | | |
| (in thousands) | | | December 31, 2017 | | December 31, 2016 |
| Derivative Type | Balance Sheet Location | | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives: | | | | | | | | |
OTC commodity swaps (1) | Other current assets | | $ | — |
| | $ | (1,087 | ) | | $ | 9 |
| | $ | (82 | ) |
| Total gross value of derivatives | | — |
| | (1,087 | ) | | 9 |
| | (82 | ) |
Less: Counterparty netting and cash collateral (2) | | | — |
| | (290 | ) | | 9 |
| | 621 |
|
| Total net fair value of derivatives | | | $ | — |
| | $ | (797 | ) | | $ | — |
| | $ | (703 | ) |
| | |
| (1)
As of December 31, 2017 and 2016, we had open derivative contracts representing 370,000 barrels and 93,000 barrels, respectively, of refined petroleum products. |
| |
(2)
| As of December 31, 2017 and 2016, we had cash collateral of $0.3 million and a cash deficit of $0.6 million, respectively, netted with the net derivative position of our counterparty. |
Recognized gains (losses) associated with our derivatives for the years ended December 31, 2017 and 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| Derivative Type | Income Statement Location | | 2017 | | 2016 | | 2015 |
| | | | | | | | |
| Interest rate derivatives | Interest expense | | $ | — |
| | $ | — |
| | $ | (24 | ) |
| OTC commodity swaps | Cost of goods sold | | (1,550 | ) | | (2,122 | ) | | 441 |
|
| | Total | | $ | (1,550 | ) | | $ | (2,122 | ) | | $ | 417 |
|
18. 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. The Partnership does not file a separate Texas tax return. Our results of operations are included in Delek’s consolidated return. However, the provisions of ASC 740 have been followed as if we were a stand-alone entity. As a result, the Partnership must record deferred income taxes for the differences between book and tax bases of its assets and liabilities based on those states' enacted tax rates and laws that will be in effect when the differences are expected to reverse. The consolidated Texas franchise tax return for Delek, including the Partnership, is currently under examination for tax years 2012 through 2015. No material adjustments have been identified at this time.
The total non-current deferred tax assets were $0.4 million and $0.3 million as of December 31, 2017 and 2016, respectively, and are included in other non-current assets in our accompanying consolidated balance sheets. The majority component of our non-current deferred tax assets as of December 31, 2017 and 2016 was depreciation and amortization.
The difference between the actual income tax expense and the tax expense computed by applying the statutory federal income tax rate to income before income taxes is attributable to the following (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| State income taxes | | (222 | ) | | 121 |
| | 171 |
|
| Other items | | — |
| | (40 | ) | | (366 | ) |
| Income tax expense (benefit) | | $ | (222 | ) | | $ | 81 |
| | $ | (195 | ) |
Income tax expense (benefit) is as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Current | | $ | (111 | ) | | $ | 254 |
| | $ | (209 | ) |
| Deferred | | (111 | ) | | (173 | ) | | 14 |
|
| Total | | $ | (222 | ) | | $ | 81 |
| | $ | (195 | ) |
Delek files a consolidated Texas gross margin tax return, and tax payments for the Partnership are paid by Delek. Therefore, a portion of the current tax payable is included in accounts receivable/payable from related parties. As of December 31, 2017 and 2016, income taxes payable of $0.3 million and $0.1 million, respectively, were included in accounts receivable/payable from related parties in the accompanying consolidated balance sheets. Taxes that are determined on a consolidated basis apply the “benefits for loss” allocation method; thus, tax attributes are realized when used in the combined tax return to the extent that they have been subject to a valuation allowance.
We recognize accrued interest and penalties related to unrecognized tax benefits as an adjustment to the current provision for income taxes. There were no uncertain tax positions recorded as of December 31, 2017 or 2016, and there were no interest or penalties recognized related to uncertain tax positions for the years ended December 31, 2017, 2016 or 2015. We have examined uncertain tax positions for any material changes in the next 12 months and none are expected.
19.14. 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.
statements.
Environmental, Health and Safety
We are subject to extensive and periodically changing federal, state and local environmental and safety laws and regulations relating toenforced by various agencies, including the protectionEnvironmental Protection Agency (the "EPA"), the United States Department of Transportation, the environment, healthOccupational Safety and safety. Among other things, theseHealth Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the emission or discharge of pollutantsmaterials into or onto the land, airenvironment, waste management practices and water,pollution prevention measures, as well as the handling and disposalsafe operation of solid and hazardous wastes,our pipelines and the remediationsafety of contamination and the protection ofour 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 and
regulations for the operation of our terminals, pipelines, saltwells, trucks and related operations, and may be subject to revocation, modification and renewal.
These laws and permits may become the basis forraise potential exposure to future claims and lawsuits involving environmental and safety matters, which could include soil, surface water and watergroundwater contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured,may have handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we may 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 the receipt and response to notices of violations, citations and other enforcement actions, some of which have resulted or are assigned responsibility. 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 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 partiesgovernmental agencies or other persons for personal injury, property damage, response costs, 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
15. Leases
Lessee
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 ofnoncancellable operating leases primarily associated with certain pipeline and transportation equipment. Our remaining lease terms range from less than 30 barrels occurredone year to 41 years. Our leases do not have any outstanding renewal options.
The components of lease cost are as follows (in thousands) (1):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| | | | | | | | | |
| Operating lease cost | | | | | $ | 11,533 | | | $ | 12,054 | | | $ | 12,586 | |
| Short-term lease cost | | | | | 5,031 | | | 2,541 | | | 1,609 | |
| Variable lease cost | | | | | 3,826 | | | 4,803 | | | 600 | |
| Total lease cost | | | | | $ | 20,390 | | | $ | 19,398 | | | $ | 14,795 | |
| | | | | | | | | |
| (1) Includes an immaterial amount of financing lease cost. | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Supplemental balance sheet information related to leases is as follows: | | | | | | | | | |
| | | | | | | | | |
| | Years Ended December 31, |
| | 2023 | | 2022 |
| Weighted-average remaining lease term (years) for operating leases | | 3.5 | | 3.3 |
Weighted-average discount rate (1) operating leases | | 7.3 | % | | 6.6 | % |
| Weighted-average remaining lease term (years) for finance lease | | 3.6 | | 1.1 |
Weighted-average discount rate (1) finance lease | | 7.2 | % | | 1.9 | % |
| | | | | | | | | |
| (1) Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842. | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Supplemental cash flow and other information related to leases are as follows (in thousands): | | | | | | | | | |
| | | | | | | | | |
| | | | | Years Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | |
| Operating cash flows from operating leases | | | | | $ | (9,588) | | | $ | (12,054) | | | $ | (12,586) | |
| | | | | | | | | |
| Leased assets obtained in exchange for new operating lease liabilities | | | | | $ | 3,804 | | | $ | 12,682 | | | $ | 6,386 | |
| Leased assets obtained in exchange for new financing lease liabilities | | | | | $ | 1,162 | | | $ | 35 | | | $ | 3,071 | |
| | | | | | | | | |
Maturities of lease liabilities as of December 31, 2023 are as follows (in thousands):
| | | | | | | | | | | |
| |
| Year Ended December 31, | Operating | | Finance |
| 2024 | $ | 7,515 | | | $ | 583 | |
| 2025 | 4,377 | | | 288 | |
| 2026 | 1,972 | | | 263 | |
| 2027 | 1,473 | | | 263 | |
| 2028 | 631 | | | 154 | |
| 2029 and thereafter | 1,111 | | | — | |
| Total lease payments | 17,079 | | | 1,551 | |
| Less: present value discount | 2,047 | | | 206 | |
| Lease payable | $ | 15,032 | | | $ | 1,345 | |
| | | |
Lessor
We are the lessor under certain agreements for gathering, transportation, storage, terminalling, and offloading with Delek Holdings. These agreements have remaining terms ranging from a gathering line atless than one year to 11 years with renewal options ranging from one year to 10 years, and some agreements have multiple renewal options. Revenue from these leases are recorded in affiliate revenue on 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");
In April 2015, a crude oil release of an estimated 130 barrels was discovered from a gathering line near Fouke, Arkansas; 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 pursuing an enforcement actionincome. For details 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 December 31, 2017, we have accrued $1.0 million, which we have recorded in pipeline release liabilities in our consolidated balance sheet, for the Magnolia Release in connection with these proceedings.
Contracts and Agreements
The majority of the petroleum products we sold prior to December 31, 2017 in west Texas were purchased from Noble Petro, Inc. ("Noble Petro"). Under the terms of a supply contract (the "Abilene Contract") with Noble Petro that expired on December 31, 2017, we purchased petroleum products based on monthly average prices from Noble Petro at the Abilene, Texas terminal, which we own, for sales and exchange with third parties at the Abilene and San Angelo terminals. We leased the Abilene and San Angelo, Texas terminals to Noble Petro under a separate Terminal and Pipeline Lease and Operating Agreement, that expired on December 31, 2017. We purchase spot barrels from various third parties, which may continue to include Noble Petro, and from Delek for sale to wholesale customers in west Texas.
Letters of Credit
As of December 31, 2017, we had in place letters of credit totaling $9.0 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 December 31, 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 for the years ended December 31, 2017, 2016 and 2015 totaled $5.6 million, $5.7 million and $5.3 million, respectively.
Revenue, see Note 5.
The following is an estimatea schedule of ourannual undiscounted minimum future minimum lease payments forcash receipts on the non-cancellable operating leases having remaining noncancelable terms in excess of one year as of December 31, 20172023 (in thousands):
| | | | | |
| |
| 2024 | $ | 129,596 | |
| 2025 | 112,428 | |
| 2026 | 107,660 | |
| 2027 | 93,469 | |
| 2028 | 62,909 | |
| 2029 and thereafter | 76,455 | |
| Total minimum future lease revenue | $ | 582,517 | |
| |
The following table summarized our investment in assets held under operating lease by major classes (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Land | $ | 14,946 | | | $ | 14,946 | |
| Building and building improvements | 853 | | | 853 | |
| Pipelines, tanks and terminals | 664,567 | | | 622,609 | |
| Other equipment | 3,856 | | | 3,856 | |
| Property, plant and equipment | 684,222 | | | 642,264 | |
| Less: accumulated depreciation | 253,955 | | | 221,375 | |
| Property, plant and equipment, net | $ | 430,267 | | | $ | 420,889 | |
| | | |
|
| | | | |
| 2018 | | $ | 2,482 |
|
| 2019 | | 546 |
|
| 2020 | | 483 |
|
| 2021 | | 293 |
|
| 2022 | | 173 |
|
| Thereafter | | 8 |
|
| Total future minimum rentals | | $ | 3,985 |
|
20. Selected Quarterly Financial Data (Unaudited)
Quarterly financial information for the years ended December 31, 2017 and 2016 is summarized below. The quarterly financial information summarized below has been prepared by management and is unaudited (in thousands, except per unit data).
|
| | | | | | | | | | | | | | | | |
| | | For the Three Month Periods Ended |
| | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| Net sales | | $ | 129,473 |
| | $ | 126,769 |
| | $ | 130,626 |
| | $ | 151,207 |
|
| Operating income | | $ | 18,472 |
| | $ | 23,371 |
| | $ | 22,636 |
| | $ | 23,698 |
|
| Net income | | $ | 14,595 |
| | $ | 18,977 |
| | $ | 16,923 |
| | $ | 18,914 |
|
| Limited partners' interest in net income | | $ | 10,486 |
| | $ | 14,425 |
| | $ | 12,178 |
| | $ | 13,891 |
|
| Net income per limited partner unit: | |
|
| | | | | | |
| Common (basic) | | $ | 0.43 |
| | $ | 0.59 |
| | $ | 0.50 |
| | $ | 0.57 |
|
| Common (diluted) | | $ | 0.43 |
| | $ | 0.59 |
| | $ | 0.50 |
| | $ | 0.57 |
|
|
| | | | | | | | | | | | | | | | |
| | | For the Three Month Periods Ended |
| | | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 |
| Net sales | | $ | 104,056 |
| | $ | 111,853 |
| | $ | 107,470 |
| | $ | 124,680 |
|
| Operating income | | $ | 18,974 |
| | $ | 22,512 |
| | $ | 17,001 |
| | $ | 19,163 |
|
| Net income | | $ | 15,448 |
| | $ | 18,893 |
| | $ | 13,151 |
| | $ | 15,312 |
|
| Limited partners' interest in net income | | $ | 13,195 |
| | $ | 16,102 |
| | $ | 9,892 |
| | $ | 11,422 |
|
| Net income per limited partner unit: | | | | | | | | |
| Common (basic) | | $ | 0.54 |
| | $ | 0.66 |
| | $ | 0.41 |
| | $ | 0.47 |
|
| Common (diluted) | | $ | 0.54 |
| | $ | 0.66 |
| | $ | 0.41 |
| | $ | 0.47 |
|
| Subordinated - Delek (basic and diluted) | | $ | 0.54 |
| | $ | — |
| | $ | — |
| | $ | — |
|
21.16. Subsequent Events
Distribution Declaration
On January 23, 2018,24, 2024, our general partner's board of directors declared a quarterly cash distribution of $0.725$1.055 per share, paidunit, payable on February 12, 2018,2024, to unitholders of record on February 2, 2018.5, 2024.
Big Spring Asset DropdownOn February 26, 2018, a definitive agreement was entered into between the Partnership and Delek for the Partnership to acquire certain logistics assets primarily located adjacent to Delek's Big Spring, Texas refinery (“Big Spring Refinery”), which are discussed in more detail below (“Big Spring Logistics Assets”). In addition, the parties entered into a new wholesale marketing agreement, whereby the Partnership will market certain finished products produced at the Big Spring refinery to various branded and unbranded customers in return for a marketing fee.
The Big Spring Logistics Assets will include:
Approximately 60 storage tanks and certain ancillary assets (such as tank pumps and piping) primarily located adjacent to the Big Spring Refinery;
An asphalt terminal and a light products terminal;
Certain crude oil and refined product pipelines; and
Other logistics assets, such as four underground saltwells used for natural gas liquids storage.
The purchase price is $315.0 million, financed through a combination of cash on hand and borrowings on the Partnership’s revolving credit facility, with closing expected to occur in March 2018.
In connection with the closing of the transaction, Delek, the Partnership and various of their subsidiaries expect to enter into and amend certain existing contracts, such as a new throughput and tankage agreement for the Big Spring Logistics Assets. The transaction has been and related agreements are expected to be approved by the Conflicts Committee of Delek Logistics’ general partner, which is comprised solely of independent directors.
Formation of Green Plains Joint Venture
On February 20, 2018, the Partnership and Green Plains Partners LP ("Green Plains") announced the companies have formed DKGP Energy Terminals, LLC ("DKGP Energy"), a joint venture engaging in the light products terminalling business. The Partnership and Green Plains will each own a 50% membership interest in DKGP Energy. DKGP Energy signed a membership interest purchase agreement to acquire two light products terminals located in Caddo Mills, Texas and North Little Rock, Arkansas from an affiliate of American Midstream Partners, L.P. ("American Midstream"). Subject to customary closing conditions and regulatory approvals, this transaction is expected to close in the first half of 2018. DKGP Energy will consist of the assets purchased from the affiliate of American Midstream and assets contributed by the Partnership. Immediately prior to the closing of the acquisition by the joint venture of the two terminals from American Midstream, the Partnership will contribute to the joint venture its North Little Rock, Arkansas terminal and its
Greenville tank farm located in Caddo Mills, Texas. The DKGP Energy board will oversee the newly formed joint venture and will appoint an affiliate of the Partnership as the operator with day-to-day operational responsibilities of the four terminals.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Delek Logistics Partners, LP
by and through its general partner, Delek Logistics GP, LLC
By: /s/ Kevin KremkeReuven Spiegel
Kevin Kremke Reuven Spiegel
Director, Executive Vice President and Chief Financial Officer
Dated: February 28, 20182024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by or on behalf of the following persons on behalf of the registrant and in the capacities indicated on February 28, 2018:2024:
/s/ Ezra Uzi YeminAvigal Soreq
Ezra Uzi YeminAvigal Soreq
Chairman of the Board of Directors and Chief
Executive OfficerPresident
(Principal Executive Officer)
/s/ Kevin L. KremkeReuven Spiegel
Kevin L. KremkeReuven Spiegel
Director, Executive Vice President and Chief Financial Officer (Principal
(Principal Financial andOfficer)
/s/ Robert Wright
Robert Wright
Senior Vice President, Deputy Chief Financial Officer
(Principal Accounting Officer)
/s/ Ezra Uzi Yemin
Ezra Uzi Yemin
Executive Chairman of the Board of Directors
/s/ Sherri A. Brillon
Sherri A. Brillon
Director
/s/ Charles J. Brown, III*III
Charles J. Brown, III
Director
/s/ Mark Baker Cox*
Mark Baker Cox
Director
/s/ Francis C. D'Andrea*
Francis C. D'Andrea
Director
/s/ Eric D. Gadd*Gadd
Eric D. Gadd
Director
/s/ Assi Ginzburg
Assi Ginzburg
Director and Executive Vice President
/s/ Frederec Charles Green
Frederec Charles Green
Director and Executive Vice President
/s/ Ron W. Haddock
Ron W. Haddock
Director
/s/ Reuven Spiegel*Gennifer F. Kelly
Reuven SpiegelGennifer F. Kelly
Director
Kevin L. Kremke
Individually and as Attorney-in-Fact
