1. Organization and Basis of Presentation
As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principlesUnited States ("U.S.") Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20162022 (our "Annual Report on Form 10-K"), filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2017.March 1, 2023 and in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20162022 included in our Annual Report on Form 10-K.
|
| | | | |
| Property, plant and equipment | | $ | 6,443 |
|
Intangible assets (1) | | 2,560 |
|
| Total | | $ | 9,003 |
|
| | |
8 |  |
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Intangible assetsThe goodwill recognized in the Delaware Gathering Acquisition is primarily attributable to enhancing our third party revenues, further diversification of our customer and product mix, expanding our footprint into the Delaware basin and bolstering our Environmental, Social and Governance ("ESG") optionality through furthering carbon capture opportunities and greenhouse gas reduction projects currently underway. This goodwill is deductible for income tax purposes. Goodwill related to the Delaware Gathering Acquisition is included in the Gathering and Processing segment.
Unaudited Pro Forma Financial Information
The following table summarizes the unaudited pro forma financial information of the Partnership assuming the Delaware Gathering Acquisition had occurred on January 1, 2021. The unaudited pro forma financial information has been adjusted to give effect to certain pro forma adjustments that are directly related to the Delaware Gathering Acquisition based on available information and certain assumptions that management believes are factually supportable. The most significant pro forma adjustments relate to (i) incremental interest expense and amortization of deferred financing costs associated with revolving credit facility borrowings incurred in connection with the Delaware Gathering Acquisition, (ii) incremental depreciation resulting from the estimated fair values of acquired represent rights-of-way assets with indefinite useful lives. Rights-of-way assets areproperty, plant and equipment, (iii) incremental amortization resulting from the estimated fair value of the acquired customer relationship intangibles, (iv) accounting policy alignment and (v) transaction costs. The unaudited pro forma financial information excludes any expected cost savings or other synergies as a result of the Delaware Gathering Acquisition. The unaudited pro forma financial information is not subject to amortization. necessarily indicative of the results of operations that would have been achieved had the Delaware Gathering Acquisition been effective as of the date presented, nor is it indicative of future operating results of the combined company. Actual results may differ significantly from the unaudited pro forma financial information.
| | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| (in thousands, except per unit data) | | | | | | | 2022 |
| Net sales | | | | | | | $ | 256,940 | |
| Net income attributable to partners | | | | | | | $ | 29,881 | |
| Net income per limited partner unit: | | | | | | | |
| Basic income per unit | | | | | | | $ | 0.69 | |
| Diluted income per unit | | | | | | | $ | 0.69 | |
3. Related Party Transactions
Commercial Agreements
The Partnership has a number of long-term, fee basedfee-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. The initial terms for agreements effective in November 2012 were to expire in November 2017. Delek has opted to renew these agreements for subsequent five-year terms. In the case of our marketing agreement with Delek, the initial term has been extended through 2026.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.
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.
See our Annual Report on Form 10-K for a more complete description of certain of our material commercial agreements and other agreements with Delek.Delek Holdings.
Other Agreements with Delek Holdings
In addition to the commercial agreements described above, the Partnership has entered into the following agreements with Delek Holdings:
Omnibus Agreement. Agreement
The Partnership entered into an omnibus agreement with Delek Holdings, our general partner, Delek Logistics Operating, LLC, Lion Oil Company, LLC and certain of the Partnership'sPartnership’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, 2015from time to time in connection with our subsequent acquisitions of certain assets from Delek Holdings (collectively, as amended, the "Omnibus Agreement"). Additionally,The Omnibus Agreement governs the provision of certain operational services and reimbursement obligations, among other matters, between the Partnership entered intoand Delek Holdings, and obligates us to pay an amendmentannual fee of $4.3 million to Delek Holdings for its provision of centralized corporate services to the Omnibus Agreement on August 3, 2015, with an effective date of April 1, 2015. This amendment eliminated a $1.0 million per event deductible that appliedPartnership.
| | |
9 | |
Notes to certain asset failures before Delek was required to reimburse the Partnership.Condensed Consolidated Financial Statements (Unaudited)
Pursuant to the terms of the Omnibus Agreement, we wereare reimbursed by Delek Holdings for certain capital expenditures in the amount of $0.4 million and $4.3 million during the three and nine months ended September 30, 2017, respectively, and $0.7 million and $1.5 million during the three and nine months ended September 30, 2016, respectively.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. Additionally,There was no reimbursement by Delek Holdings during the three months ended March 31, 2023. We were reimbursed a nominal amount by Delek Holdings during the three months ended March 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. WeAgreement. As of March 31, 2023 and December 31, 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 millionno reimbursements for these matters duringin each of the nine monthsthree month periods ended September 30, 2017. DuringMarch 31, 2023 and 2022.
Other Transactions
The 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 gathering systems have been constructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and are 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 2023. Total fees paid to the Partnership were $0.4 million for both the three months ended September 30, 2017, we recorded an adjustment of $(0.1) million for these matters. We were reimbursed $0.1 millionMarch 31, 2023 and $1.2 million during the three and nine months ended September 30, 2016, respectively,2022, which are recorded as a reduction to operating expense.
in affiliate revenue in our condensed consolidated statements of income. Additionally, the Partnership incurs the costs in connection with the construction of the assets and is subsequently reimbursed by Delek Holdings. Amounts reimbursable by Delek Holdings are recorded in accounts receivable from related parties.
Summary of Transactions
Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers, wholesale marketing and products terminalling services provided primarily to Delek Holdings based on regulated tariff rates or contractually based fees and product sales to Alon USA.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 First Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement").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.
A summary of revenue, purchases and expense transactions with Delek Holdings and its affiliates are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Revenues | | | | | $ | 124,999 | | | $ | 123,754 | |
| Purchases | | | | | $ | 91,071 | | | $ | 105,885 | |
Operating and maintenance expenses | | | | | $ | 8,823 | | | $ | 11,476 | |
General and administrative expenses | | | | | $ | 12,215 | | | $ | 3,068 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | $ | 40,131 |
| | $ | 36,360 |
| | $ | 116,574 |
| | $ | 111,814 |
|
| Cost of goods sold | | $ | 9,232 |
| | $ | 5,247 |
| | $ | 26,412 |
| | $ | 24,064 |
|
Operating and maintenance expenses | | $ | 7,275 |
| | $ | 7,988 |
| | $ | 20,756 |
| | $ | 22,738 |
|
General and administrative expenses | | $ | 2,073 |
| | $ | 1,641 |
| | $ | 5,327 |
| | $ | 4,595 |
|
Quarterly Cash Distributions
Our common and general partner unitholders and the holders of incentive distribution rights ("IDRs") are entitled to receiveIn February 2023, we paid quarterly cash distributions of available$44.4 million, of which $35.0 million were paid to Delek Holdings. In February 2022, we paid quarterly cash as it is determined bydistributions of $42.4 million, of which $33.8 million were paid to Delek Holdings. On April 28, 2023, the board of directors of our general partner in accordance with the terms and provisions of our Partnership Agreement. In February, May and August 2017, we paid quarterly cash distributions of $20.5 million, $21.0 million and $21.8 million, respectively, of which $14.2 million, $14.7 million and $15.4 million, respectively, were paid to Delek and our general partner. In February, May and August 2016, we paid quarterly cash distributions of $16.1 million, $17.1 million and $18.1 million, respectively, of which $10.5 million, $11.3 million and $12.1 million, respectively, were paid to Delek and our general partner. On October 25, 2017, our general partner's board of directors declared a quarterly cash distribution totaling $22.3$44.7 million, based on the available cash as of the date of determination, for the end of the thirdfirst quarter of 2017,2023, payable on November 14, 2017,May 15, 2023, of which $15.8$35.2 million is expected to be paid to Delek Holdings.
| | |
10 | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Revenues
We generate revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate products and feed stocks; for distributing, transporting and storing refined products; for marketing refined products output of Delek Holdings' Tyler and Big Spring refineries; and for wholesale marketing in the West Texas area. A significant portion of our general partner, includingrevenue is derived from long-term commercial agreements with Delek Holdings, which provide for annual fee adjustments for increases or decreases in the paymentCPI, PPI or the FERC index (refer to Note 3 for a more detailed description of these agreements). In addition to the services we provide to Delek Holdings, we also generate substantial revenue from crude oil, intermediate and refined products transportation services for, and terminalling and marketing services to, third parties primarily in Texas, New Mexico, Tennessee and Arkansas. Certain of these services are provided pursuant to contractual agreements with third parties. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
The majority of our commercial agreements with Delek Holdings meet the definition of a lease because: (1) performance of the contracts is dependent on specified property, plant or equipment and (2) it is remote that one or more parties other than Delek Holdings will take more than a minor amount of the output associated with the specified property, plant or equipment. As part of our adoption of ASC 842, Leases ("ASC 842"), we applied the permitted practical expedient to not separate lease and non-lease components under the predominance principle to designated asset classes associated with the provision of logistics services. We have determined that the predominant component of the related agreements currently in effect is the lease component. Therefore, the combined component is accounted for under the applicable lease accounting guidance. Of our $941.1 million net property, plant, and equipment balance as of March 31, 2023, $338.2 million is subject to operating leases under our commercial agreements. These agreements do not include options for the IDRs.lessee to purchase our leased assets, nor do they include any material residual value guarantees or material restrictive covenants.
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
|
| Three Months Ended March 31, 2023 |
| Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | | | | | Consolidated |
| Service Revenue - Third Party | $ | 13,179 | | | $ | — | | | $ | 297 | | | | | | | $ | 13,476 | |
Service Revenue - Affiliate (1) | 4,301 | | | 9,271 | | | 20,609 | | | | | | | 34,181 | |
| Product Revenue - Third Party | 26,492 | | | 78,558 | | | — | | | | | | | 105,050 | |
| Product Revenue - Affiliate | 4,670 | | | 979 | | | — | | | | | | | 5,649 | |
| Lease Revenue - Affiliate | 43,790 | | | 23,501 | | | 17,878 | | | | | | | 85,169 | |
| Total Revenue | $ | 92,432 | | | $ | 112,309 | | | $ | 38,784 | | | | | | | $ | 243,525 | |
4. Inventory | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Consolidated |
| Service Revenue - Third Party | $ | 1,710 | | | $ | — | | | $ | 3,072 | | | $ | 4,782 | |
Service Revenue - Affiliate (1) | 4,004 | | | 8,545 | | | — | | | 12,549 | |
| Product Revenue - Third Party | — | | | 78,045 | | | — | | | 78,045 | |
| Product Revenue - Affiliate | — | | | 31,746 | | | — | | | 31,746 | |
| Lease Revenue - Affiliate | 36,330 | | | 12,440 | | | 30,689 | | | 79,459 | |
| Total Revenue | $ | 42,044 | | | $ | 130,776 | | | $ | 33,761 | | | $ | 206,581 | |
Inventories consisted(1) Net of $7.9 million and $8.9$1.8 million of refined petroleum products as of September 30, 2017 and December 31, 2016, respectively. Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We recognize lower of cost or net realizable value charges as a component of cost of goods sold in the consolidated statements of income and comprehensive income, which amounted to $0.3 million duringamortization expense for both the three and nine months ended September 30, 2017. ThereMarch 31, 2023 and March 31, 2022, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.
As of March 31, 2023, we expect to recognize approximately $1.2 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 may be extended for various renewal terms. We disclose information about remaining performance obligations that have original expected durations of greater than one year.
| | |
11 | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
Our unfulfilled performance obligations as of March 31, 2023 were no lower of cost or net realizable value charges during the three and nine months ended September 30, 2016.as follows (in thousands):
| | | | | |
| Remainder of 2023 | $ | 218,135 | |
| 2024 | 210,897 | |
| 2025 | 185,592 | |
| 2026 | 177,917 | |
| 2027 and thereafter | 430,886 | |
| Total expected revenue on remaining performance obligations | $ | 1,223,427 | |
5. Long-Term Obligations
Second Amended and Restated Credit Agreement
We entered into a senior secured revolving credit agreement on November 7, 2012 , with Fifth Third Bank, as administrative agent, and a syndicate of lenders. The agreement was amended and restated on July 9, 2013 (the "Amended and Restated Credit Agreement") and was most recently amended and restated on December 30, 2014 (the “Second Amended and Restated Credit Agreement”). Under the terms of the Second Amended and Restated Credit Agreement, the lender commitments were increased from $400.0 million to $700.0 million. The Second Amended and Restated Credit Agreement also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of $800.0 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent. The Second Amended and Restated Credit Agreement contains an option for Canadian dollar denominated borrowings.
Borrowings denominated in U.S. dollars bear interest at either a U.S. dollar prime rate, plus an applicable margin, or the London Interbank Offered Rate ("LIBOR"), plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars bear interest at either a Canadian dollar prime rate, plus an applicable margin, or the Canadian Dealer Offered Rate, plus an applicable margin, at the election of the borrowers. The applicable margin in each case varies based upon the Partnership's most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the credit facility. At September 30, 2017, the weighted average interest rate for our borrowings under the facility was approximately 4.0%. Additionally, the Second Amended and Restated Credit Agreement requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of September 30, 2017, this fee was 0.5% per year.
The obligations under the Second Amended and Restated Credit Agreement remain secured by first priority liens on substantially all of the Partnership's and its subsidiaries' tangible and intangible assets. Additionally, Delek Marketing & Supply, LLC ("Delek Marketing"), a direct wholly owned subsidiary of Delek, continues to provide a limited guaranty of the Partnership's obligations under the Second Amended and Restated Credit Agreement. Delek Marketing's guaranty is (i) limited to an amount equal to the principal amount, plus unpaid and accrued interest, of a promissory note made by Delek US in favor of Delek Marketing (the "Holdings Note") and (ii) secured by Delek Marketing's pledge of the Holdings Note to our lenders under the Second Amended and Restated Credit Agreement. As of September 30, 2017, the principal amount of the Holdings Note was $102.0 million, plus unpaid interest accrued since the issuance date. The Second Amended and Restated Credit Agreement matures on December 30, 2019.
As of September 30, 2017, we had $158.8 million in outstanding borrowings under the Second Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling $8.5 million, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at September 30, 2017. Unused credit commitments under the Second Amended and Restated Credit Agreement as of September 30, 2017 were $532.7 million.
6.75% Senior Notes Due 2025
On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued $250.0 million in aggregate principal amount of 6.750% senior notes due 2025 (the “2025 Notes”) at a discount. The 2025 Notes are general unsecured senior obligations of the Issuers. The 2025
Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Finance Corp., the "Guarantors") and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2025 Notes rank equal in right of payment with all existing and future senior indebtedness of the Issuers, and senior in right of payment to any future subordinated indebtedness of the Issuers. Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.
At any time prior to May 15, 2020, the Issuers may redeem up to 35% of the aggregate principal amount of the 2025 Notes with the net cash proceeds of one or more equity offerings by the Partnership at a redemption price of 106.750% of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to May 15, 2020, the Issuers may redeem all or part of the 2025 Notes, at a redemption price of the principal amount, plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on May 15, 2020, the Issuers may, subject to certain conditions and limitations, redeem all or part of the 2025 Notes at a redemption price of 105.063% for the twelve-month period beginning on May 15, 2020, 103.375% for the twelve-month period beginning on May 15, 2021, 101.688% for the twelve-month period beginning on May 15, 2022 and 100.00% beginning on May 15, 2023 and thereafter, plus accrued and unpaid interest, if any. There are also certain redemption provisions in the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations.
In connection with the issuance of the 2025 Notes, the Issuers and the Guarantors entered into a registration rights agreement, whereby the Issuers and the Guarantors are required to exchange the 2025 Notes for new notes with terms substantially identical in all material respects with the 2025 Notes (except the new notes will not contain terms with respect to transfer restrictions). The Issuers and the Guarantors will use their commercially reasonable efforts to cause the exchange offer to be consummated not later than 365 days after May 23, 2017.
As of September 30, 2017, we had $250.0 million in outstanding principal amount of the 2025 Notes. Outstanding borrowings under the 2025 Notes are net of deferred financing costs and debt discount of $5.7 million and $1.8 million, respectively, as of September 30, 2017.
6. Income Taxes
For tax purposes, each partner of the Partnership is required to take into account its share of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and fair market value of our assets, the acquisition price of such partner's units and the taxable income allocation requirements under our Partnership Agreement.
7. Net Income 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 applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’partners' interest in net income after deducting our general partner’s 2% interest and IDRs, by the weighted-average number of outstanding common and subordinated units. Our net income is allocated to our general partner and limited partners in accordance with their respective partnership percentages after giving effect to priority income allocations for IDRs, which are held by our general partner pursuant to our Partnership Agreement. The IDRs are paid following the close of each quarter.
Earnings in excess of distributions are allocated to our general partner and limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. At present,As of March 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.
Following the February 12, 2016 payment of the cash distribution attributable to the fourth quarter of 2015 and confirmation by the board of directors of our general partner (based on the recommendation of the Conflicts Committee) on February 25, 2016 that the requirements under the Partnership Agreement for the conversion of all subordinated units into common units were satisfied, the subordination period ended. As a result, in the first quarter of 2016, all of the Partnership's 11,999,258 outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. The conversion did not impact the amount of the cash distribution paid or the total number of the Partnership's outstanding units representing limited partner interests. The Partnership's net income was allocated to the general partner and the limited partners, including the holders of the subordinated units through February 24, 2016, in accordance with our Partnership Agreement.
Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The expected date of distribution for the distributions earned during the period ended September 30, 2017March 31, 2023 is November 14, 2017.May 15, 2023.
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. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Net income attributable to partners | | | | | $ | 37,367 | | | $ | 39,514 | |
| Less: Limited partners' distribution | | | | | 44,664 | | | 42,604 | |
| Earnings in deficit of distributions | | | | | $ | (7,297) | | | $ | (3,090) | |
| | | | | | | |
| Limited partners' earnings on common units: | | | | | | | |
| Distributions | | | | | $ | 44,664 | | | $ | 42,604 | |
| Allocation of earnings in deficit of distributions | | | | | (7,297) | | | (3,090) | |
| Total limited partners' earnings on common units | | | | | $ | 37,367 | | | $ | 39,514 | |
| | | | | | | |
| Weighted average limited partner units outstanding: | | | | | | | |
| Basic | | | | | 43,569,963 | | | 43,471,536 | |
| Diluted | | | | | 43,585,297 | | | 43,481,572 | |
| | | | | | | |
| Net income per limited partner unit: | | | | | | | |
| Basic | | | | | $ | 0.86 | | | $ | 0.91 | |
Diluted (1) | | | | | $ | 0.86 | | | $ | 0.91 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Net income attributable to partners | | $ | 16,923 |
| | $ | 13,151 |
| | $ | 50,495 |
| | $ | 47,492 |
|
Less: General partner's distribution (including IDRs) (1) | | 4,852 |
| | 3,382 |
| | 13,697 |
| | 8,443 |
|
| Less: Limited partners' distribution | | 17,418 |
| | 15,920 |
| | 51,380 |
| | 41,615 |
|
| Less: Subordinated partner's distribution | | — |
| | — |
| | — |
| | 4,424 |
|
| Distributions (in excess of) less than earnings | | $ | (5,347 | ) | | $ | (6,151 | ) | | $ | (14,582 | ) | | $ | (6,990 | ) |
| | | | | | | | | |
| General partner's earnings: | | | | | | | | |
Distributions (including IDRs) (1) | | $ | 4,852 |
| | $ | 3,382 |
| | $ | 13,697 |
| | $ | 8,443 |
|
| Allocation of distributions (in excess of) less than earnings | | (107 | ) | | (123 | ) | | (291 | ) | | (140 | ) |
| Total general partner's earnings | | $ | 4,745 |
| | $ | 3,259 |
| | $ | 13,406 |
| | $ | 8,303 |
|
| | | | | | | | | |
| Limited partners' earnings on common units: | | | | | | | | |
| Distributions | | $ | 17,418 |
| | $ | 15,920 |
| | $ | 51,380 |
| | $ | 41,615 |
|
| Allocation of distributions (in excess of) less than earnings | | (5,240 | ) | | (6,028 | ) | | (14,291 | ) | | (6,368 | ) |
| Total limited partners' earnings on common units | | $ | 12,178 |
| | $ | 9,892 |
| | $ | 37,089 |
| | $ | 35,247 |
|
| | | | | | | | | |
| Limited partners' earnings on subordinated units: | | | | | | | | |
| Distributions | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,424 |
|
| Allocation of distributions in excess of earnings | | — |
| | — |
| | — |
| | (482 | ) |
| Total limited partners' earnings on subordinated units | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,942 |
|
| | | | | | | | | |
Weighted average limited partner units outstanding (2): | | | | | | | | |
| Common units - (basic) | | 24,361,457 |
| | 24,303,740 |
| | 24,341,921 |
| | 21,878,935 |
|
| Common units - (diluted) | | 24,389,582 |
| | 24,380,334 |
| | 24,382,426 |
| | 21,962,733 |
|
Subordinated units - Delek (basic and diluted) (3) | | — |
| | — |
| | — |
| | 2,408,610 |
|
| | | | | | | | | |
Net income per limited partner unit (2): | | | | | | | | |
| Common units - (basic) | | $ | 0.50 |
| | $ | 0.41 |
| | $ | 1.52 |
| | $ | 1.61 |
|
Common units - (diluted) (4) | | $ | 0.50 |
| | $ | 0.41 |
| | $ | 1.52 |
| | $ | 1.60 |
|
| Subordinated units - Delek (basic and diluted) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.64 |
|
(1) General partner distributions (including IDRs) consist of the 2% general partner interest and IDRs, which represent the right of the general partner to receive increasing percentages of quarterly distributions of available cash from operating surplus in excess of $0.43125 per unit per quarter. See Note 8 for further discussion related to IDRs.
(2) We base our calculation of net income per unit on the weighted-average number of common and subordinated limited partner units outstanding during the period. The weighted-average number of common and subordinated units reflects the conversion of the subordinated units toOutstanding common units on February 25, 2016.
(3) On February 25, 2016, each of the Partnership's 11,999,258 outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. Distributions and the Partnership's net incometotaling 22,632 were allocated to the subordinated units through February 24, 2016.
(4) Outstanding common unit equivalents totaling 10,090 were excluded from the diluted earnings per unit calculation for the nine months ended September 30, 2017. There were no outstanding common unit equivalents excluded from the diluted earnings per unit calculation for the three months ended September 30, 2017. OutstandingMarch 31, 2023. There were no outstanding common unit equivalents of 6,540 wereunits excluded from the diluted earnings per unit calculation for both the three and nine months ended September 30, 2016, as these common unit equivalents did not have a dilutive effectMarch 31, 2022.
| | |
12 | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. Long-Term Obligations
Outstanding borrowings under the treasury stock method.Partnership’s debt instruments are as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| DKL Revolving Facility | 770,600 | | | 720,500 | |
| DKL Term Facility | 296,250 | | | 300,000 | |
| 2028 Notes | $ | 400,000 | | | $ | 400,000 | |
| 2025 Notes | 250,000 | | | 250,000 | |
| Principal amount of long-term debt | 1,716,850 | | | 1,670,500 | |
| Less: Unamortized discount and deferred financing costs | $ | 8,650 | | | 8,933 | |
| Total debt, net of unamortized discount and deferred financing costs | $ | 1,708,200 | | | 1,661,567 | |
| Less: Current portion of long-term debt and notes payable | $ | 15,000 | | | 15,000 | |
| Long-term debt, net of current portion | $ | 1,693,200 | | | $ | 1,646,567 | |
8.DKL Credit Facility
The DKL Term Facility principal $300.0 million was drawn on October 13, 2022. This senior secured facility requires four quarterly amortization payments of $3.8 million in 2023 and three quarterly amortization payments of $7.5 million in 2024 with final maturity and principal due on October 13, 2024. At the Partnership's option, borrowings bear interest at either the Adjusted Term Secured Overnight Financing Rate benchmark (“SOFR”) or U.S. dollar prime rate, plus an applicable margin. The applicable margin is 2.50% for the first year of the DKL Term Facility and 3.00% for the second year for U.S. dollar prime rate borrowings. SOFR rate borrowings include a credit spread adjustment of 0.10% to 0.25% plus an applicable margin of 3.50% for the first year and 4.00% for the second year. At March 31, 2023 and December 31, 2022, the weighted average borrowing rate was approximately 8.41% and 7.92%, respectively. The effective interest rate was 8.83% as of March 31, 2023.
The DKL Revolving Facility has a total capacity of $900.0 million, 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 and requires a quarterly unused commitment fee based on average commitment usage, currently at 0.50% per annum. Interest is measured at either the U.S. dollar prime rate plus an applicable margin of 1.00% to 2.00% depending on the Partnership’s Total Leverage Ratio (as defined in the DKL Credit Agreement), or a SOFR rate plus a credit spread adjustment of 0.10% or 0.25% and an applicable margin ranging from 2.00% to 3.00% depending on the Partnership’s Total Leverage Ratio. As of March 31, 2023 and December 31, 2022, the weighted average interest rate was 7.57% and 7.55%, respectively. There were no letters of credit outstanding as of March 31, 2023 or December 31, 2022.
The obligations under the 2022 DKL Credit Facility are secured by first priority liens on substantially all of the Partnership’s and its subsidiaries’ tangible and intangible assets. The carrying values of outstanding borrowings under the 2022 DKL Credit Facility as of March 31, 2023 and December 31, 2022 approximate their fair values.
Our debt facilities contain affirmative and negative covenants and events of default the Partnership considers usual and customary. As of March 31, 2023, we were in compliance with covenants on all of our debt instruments.
2028 Notes
Our 2028 Notes are general unsecured senior obligations comprised of $400.0 million in aggregate principal of 7.125% senior notes maturing June 1, 2028. The 2028 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Delek Logistics Finance Corp.) and will be unconditionally guaranteed on the same basis by certain of the Partnership's future subsidiaries. As of March 31, 2023, the effective interest rate was 7.40%. The estimated fair value of the 2028 Notes was $365.4 million and $359.7 million as of March 31, 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
Our 2025 Notes are general unsecured senior obligations comprised of $250.0 million in aggregate principal of 6.75% senior notes maturing on May 15, 2025. The 2025 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Delek Logistics Finance Corp.) and will be unconditionally guaranteed on the same basis by certain of the Partnership's future subsidiaries. As of March 31, 2023, the effective interest rate was 7.19%. The estimated fair value of the 2025 Notes was $244.7 million and $243.4 million as of March 31, 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.
| | |
13 | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. Equity
We had 9,067,4119,263,842 common limited partner units held by the public outstanding as of September 30, 2017.March 31, 2023. Additionally, as of September 30, 2017,March 31, 2023, Delek Holdings owned a 61.5%78.7% limited partner interest in us, consisting of 15,294,04634,311,278 common limited partner units and a 94.6% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 497,172 general partner units. Affiliates who are also members of our general partner's management and board of directors own the remaining 5.4% interest in our general partner.
Equity Activity
The table below summarizes the changes in the number of limited partner units outstanding from December 31, 20162022 through September 30, 2017.March 31, 2023.
| | | | | | | | | | | | | | | | | |
| Common - Public | | Common - Delek Holdings | | Total |
| Balance at December 31, 2022 | 9,257,305 | | | 34,311,278 | | | 43,568,583 | |
Unit-based compensation awards (1) | 6,537 | | | — | | | 6,537 | |
| Balance at March 31, 2023 | 9,263,842 | | | 34,311,278 | | | 43,575,120 | |
(1) Unit-based compensation awards are presented net of 2,196 units withheld for taxes as of March 31, 2023. |
| | | | | | | | | | | | |
| | | Common - Public | | Common - Delek | | General Partner | | Total |
| Balance at December 31, 2016 | | 9,263,415 |
| | 15,065,192 |
| | 496,502 |
| | 24,825,109 |
|
| General partner units issued to maintain 2% interest | | — |
| | — |
| | 670 |
| | 670 |
|
| Unit-based compensation awards | | 32,850 |
| | — |
| | — |
| | 32,850 |
|
| Delek unit repurchases from public | | (228,854 | ) | | 228,854 |
| | — |
| | — |
|
| Balance at September 30, 2017 | | 9,067,411 |
| | 15,294,046 |
| | 497,172 |
| | 24,858,629 |
|
The summarized changes in the carrying amountIssuance of our equity from December 31, 2016 through September 30, 2017 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Common - Public | | Common - Delek | | General Partner | | Total |
| Balance at December 31, 2016 | | $ | 188,013 |
| | $ | (195,076 | ) | | $ | (6,221 | ) | | $ | (13,284 | ) |
| Cash distributions | (19,208 | ) | | (31,555 | ) | | (12,839 | ) | | (63,602 | ) |
| Sponsor contribution of fixed assets | — |
| | 65 |
| | 2 |
| | 67 |
|
| Net income attributable to partners | 13,837 |
| | 23,252 |
| | 13,406 |
| | 50,495 |
|
| Unit-based compensation | 480 |
| | 806 |
| | (741 | ) | | 545 |
|
| Delek unit repurchases from public | (7,291 | ) | | 7,291 |
| | — |
| | — |
|
| General partner units issued to maintain 2% interest | — |
| | — |
| | 21 |
| | 21 |
|
| Balance at September 30, 2017 | | $ | 175,831 |
| | $ | (195,217 | ) | | $ | (6,372 | ) | | $ | (25,758 | ) |
Allocations of Net Income
Additional Securities
Our Partnership Agreement contains provisionsauthorizes us to issue an unlimited number of additional partnership securities for the allocation of net incomeconsideration and loss toon the unitholdersterms and our general partner. For purposes of maintaining partner capital accounts, the Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our general partner.
The following table presents the allocation of the general partner's interest in net income (in thousands, except percentage of ownership interest):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Net income attributable to partners | | $ | 16,923 |
| | $ | 13,151 |
| | $ | 50,495 |
| | $ | 47,492 |
|
| Less: General partner's IDRs | | (4,496 | ) | | (3,057 | ) | | (12,649 | ) | | (7,503 | ) |
| Net income available to partners | | $ | 12,427 |
| | $ | 10,094 |
| | $ | 37,846 |
| | $ | 39,989 |
|
| General partner's ownership interest | | 2.0 | % | | 2.0 | % | | 2.0 | % | | 2.0 | % |
| General partner's allocated interest in net income | | $ | 249 |
| | $ | 202 |
| | $ | 757 |
| | $ | 800 |
|
| General partner's IDRs | | 4,496 |
| | 3,057 |
| | 12,649 |
| | 7,503 |
|
| Total general partner's interest in net income | | $ | 4,745 |
| | $ | 3,259 |
| | $ | 13,406 |
| | $ | 8,303 |
|
Incentive Distribution Rights
The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders andconditions 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 specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage intereststime of our general partner and our unitholders in any available cash from operating surplus that we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that (i) our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest, (ii) our general partner has not transferred its IDRs, and (iii) there are no arrearages on common units.
|
| | | | | | | | | | | |
| | | | Target Quarterly Distribution per Unit | | Marginal Percentage Interest in Distributions |
| | | | Target Amount | | Unitholders | | General Partner |
| Minimum Quarterly Distribution | | | $ | 0.37500 |
| | 98.0 | % | | 2.0 | % |
| First Target Distribution | | above | $ | 0.37500 |
| | 98.0 | % | | 2.0 | % |
| | | up to | $ | 0.43125 |
| | | | |
| Second Target Distribution | | above | $ | 0.43125 |
| | 85.0 | % | | 15.0 | % |
| | | up to | $ | 0.46875 |
| | | | |
| Third Target Distribution | | above | $ | 0.46875 |
| | 75.0 | % | | 25.0 | % |
| | | up to | $ | 0.56250 |
| | | | |
| Thereafter | | thereafter | $ | 0.56250 |
| | 50.0 | % | | 50.0 | % |
issuance.
Cash Distributions
Our Partnership Agreement sets forth the calculation to be used to determine the amount and priority of available cash distributions that our limited partner unitholders and general partner will receive. Our distributions earned with respect to a given period are declared subsequent to quarter end.
The table below summarizes the quarterly distributions related to our quarterly financial results:
|
| | | | | | | | | | | | | | | | |
| Quarter Ended | | Total Quarterly Distribution Per Limited Partner Unit | | Total Quarterly Distribution Per Limited Partner Unit, Annualized | | Total Cash Distribution, including general partner interest and IDRs (in thousands) | | Date of Distribution | | Unitholders Record Date |
| September 30, 2016 | | $ | 0.655 |
| | $ | 2.62 |
| | $ | 19,302 |
| | November 14, 2016 | | November 7, 2016 |
| December 31, 2016 | | $ | 0.680 |
| | $ | 2.72 |
| | $ | 20,537 |
| | February 14, 2017 | | February 3, 2017 |
| March 31, 2017 | | $ | 0.690 |
| | $ | 2.76 |
| | $ | 21,024 |
| | May 12, 2017 | | May 5, 2017 |
| June 30, 2017 | | $ | 0.705 |
| | $ | 2.82 |
| | $ | 21,783 |
| | August 11, 2017 | | August 4, 2017 |
| September 30, 2017 | | $ | 0.715 |
| | $ | 2.86 |
| | $ | 22,270 |
| | November 14, 2017 (1) | | November 7, 2017 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Total Quarterly Distribution Per Limited Partner Unit | | Total Cash Distribution
(in thousands) | | Date of Distribution | | Unitholders Record Date |
| March 31, 2022 | | $0.980 | | $42,604 | | May 12, 2022 | | May 5, 2022 |
| June 30, 2022 | | $0.985 | | $42,832 | | August 11, 2022 | | August 4, 2022 |
| September 30, 2022 | | $0.990 | | $43,057 | | November 10, 2022 | | November 4, 2022 |
| December 31, 2022 | | $1.020 | | $44,440 | | February 9, 2023 | | February 2, 2023 |
| March 31, 2023 | | $1.025 | | $44,664 | | May 15, 2023 (1) | | May 8, 2023 |
(1) Expected date of distribution.
The allocation of total quarterly cash distributions expected to be made on November 14, 2017 to general and limited partners for the three and nine months ended September 30, 2017 and the allocation of total quarterly cash distributions for the three and nine months ended September 30, 2016 are set forth in the table below. Distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below presents total cash distributions applicable to the period in which the distributions are earned (in thousands, except per unit amounts):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| General partner's distributions: | | | | | | | | |
| General partner's distributions | | $ | 356 |
| | $ | 325 |
| | $ | 1,048 |
| | $ | 940 |
|
| General partner's IDRs | | 4,496 |
| | 3,057 |
| | 12,649 |
| | 7,503 |
|
| Total general partner's distributions | | 4,852 |
| | 3,382 |
| | 13,697 |
| | 8,443 |
|
| | | | | | | | | |
| Limited partners' distributions: | | | | | | | | |
| Common | | 17,418 |
| | 15,920 |
| | 51,380 |
| | 41,615 |
|
| Subordinated | | — |
| | — |
| | — |
| | 4,424 |
|
| Total limited partners' distributions | | 17,418 |
| | 15,920 |
| | 51,380 |
| | 46,039 |
|
| Total cash distributions | | $ | 22,270 |
| | $ | 19,302 |
| | $ | 65,077 |
| | $ | 54,482 |
|
| | | | | | | | | |
| Cash distributions per limited partner unit | | $ | 0.715 |
| | $ | 0.655 |
| | $ | 2.110 |
| | $ | 1.895 |
|
9. Equity Based Compensation
We incurred approximately $0.2 million and $0.5 million of unit-based compensation expense related to the Partnership during the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.4 million during the three and nine months ended September 30, 2016, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income. The fair value of phantom unit awards under the Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") is determined based on the closing price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized over the vesting period using the straight line method. Awards vest over one- to five-year service periods, unless such awards are amended in accordance with the LTIP. As of September 30, 2017, there was $0.5 million of total unrecognized compensation cost related to non-vested equity-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.2 years.
10.8. Equity Method Investments
The Partnership 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 235,000 bpd.
In March 2015, we entered intoSummarized financial information for Red River on a 100% basis is shown below (in thousands):
| | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Current Assets | $ | 28,249 | | | $ | 33,365 | |
| Non-current Assets | $ | 392,238 | | | $ | 394,267 | |
| Current liabilities | $ | 4,932 | | | $ | 5,144 | |
| | | |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 | | |
| Revenues | | | | | $ | 18,952 | | | $ | 22,686 | | | |
| Gross profit | | | | | $ | 11,487 | | | $ | 15,601 | | | |
| Operating income | | | | | $ | 11,294 | | | $ | 15,419 | | | |
| Net income | | | | | $ | 11,473 | | | $ | 15,396 | | | |
| | |
14 | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
We have two additional joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek.Delek Holdings. We own a 50% membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC") to operate one of these pipeline systems and a 33% membership interest in the entity formed with Andeavor Logistics Rio Pipeline LLC ("Andeavor Logistics"), formerly known as Rangeland Energy II, LLC ("Rangeland RIO"Energy") 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.
Combined summarized financial information for these two equity method investees on a 100% basis is shown below (in thousands):
| | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Current assets | $ | 18,049 | | | $ | 18,888 | |
| Non-current assets | $ | 228,008 | | | $ | 231,898 | |
| Current liabilities | $ | 1,740 | | | $ | 1,973 | |
| | | |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 | | |
| Revenues | | | | | $ | 12,146 | | | $ | 8,895 | | | |
| Gross profit | | | | | $ | 7,820 | | | $ | 4,238 | | | |
| Operating income | | | | | $ | 6,646 | | | $ | 3,568 | | | |
| Net Income | | | | | $ | 6,746 | | | $ | 3,569 | | | |
The Partnership's investments in these twothree entities were financed through a combination of cash from operations and borrowings under the Second Amended and RestatedDKL Credit Agreement. As of September 30, 2017, theFacility. The Partnership's investment balancebalances in these joint ventures was $106.1 million.were as follows (in thousands):
| | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Red River | $ | 141,557 | | | $ | 149,635 | |
| CP LLC | 60,332 | | | 64,056 | |
| Andeavor Logistics | 41,384 | | | 43,331 | |
| Total Equity Method Investments | $ | 243,273 | | | $ | 257,022 | |
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,our equity method investments, we determined that these entities do not represent variable interest entities and consolidation wasis 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 transportationinvestments in pipeline joint ventures segment.
Summarized Financial Information
Combined summarized financial information for our equity method investees is shown below (in thousands):
|
| | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Current assets | | $ | 11,333 |
| | $ | 7,760 |
|
| Noncurrent assets | | $ | 244,615 |
| | $ | 237,516 |
|
| Current liabilities | | $ | 1,482 |
| | $ | 4,512 |
|
| Noncurrent liabilities | | $ | 165 |
| | $ | — |
|
| | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | $ | 7,026 |
| | $ | 226 |
| | $ | 19,719 |
| | $ | 229 |
|
| Gross profit | | $ | 7,026 |
| | $ | 226 |
| | $ | 19,719 |
| | $ | 229 |
|
| Net income (loss) | | $ | 2,282 |
| | $ | (1,538 | ) | | $ | 6,674 |
| | $ | (2,857 | ) |
| | | | | | | | | |
11.9. Segment Data
We aggregate our operating segments into twofour reportable segments: (i) gathering and processing; (ii) wholesale marketing and terminalling; (iii) storage and transportation; and (iv) investment in pipeline joint ventures. Operations that are not specifically included in the reportable segments are included in Corporate and other segment.
During the fourth quarter 2022, we realigned our reportable segments for financial reporting purposes to reflect changes in the manner in which our chief operating decision maker, or CODM, assesses financial information for decision-making purposes. The change primarily represents reporting the operating results of our pipeline operations and legacy gathering assets and the operating results of the Delaware Gathering operations within a new reportable segment called gathering and processing. Prior to this change, the pipeline operations and legacy gathering assets were reported as part of pipelines and transportation and (ii) wholesale marketing and terminalling:
segment. The assets and investments reported in theformer pipelines and transportation reportable segment provide crude oil gatheringwas renamed to storage and crude oil, intermediatetransportation. We are also now segregating out certain non-segment specific costs and finished products transportationexpenses and, storage serviceswhen applicable, immaterial operating segments that may not fit into our existing reportable segments as Corporate and Other activities. Corporate and Other primarily includes general and administrative expenses, interest expense and depreciation and amortization. Additionally, the CODM determined that EBITDA is the key performance measure for planning and forecasting purposes and discontinued the use of contribution margin as a measure of performance. While this reporting change did not change our consolidated results, segment data for previous years has been restated and is consistent with the current year presentation throughout the financial statements and the accompanying notes.
| | |
15 | |
Notes to Delek's refining operationsCondensed Consolidated Financial Statements (Unaudited)
Segment EBITDA should not be considered a substitute for results prepared in accordance with GAAP and independent third parties.
should not be considered alternatives to net income (loss), which is the most directly comparable financial measure to EBITDA that is in accordance with GAAP. Segment EBITDA, as determined and measured by us, should also not be compared to similarly titled measures reported by other companies.
The wholesale marketingdisaggregated financial results for the reporting segments have been prepared using a management approach, which is consistent with the basis and terminallingmanner in which management internally disaggregates financial information for the purposes of assisting internal operating decisions. The CODM evaluates performance based upon EBITDA. We define EBITDA for any period as net income before net interest expense, income tax expense, depreciation and amortization expense, including amortization of customer contract intangible assets, which is included as a component of net revenues in our accompanying condensed consolidated statements of income. Segment EBITDA should not be considered a substitute for results prepared in accordance with GAAP and should not be considered alternatives to net income (loss), which is the most directly comparable financial measure to EBITDA that is in accordance with GAAP. Segment EBITDA, as determined and measured by us, should also not be compared to similarly titled measures reported by other companies.
Assets by segment provides wholesale marketing and terminalling servicesis not a measure used to Delek's refining operations and independent third parties.
Our operating segments adhere toassess the accounting policies used for our consolidated financial statements. Our operating segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on segment contribution margin. Segment contribution marginthe Partnership by the CODM and thus is defined as net sales less cost of goods sold and operating expenses.
not disclosed.
The following is a summary of business segment operating performance as measured by contribution marginEBITDA for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
| (In thousands) | | Gathering and Processing | | Wholesale Marketing and Terminalling | | Storage and Transportation | | Investments in Pipeline Joint Ventures | | Corporate and Other | | Consolidated |
| Net revenues: | | | | | | | | | | | | |
Affiliate (1) | | $ | 52,761 | | | $ | 33,751 | | | $ | 38,487 | | | $ | — | | | $ | — | | | $ | 124,999 | |
| Third party | | 39,671 | | | 78,558 | | | 297 | | | — | | | — | | | 118,526 | |
| Total revenue | | $ | 92,432 | | | $ | 112,309 | | | $ | 38,784 | | | $ | — | | | $ | — | | | $ | 243,525 | |
| | | | | | | | | | | | |
| Segment EBITDA | | $ | 55,445 | | | $ | 21,954 | | | $ | 13,422 | | | $ | 6,316 | | | $ | (3,979) | | | $ | 93,158 | |
| Depreciation and amortization | | 16,447 | | | 1,689 | | | 2,102 | | | — | | | 867 | | | 21,105 | |
| Amortization of customer contract intangible | | — | | | 1,803 | | | — | | | — | | | — | | | 1,803 | |
| Interest expense, net | | — | | | — | | | — | | | — | | | 32,581 | | | 32,581 | |
| Income tax expense | | | | | | | | | | | | 302 | |
| Net income | | | | | | | | | | | | $ | 37,367 | |
| | | | | | | | | | | | |
| Capital spending | | $ | 32,789 | | | $ | 3,116 | | | $ | 196 | | | $ | — | | | $ | — | | | $ | 36,101 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Pipelines and Transportation | | | | | | | | |
| Net sales: | | | | | | | | |
| Affiliate | | $ | 27,805 |
| | $ | 25,238 |
| | $ | 81,972 |
| | $ | 77,680 |
|
| Third party | | 3,177 |
| | 3,388 |
| | 7,910 |
| | 15,739 |
|
| Total pipelines and transportation | | 30,982 |
| | 28,626 |
| | 89,882 |
| | 93,419 |
|
| Operating costs and expenses: | | | | | | | | |
| Cost of goods sold | | 4,883 |
| | 4,811 |
| | 13,691 |
| | 14,401 |
|
| Operating expenses | | 8,573 |
| | 7,678 |
| | 24,661 |
| | 22,317 |
|
| Segment contribution margin | | $ | 17,526 |
| | $ | 16,137 |
| | $ | 51,530 |
| | $ | 56,701 |
|
| Capital spending (excluding business combinations) | | $ | 2,918 |
| | $ | 2,613 |
| | $ | 6,715 |
| | $ | 4,037 |
|
| | | | | | | | | |
| Wholesale Marketing and Terminalling | | | | | | | | |
| Net sales: | | | | | | | | |
| Affiliate | | $ | 12,326 |
| | $ | 11,122 |
| | $ | 34,602 |
| | $ | 34,134 |
|
| Third party | | 87,318 |
| | 67,722 |
| | 262,384 |
| | 195,826 |
|
| Total wholesale marketing and terminalling | | 99,644 |
| | 78,844 |
| | 296,986 |
| | 229,960 |
|
| Operating costs and expenses: | | | | | | | | |
| Cost of goods sold | | 84,237 |
| | 68,716 |
| | 253,058 |
| | 198,980 |
|
| Operating expenses | | 2,089 |
| | 1,573 |
| | 6,325 |
| | 6,128 |
|
| Segment contribution margin | | $ | 13,318 |
| | $ | 8,555 |
| | $ | 37,603 |
| | $ | 24,852 |
|
| Capital spending (excluding business combinations) | | $ | 868 |
| | $ | 464 |
| | $ | 1,981 |
| | $ | 972 |
|
| | | | | | | | | |
| Consolidated | | | | | | | | |
| Net sales: | | | | | | | | |
| Affiliate | | $ | 40,131 |
| | $ | 36,360 |
| | $ | 116,574 |
| | $ | 111,814 |
|
| Third party | | 90,495 |
| | 71,110 |
| | 270,294 |
| | 211,565 |
|
| Total consolidated | | 130,626 |
| | 107,470 |
| | 386,868 |
| | 323,379 |
|
| Operating costs and expenses: | | | | | | | | |
| Cost of goods sold | | 89,120 |
| | 73,527 |
| | 266,749 |
| | 213,381 |
|
| Operating expenses | | 10,662 |
| | 9,251 |
| | 30,986 |
| | 28,445 |
|
| Contribution margin | | 30,844 |
| | 24,692 |
| | 89,133 |
| | 81,553 |
|
| General and administrative expenses | | 2,751 |
| | 2,307 |
| | 8,255 |
| | 7,918 |
|
| Depreciation and amortization | | 5,462 |
| | 5,356 |
| | 16,397 |
| | 15,164 |
|
| (Gain) loss on asset disposals | | (5 | ) | | 28 |
|
| 2 |
| | (16 | ) |
| Operating income | | $ | 22,636 |
| | $ | 17,001 |
| | $ | 64,479 |
| | $ | 58,487 |
|
Capital spending (excluding business combinations) | | $ | 3,786 |
| | $ | 3,077 |
| | $ | 8,696 |
| | $ | 5,009 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 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 (1) | | $ | 40,334 | | | $ | 52,731 | | | $ | 30,689 | | | $ | — | | | $ | — | | | $ | 123,754 | |
| Third party | | 1,710 | | | 78,045 | | | 3,072 | | | — | | | — | | | 82,827 | |
| Total revenue | | $ | 42,044 | | | $ | 130,776 | | | $ | 33,761 | | | $ | — | | | $ | — | | | $ | 206,581 | |
| | | | | | | | | | | | |
| Segment EBITDA | | $ | 32,081 | | | $ | 20,734 | | | $ | 11,108 | | | $ | 7,026 | | | $ | (4,946) | | | $ | 66,003 | |
| Depreciation and amortization | | 5,841 | | | 1,378 | | | 2,096 | | | — | | | 1,020 | | | 10,335 | |
| Amortization of customer contract intangible | | — | | | 1,803 | | | — | | | — | | | — | | | 1,803 | |
| Interest expense, net | | — | | | — | | | — | | | — | | | 14,250 | | | 14,250 | |
| Income tax expense | | | | | | | | | | | | 101 | |
| Net income | | | | | | | | | | | | $ | 39,514 | |
| | | | | | | | | | | | |
| Capital spending | | $ | 8,855 | | | $ | 231 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,086 | |
(1) Affiliate revenue for the wholesale marketing and terminalling segment is presented net of amortization expense pertaining to the Marketing Contract Intangible Acquisition. See Note 3 for additional information.
The following table summarizes the total assets for each segment as of September 30, 2017 and December 31, 2016 (in thousands).
|
| | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Pipelines and transportation | | $ | 344,260 |
| | $ | 337,349 |
|
| Wholesale marketing and terminalling | | 78,598 |
| | 78,198 |
|
| Total assets | | $ | 422,858 |
| | $ | 415,547 |
|
| | |
16 | |
Property, plant and equipment and accumulated depreciation as of September 30, 2017 and depreciation expense by reporting segment for the three and nine months ended September 30, 2017 were as follows (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | |
| | | Pipelines and Transportation | | Wholesale Marketing and Terminalling | | Consolidated |
| Property, plant and equipment | | $ | 292,116 |
| | $ | 65,416 |
| | $ | 357,532 |
|
| Less: accumulated depreciation | | (80,008 | ) | | (26,872 | ) | | (106,880 | ) |
| Property, plant and equipment, net | | $ | 212,108 |
| | $ | 38,544 |
| | $ | 250,652 |
|
| Depreciation expense for the three months ended September 30, 2017 | | $ | 4,257 |
| | $ | 940 |
| | $ | 5,197 |
|
| Depreciation expense for the nine months ended September 30, 2017 | | $ | 12,821 |
| | $ | 2,779 |
| | $ | 15,600 |
|
In accordance with ASC 360, Property, Plant & Equipment, we evaluate the realizability of property, plant and equipment as events occur that might indicate potential impairment. There were no indicators of impairment of our property, plant and equipment as of September 30, 2017.
12. Fair Value Measurements
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of our assets and liabilities that fall under the scope of ASC 825, Financial Instruments.
We apply the provisions of ASC 820, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to commodity and interest rate derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material as of September 30, 2017.
ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
Over the counter ("OTC") commodity swaps and any interest rate swaps and caps are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, spot prices, interest rates, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines the classification as Level 2 or 3. Our contracts are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at September 30, 2017 and December 31, 2016 was as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | As of September 30, 2017 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| OTC commodity swaps | | $ | — |
| | $ | 88 |
| | $ | — |
| | $ | 88 |
|
| Total assets | | — |
| | 88 |
| | — |
| | 88 |
|
| Liabilities | | | | | | | |
|
|
| OTC commodity swaps | | — |
| | — |
| | — |
| | — |
|
| Net assets | | $ | — |
| | $ | 88 |
| | $ | — |
| | $ | 88 |
|
|
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2016 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| OTC commodity swaps | | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 9 |
|
| Total assets | | — |
| | 9 |
| | — |
| | 9 |
|
| Liabilities | | | | | | | | |
| OTC commodity swaps | | — |
| | (82 | ) | | — |
| | (82 | ) |
| Net liabilities | | $ | — |
| | $ | (73 | ) | | $ | — |
| | $ | (73 | ) |
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy under the guidance of ASC 815-10-45, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty where the legal right of offset exists.
As of September 30, 2017 and December 31, 2016, we had a cash deficit of $0.7 million and $0.6 million, respectively, netted with the net derivative position of our counterparty. See Note 13 for further information regarding derivative instruments.
13. Derivative Instruments
From time to time, we enter into forward fuel contracts to limit the exposure to price fluctuations for physical purchases of finished products in the normal course of business. We use derivatives to reduce normal operating and market risks with a primary objective in derivative instrument use being the reduction of the impact of market price volatility on our results of operations.
Typically, we enter into forward fuel contracts with major financial institutions in which we fix the purchase price of finished grade fuel for a predetermined number of units with fulfillment terms of less than 90 days.
From time to time, we may also enter into interest rate hedging agreements to limit floating interest rate exposure under the Second Amended and Restated Credit Agreement. Our initial credit facility required us to maintain interest rate hedging arrangements on at least 50% of the amount funded on November 7, 2012 under the credit facility, which was required to be in place for at least a three-year period beginning no later than March 7, 2013.Accordingly, effective February 25, 2013, we entered into an interest rate hedge in the form of a LIBOR interest rate cap for a term of three years for a total notional amount of $45.0 million, thereby meeting the requirements in effect at that time. These requirements were eliminated in connection with the Amended and Restated Credit Agreement in July 2013, but the interest rate hedge remained in place in accordance with its term through its maturity date in February 2016.
The following table presents the fair value of our derivative instruments as of September 30, 2017 and December 31, 2016. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements, including any cash deficit or collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below may differ from the amounts presented in our accompanying consolidated balance sheets. During the three and nine months ended September 30, 2017 and 2016, we did not elect hedge accounting treatment for these derivative positions. As a result, all changes in fair value are marked to market in the accompanying condensed consolidated statements of income and comprehensive income. See Note 12 for further information regarding the fair value of derivative instruments.
|
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | September 30, 2017 | | December 31, 2016 |
| Derivative Type | | Balance Sheet Location | | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives: | | | | | | | | |
OTC commodity swaps (1) | | Other current assets | | $ | 88 |
| | $ | — |
| | $ | 9 |
| | $ | (82 | ) |
| Total gross value of derivatives | | 88 |
| | — |
| | 9 |
| | (82 | ) |
Less: Counterparty netting and cash collateral (2) | | 88 |
| | 585 |
| | 9 |
| | 621 |
|
| Total net fair value of derivatives | | $ | — |
| | $ | (585 | ) | | $ | — |
| | $ | (703 | ) |
(1) As of September 30, 2017 and December 31, 2016, we had open derivative contracts representing 96,000 barrels and 93,000 barrels, respectively, of refined petroleum products.
(2) As of September 30, 2017 and December 31, 2016, we had a cash deficit of $0.7 million and $0.6 million, respectively, netted with the net derivative position of our counterparty.
Recognized gains (losses) associated with our derivatives for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Derivative Type | Income Statement Location | | 2017 | | 2016 | | 2017 | | 2016 |
| Interest rate derivatives | Interest expense | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Commodity derivatives | Cost of goods sold | | $ | (1,474 | ) | | $ | (255 | ) | | $ | (358 | ) | | $ | (1,714 | ) |
| | Total | | $ | (1,474 | ) | | $ | (255 | ) | | $ | (358 | ) | | $ | (1,714 | ) |
14.10. 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.statements. See "Crude Oil and Other Releases" below for a potentialdiscussion of an enforcement action.
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 wastesour 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 and Other Releases
We have experienced several crude oil releases involving our assets, including, but not limited to,During the following releases:
three months ended March 31, 2023, there were no significant releases.
In January 2016, a crude oil release of less than 30 barrels occurred from a gathering line at the Modisette pumping station near El Dorado, Arkansas;
In January 2016, a crude oil release of approximately 350 barrels occurred from the Paline Pipeline near Woodville, Texas (the "Paline Release"); and
In March 2013,August 2021, a release of approximately 5,900 barrels of crude oil, the majority of which was contained on-site,finished product from our Greenville pipeline occurred from a pumping facility at our Magnolia Station located west of the El Dorado Refinerynear Dixon, Texas (the "Magnolia"Greenville Dixon Release").
Cleanup operations, and site maintenance and remediation efforts on these and other releasesof this release have been substantially completed.completed, where such costs incurred as of March 31, 2023 totaled $4.7 million. We believe any additional costs associated with this release will be immaterial.
For other releases that occurred in prior years, we have received regulatory closure or a majority of the cleanup and remediation efforts are substantially complete. We expect regulatory closure in 2023 for the release sites that have not yet received it and do not anticipate material costs associated with any fines or penalties or to complete activities that may be needed to achieve regulatory closure. Regulatory authorities could require additional remediation based on the results of our remediation efforts. We may incur additional expenses as a result of further scrutiny by regulatory authorities and continued compliance with laws and regulations to which our assets are subject. As of March 31, 2023, we have accrued $0.3 million for remediation and other such matters related to these releases.
Expenses incurred for the remediation of these crude oil and other releases are included in operating expenses in our condensed consolidated statements of income and comprehensive income and areincome. The majority of our releases have been subsequently reimbursed by Delek Holdings pursuant to the terms of the Omnibus Agreement, with the exception of the Greenville Dixon Release noted above as it is not covered under 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 partialavailable insurance, indemnification or reimbursement, will have a material adverse effect upon our business, financial condition or results of operations asoperations.
During the three months ended March 31, 2023, we are reimbursed by Delek for such costs.recorded a nominal amount of crude oil and other releases remediation expenses, net of reimbursable expenses. During the three months ended March 31, 2022 there were no crude oil and other releases remediation expenses, net of reimbursable expenses.
In June 2015, the United States Department of Justice notified the Partnership that it was evaluating an enforcement action on behalf of the Environmental Protection Agency (the "EPA") with regard | | |
17 | |
Notes to potential Clean Water Act violations arising from the Magnolia Release. We are currently attempting to negotiate a resolution to this matter with the EPA and the State of Arkansas, which may include monetary penalties and/or other relief. As of September 30, 2017, we have accrued $1.0 million, which we have recorded in pipeline release liabilities in our condensed consolidated balance sheet, for the Magnolia Release in connection with these proceedings.Condensed Consolidated Financial Statements (Unaudited)
Contracts and Agreements
The majority of the petroleum products we sell in west Texas are purchased from Noble Petro, Inc. ("Noble Petro"). Under the terms of a supply contract (the "Abilene Contract") with Noble Petro, we have the right to purchase up to 20,350 bpd of petroleum products at the Abilene, Texas terminal, which we own, for sales and exchange with third parties at the Abilene and San Angelo terminals. We lease the Abilene and San Angelo, Texas terminals to Noble Petro, under a separate Terminal and Pipeline Lease and Operating Agreement, with a term that runs concurrently with that of the Abilene Contract. The Abilene Contract expires on December 31, 2017 and does not include any options for renewal. We also purchase spot barrels from various third parties and from Delek for sale to wholesale customers in west Texas.
Letters of Credit
As of September 30, 2017, we had in place letters of credit totaling $8.5 million under the Second Amended and Restated Credit Agreement, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at September 30, 2017.
Operating11. Leases
We lease certain equipmentpipeline and have surface leases under various operatingtransportation equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize 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 allthese leases on a straight-line basis over the lease term.
Certain leases also include options to purchase the leased equipment.
Certain of our lease agreements include rates based on equipment usage and others include rate inflationary indices based increases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table presents additional information related to our operating leases totaled $1.4 million and $4.1 millionfor the three and nine months ended September 30, 2017, respectively, and $1.3 million and $4.4 million for the three and nine months ended September 30, 2016, respectively.in accordance ASC 842:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| (in thousands) | | | | | 2023 | | 2022 |
Lease Cost (1) | | | | | | | |
| Operating lease cost | | | | | $ | 3,232 | | | $ | 2,641 | |
| Short-term lease cost | | | | | 363 | | | 319 | |
| Variable lease costs | | | | | 695 | | | 936 | |
| Total lease cost | | | | | $ | 4,290 | | | $ | 3,896 | |
| | | | | | | |
| Other Information | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows from operating leases | | | | | $ | (3,232) | | | $ | (2,641) | |
| | | | | | | |
| Leased assets obtained in exchange for new operating lease liabilities | | | | | $ | 2,294 | | | $ | — | |
| Leased assets obtained in exchange for new financing lease liabilities | | | | | $ | 1,162 | | | $ | — | |
| | | | | | | |
| | | | | As of March 31, |
| | | | | 2023 | | 2022 |
| | | | | | | |
| Weighted-average remaining lease term (years) for operating leases | | | | | 3.5 | | 3.2 |
Weighted-average discount rate (2) operating leases | | | | | 6.9 | % | | 5.8 | % |
| Weighted-average remaining lease term (years) for finance lease | | | | | 2.4 | | 1.9 |
Weighted-average discount rate (2) finance lease | | | | | 4.3 | % | | 1.9 | % |
(1) Includes an immaterial amount of financing lease.
(2) Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842.
12. Subsequent Events
Distribution Declaration
On October 25, 2017,April 28, 2023, our general partner's board of directors declared a quarterly cash distribution of $0.715$1.025 per limited partner unit, payable on November 14, 2017,May 15, 2023, to unitholders of record on November 7, 2017.May 8, 2023.
| | |
18 | |
Management's Discussion and Analysis
ITEM 2.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 condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC"(''SEC'') on February 27, 2017March 1, 2023 (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 as Delek US Holdings, Inc. (“New Delek”), with Alon USA and Old Delek surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon USA pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended.
Unless 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 Delek Logistics Partners, LPthe Partnership and its subsidiaries and its general partner.
You should readThe Partnership announces material information to the following discussionpublic about the Partnership, its products and services and other matters through a variety of our financial conditionmeans, including filings with the Securities and resultsExchange Commission, press releases, public conference calls, the Partnership's website (www.deleklogistics.com), the investor relations section of operationsthe website (ir.deleklogistics.com), the news section of its website (www.deleklogistics.com/news), and/or social media, including its Twitter account (@DelekLogistics). The Partnership encourages investors and others to review the information it makes public in conjunction with our historical condensed consolidated financial statements and notes thereto.
these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (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 Holdings' future growth, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution;
•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'sthird-party's obligations under our commercial agreements;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;
| | |
19 | |
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 the COVID-19 Pandemic;
•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 the COVID-19 Pandemic or future pandemics;
•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 the COVID-19 Pandemic;
•significant operational, investment or other changes required by existing or future environmental statutes and regulations, including international agreements and national or regional 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;
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 integrate acquired businesses;
•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 Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for10-K.
Many of the year ended December 31, 2016.
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.
| | |
20 | |
Management's Discussion and Analysis
Executive Summary: Management's View of Our Business and Strategic Overview
| | |
| Management's View of Our Business |
The Partnership primarily owns and operates crude oil, intermediate and refined products logistics and marketing assets as well as crude oil and natural gas gathering and water processing assets. We gather, transport, offload and store crude oil and intermediate products and market, distribute, transport and store refined products primarily in select regions of the southeastern United States and Texas for Delek Holdings and third parties. In June 2022, we acquired 100% of the interest in 3 Bear Delaware Holding – NM, LLC ("3 Bear") (subsequently renamed to Delek Delaware Gathering ("Delaware Gathering"), which expands our third-party revenue and includes 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 Business"). As we continue the process of integrating these operations into our existing businesses and assessing the long-term impact to our business, management (including the designated Chief Operating Decision Maker or “CODM”) has changed the way that the business is managed and reviewed, including from a financial reporting perspective. As a result, effective in the fourth quarter 2022, we have revised our reportable segments accordingly. The new reportable segments consist of Gathering and Processing, Wholesale Marketing and Terminalling, Storage and Transportation, and Investments in Pipeline Joint Ventures. The primary change in our segmentation as compared to prior presentations is that, now that we have substantially expanded our gathering activities, certain legacy gathering activities and operations are now managed as part of the Gathering and Processing segment. Additionally, we are also now segregating out certain non-segment specific costs and expenses and, when applicable, immaterial operating segments that may not fit into our existing reportable segments as Corporate and Other activities. A substantial majorityportion of our existing assets are both integral to and dependent upon the success of Delek’sDelek Holdings' refining operations, as many of our assetspipeline usage and gathered crude oil barrels are contracted either primarily or exclusively to Delek Holdings in support of its Tyler, and El Dorado Refineries.
and Big Spring refineries.
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 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 thesuch partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and the fair market value of our assets and financial reporting bases of assets and liabilities, the acquisition price of the partner's units and the taxable income allocation requirements under the Partnership's FirstSecond Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement").
Business and Economic Environment Overview
During much of three months ended March 31, 2023, domestic markets have experienced an elevated hydrocarbon pricing environment has resulted in a strong demand for hydrocarbons and presented an opportunity for the Partnership to leverage its extensive network of logistics assets, resulting in increased throughputs and higher utilization as compared to the prior year. Additionally, the successful integration of Delek Delaware Gathering further diversifies our logistics customer base to include significantly more third-party customers, it allows us to provide comprehensive logistics services in the Delaware Basin, while also serving as a funnel into our existing midstream Permian activities. As producers continue to ramp up production within the Permian Basin, the Partnership is well 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 Reporting Segmentspositioning allows our customers the ability to control quality and Assets
adds optionality to place barrels in a variety of markets. Through our joint venture projects, we have increased our supply network to take advantage of growth opportunities in expanding markets and added additional flexibility which has delivered realized value through the entire Delek Logistics system. As a result, we saw an increase in EBITDA (as defined in "Non GAAP Measures" section below) of $27.2 million in 2023 as compared to 2022. Our business consistsgathering and processing segment which had EBITDA of two reportable segments: (i) our pipelines and transportation segment and (ii) our$55.4 million in 2023 compared to $32.1 million in 2022, benefited from additional EBITDA associated with the Delaware Gathering Acquisition. Our wholesale marketing and terminalling segment.segment saw a $1.2 million increase in EBITDA. EBITDA for our investments in pipeline joint ventures decreased by $0.7 million. See the “Results of Operations” 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. 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 2023, 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 flows and balance sheet in order to continue maximizing unitholder returns and the long-term prospects for return on investment.
| | |
21 | |
Management's Discussion and Analysis
Segment Overview
We aggregate our operating segments into four reportable segments: (i) gathering and processing; (ii) wholesale marketing and terminalling; (iii) storage and transportation; and (iv) investment in pipeline joint ventures. Operations that are not specifically included in the reportable segments are included in Corporate and other, consisting primarily of general and administrative expenses, interest expense and depreciation and amortization.
The operational assets and investments in our gathering and processing segment, consist of assets acquired in connection with the Midland Gathering Assets Acquisition, including approximately 200 miles of gathering assets, approximately 65 tank battery connections, terminals with total storage capacity of approximately 650,000 barrels and applicable rights-of-way assets, as well as operational assets we acquired in connection with the Delaware Gathering Acquisition, consist of approximately 485 miles of pipelines, 88 million cubic feet ("MMCf") per day ("MMCf/d") of cryogenic natural gas processing capacity, 140 thousand barrels ("MBbl") per day ("MBbl/d") of crude gathering capacity, 120 MBbl of crude storage capacity and 200 MBbl/d of water disposal capacity located primarily in the Delaware Basin (“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 products or crude oil that we transport. 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 storage and transportation segment consist of and have been made in pipelines, tanks, offloading facilities, trucks and ancillary assets, which provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services primarily in support of Delek'sDelek Holdings' refining operations in Tyler, Texas, and El Dorado, Arkansas.Arkansas and Big Spring, Texas. Additionally, the assets in this segment provide crude oil transportation services to certain third parties. In providing these services, we do not take ownership of the products or crude oil that we transport or store; and, therefore,store. Therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment.
| | |
| Investments in Pipeline Joint Ventures |
The assets in our wholesale marketing and terminalling segment consistPartnership owns a portion of refined products terminals and pipelines in Texas, Tennessee and Arkansas. We generate revenue in our wholesale marketing and terminalling segment by providing marketing servicesthree joint ventures (accounted for the refined products output of the Tyler Refinery, engaging in wholesale activity at our terminals in west Texas and at terminals owned by third parties, whereby we purchase light products for sale and exchange to third parties, and by providing terminalling services at our refined products terminals to independent third parties and Delek.
2017 Developments
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 approximate 40-mileas equity method investments) that have constructed separate crude oil pipeline systems 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.
Merger of Delek and Alon. 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 Mergers did not affect the Partnership's commercial agreements it has with Delek discussed in Note 3 to our accompanying condensed consolidated financial statements.
Inflation Adjustments. On July 1, 2017, the tariffs on our Federal Energy Regulatory Commission ("FERC") regulated pipelines and the throughput fees and storage fees under certain of our agreements with Delek and third parties that are subject to adjustment using FERC indexing increased by approximately 0.2%, the amount of the changeprimarily in the FERC oil pipeline index. Under certain of ourPermian Basin and Gulf Coast regions and with strategic connections to Cushing, Midland and other agreements with Delek and third parties, the fees increased based on the consumer price index or the producer price index,key exchange points, which increased approximately 1.8% and 1.6%, respectively. Any applicable decreases to such fees will not result in a reduction to an amount below the fee initially set forth in such agreements.
6.75% Senior Notes Due 2025. On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued $250.0 million in aggregate principal amount of 6.750% senior notes due 2025 (the “2025 Notes”) at a discount. The 2025 Notes are general unsecured senior obligations
of the Issuers. The 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 proceeds to pay down a portion of the outstanding balance under the Partnership's revolving credit facility. See Note 5 to our accompanying condensed consolidated financial statements for further discussion.
Caddo Pipeline. In March 2015, we entered into a joint venture to construct aprovide crude oil and refined product pipeline system and related ancillary assets, which is servingtransportation to third parties and subsidiaries of Delek (the "Caddo Pipeline"). We ownHoldings.
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.our existing reportable segments.
| | |
22 | |
Management's Discussion and Analysis
Long-Term Strategic Objectives
The Partnership’s Long-Term Strategic Objectives have been focused on maintaining stable cash flows and to constructgrow the Caddo Pipeline. Operationsquarterly distributions paid to our unitholders over time. To that end, we have been focused on growing our asset base within our geographic area through acquisitions, project development, joint ventures, enhancing our existing systems and lowering our carbon footprint, as we continued to evaluate ways to provide Delek Holdings with logistics services and look for ways to reduce our reliance on Delek Holdings as our primary customer.
2023 Strategic Focus Areas
In service to these overarching Long-Term Strategic Objectives, as we began 2023, we focused on the Caddo Pipeline began in January 2017.following Strategic Focus Areas:
How We •Generate Revenue
The Partnership generates revenue by charging feesStable Cash Flow. Continue to pursue opportunities to provide logistics, marketing and other services to Delek Holdings and third parties for gathering, transporting, offloading and storing crude oil and for marketing, distributing, transporting, throughputting and storing intermediate and refined products. We also wholesale market refined productspursuant to long-term, fee-based contracts. In new service contracts, endeavor to include minimum volume throughput or other commitments, similar to those included in the west Texas market. A substantial majority of our contribution margin, which we define as net sales less cost of goods sold and operating expenses, is derived fromcurrent commercial agreements with Delek Holdings.
•Focus on Growing Our Business. Continue 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 initial terms ranging from fivepotential external partners and through investments in joint ventures. Additionally, where possible, leverage our strong relationship with Delek Holdings to ten years,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 giveswe operate, to target and complete attractive third-party acquisitions.
◦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 Holdings. Delek Holdings has granted us a contractual revenue baseright 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. Delek Holdings is also required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that we believe enhances the stability of our cash flows. As more fully described below, our commercial agreements with Delek typically include minimum volumeHoldings may acquire or throughput commitments by Delek, which we believe will provide a stable revenue streamconstruct in the future. The fees charged underFurther, 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 agreementscapital structure and critically evaluating anticipated return on investment.
•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 expansion and construction of new logistics assets to support growth of any of our customers', including Delek Holdings', 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. Continue seeking to enhance the profitability of our existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization. Additionally, 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.
•Expand our ESG Consciousness and Lower Our Carbon Footprint. Continue to look for ways to grow our business whilst staying conscious of and 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 Clear Value Propositions and Sustainable Returns.
Commercial Agreements with Delek and third parties are indexed to inflation-based indices. In addition, the rates charged with respect to our assets that are subject to inflation indexing may increase or decrease, typically on July 1 of each year, by the amount of any change in various inflation-based indices, including FERC, provided that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
Commercial Agreements
Holdings
The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which we provide various services, including crude oil gathering, and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings, and Delek Holdings 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 our Annual Report on Form 10-K for the year ended December 31, 2016 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC")SEC on February 28, 2017March 1, 2023 for a discussion of our material commercial agreements with Delek.Delek Holdings.
Other Transactions
The 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 "Delek Permian Gathering
| | |
23 | |
Management's Discussion and Analysis
Project"). The majority of the gathering systems has been constructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and are still subject to the terms of the DPG 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 3 to our accompanying condensed consolidated financial statements for additional information on the DPG Management Agreement.
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.
| | |
| Operating and Maintenance Expenses |
Contribution Margin 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.
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 $1.025 per unit for the yearquarter ended DecemberMarch 31, 2016, we revised our definition2023 ($4.10 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of distributableits available cash flow(as defined in the Partnership Agreement) to includeits unitholders quarterly. As a result, the reconciliation of this non-GAAP measure from U.S. GAAP net cashPartnership expects to fund future capital expenditures primarily from operating activities rather thancash flows, borrowings under our revolving credit facility and any potential future issuances of equity and debt securities. See Note 7 to the accompanying condensed consolidated financial statements for further discussion.
| | |
24 | |
Management's Discussion and Analysis
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 EBITDA. Distributable cash flow is deriveddrilling 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 net cash flowLongview, Texas area to Shreveport, Louisiana area; and
•The Red River Pipeline provides crude oil transportation and optionality from operating activities plus or minus changesCushing, Oklahoma to Longview, Texas area and connectivity to our Caddo JV along with DKL 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 netNGLs 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.
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.
| | |
25 | |
Management's Discussion and Analysis
| | |
26 | |
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 ("U.S.") Generally Accepted Accounting Principles ("GAAP"). These financial and operational non-GAAP measures include:
| | | | | | | | |
•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 customer contract intangible assets, which is included as a component of net revenues in our accompanying condensed 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 condensed 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 definitiondefinitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies,partnerships, thereby diminishing itstheir utility. ForSee below for a reconciliation of EBITDA and distributable cash flow to itstheir 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.distributable cash flow (which are defined above) to the most directly comparable GAAP please refer to "Results of Operations—Statement of Operations Data" below.
Financing. The Partnership has declared its intent to make ameasure, or net income and net cash distribution to its unitholders at a distribution rate of $0.715 per unit for the quarter ended September 30, 2017 ($2.86 per unit on an annualized basis). Our First Amended and Restated Agreement of Limited Partnership (the "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 senior secured revolving credit agreement,activities, respectively.
| | | | | | | | | | | | | | | |
| Reconciliation of net income to EBITDA (in thousands) | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Net income | | | | | $ | 37,367 | | | $ | 39,514 | |
| Add: | | | | | | | |
| Income tax expense | | | | | 302 | | | 101 | |
| Depreciation and amortization | | | | | 21,105 | | | 10,335 | |
| Amortization of customer contract intangible assets | | | | | 1,803 | | | 1,803 | |
| Interest expense, net | | | | | 32,581 | | | 14,250 | |
| EBITDA | | | | | $ | 93,158 | | | $ | 66,003 | |
| | | | | | | | | | | | | | | |
| Reconciliation of net cash from operating activities to distributable cash flow (in thousands) | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Net cash provided by operating activities | | | | | $ | 29,190 | | | $ | 47,920 | |
| Changes in assets and liabilities | | | | | 37,670 | | | 6,012 | |
| Distributions from equity method investments in investing activities | | | | | 1,440 | | | 550 | |
| Non-cash lease expense | | | | | (2,200) | | | (1,798) | |
Regulatory capital expenditures (1) | | | | | (4,246) | | | (807) | |
Reimbursement from (refund to) Delek Holdings for capital expenditures (2) | | | | | 337 | | | (15) | |
| | | | | | | |
| Accretion of asset retirement obligations | | | | | (176) | | | (124) | |
| Deferred income taxes | | | | | (111) | | | — | |
| Loss on disposal of assets | | | | | (142) | | | (12) | |
| Distributable cash flow | | | | | $ | 61,762 | | | $ | 51,726 | |
| | | | | |
| (1) | Regulatory capital expenditures represent cash expenditures (including 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 include 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) | For the three months ended March 31, 2023 and 2022, Delek Holdings reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements). |
| | |
27 | |
Management's Discussion and any potential future issuancesAnalysis
Summary of equityFinancial 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 need 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 through the first three quarters of 2017, market conditions improved. The prices of crude oil and related refined products have increased. Drilling activity, particularly in the Permian basin, has escalated as a result of increasing prices and the discovery of a large oil deposit in the area. As market conditions improve and demand for our assets' capacity benefits from increased drilling activity, we expect our operations and results 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 in 2016 and for the nine months ended September 30, 2017.
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 in 2016 and for the nine months ended September 30, 2017.
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 $1.6 million and $3.9 millionof RINs to Delek during the three and nine months ended September 30, 2017, respectively, and $1.8 million and $4.7 million during the three and nine months ended September 30, 2016, respectively. See below for the high, low and average prices of RINs for each of the quarterly periods in 2016 and for the nine months ended September 30, 2017.
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 include minimum volume and throughput commitments.
Contractual Obligations
On May 23, 2017, the Partnership and Finance Corp issued $250.0 million in aggregate principal amount of 6.750% senior notes due 2025 at a discount. 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 proceeds to pay down a portion of the outstanding balance under the Partnership's revolving credit facility. Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017. See Note 5 to our accompanying condensed consolidated financial statements for further discussion of the terms of the issuance, including redemption dates and prices.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, complex or subjective judgments or estimates. Based on this definition and as further described in our Annual Report on Form 10-K, we believe our critical accounting policies include the following: (i) evaluating impairment for property, plant and equipment and definite life intangibles, (ii) valuing goodwill and evaluating potential impairment, and (iii) estimating environmental expenditures. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies or estimates since our Annual Report on Form 10-K.
Results of Operations
Other Information
A discussion and analysis of the factors contributing to our results of operations is presented below. 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 three and nine months ended September 30, 2017March 31, 2023 and 2016,2022, including a reconciliation of EBITDA to net income to EBITDA and distributablenet cash flow to net cash provided by operating activities to distributable cash flow.
Statement of Operations Data (in thousands, except unit and per unit amounts).
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Statement of Operations Data: | | | | | | | |
| Net revenues: | | | | | | | |
| Gathering and Processing | | | | | $ | 92,432 | | | $ | 42,044 | |
| Wholesale marketing and terminalling | | | | | 112,309 | | | 130,776 | |
| Storage and transportation | | | | | 38,784 | | | 33,761 | |
| | | | | | | |
| | | | | | | |
| Total | | | | | 243,525 | | | 206,581 | |
| Operating costs and expenses: | | | | | | | |
| Cost of materials and other | | | | | 126,096 | | | 126,194 | |
| Operating expenses (excluding depreciation and amortization) | | | | | 24,215 | | | 17,543 | |
| Depreciation and amortization | | | | | 19,764 | | | 9,861 | |
| Total cost of sales | | | | | 170,075 | | | 153,598 | |
| Operating expenses related to wholesale business (excluding depreciation and amortization presented below) | | | | | 525 | | | 564 | |
| General and administrative expenses | | | | | 7,510 | | | 5,095 | |
| Depreciation and amortization | | | | | 1,341 | | | 474 | |
| Loss on disposal of assets | | | | | 142 | | | 12 | |
| Total operating costs and expenses | | | | | 179,593 | | | 159,743 | |
| Operating income | | | | | 63,932 | | | 46,838 | |
| Interest expense, net | | | | | 32,581 | | | 14,250 | |
| Income from equity method investments | | | | | (6,316) | | | (7,026) | |
| Other income, net | | | | | (2) | | | (1) | |
| Total non-operating costs and expenses | | | | | 26,263 | | | 7,223 | |
| Income before income tax expense | | | | | 37,669 | | | 39,615 | |
| Income tax expense | | | | | 302 | | | 101 | |
| Net income attributable to partners | | | | | 37,367 | | | 39,514 | |
| Comprehensive income attributable to partners | | | | | $ | 37,367 | | | $ | 39,514 | |
| | | | | | | |
EBITDA(1) | | | | | $ | 93,158 | | | $ | 66,003 | |
| Net income per limited partner unit: | | | | | | | |
| Basic | | | | | $ | 0.86 | | | $ | 0.91 | |
| Diluted | | | | | $ | 0.86 | | | $ | 0.91 | |
| | | | | | | |
| Weighted average limited partner units outstanding: | | | | | | | |
| Basic | | | | | 43,569,963 | | | 43,471,536 | |
| Diluted | | | | | 43,585,297 | | | 43,481,572 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Statement of Operations Data: | | | | | | | | |
| Net sales: | | | | | | | | |
| Pipelines and transportation | | $ | 30,982 |
| | $ | 28,626 |
| | $ | 89,882 |
| | $ | 93,419 |
|
| Wholesale marketing and terminalling | | 99,644 |
| | 78,844 |
| | 296,986 |
| | 229,960 |
|
| Total | | 130,626 |
| | 107,470 |
| | 386,868 |
| | 323,379 |
|
| Operating costs and expenses: | | | | | | | | |
| Cost of goods sold | | 89,120 |
| | 73,527 |
| | 266,749 |
| | 213,381 |
|
| Operating expenses | | 10,662 |
| | 9,251 |
| | 30,986 |
| | 28,445 |
|
| General and administrative expenses | | 2,751 |
| | 2,307 |
| | 8,255 |
| | 7,918 |
|
| Depreciation and amortization | | 5,462 |
| | 5,356 |
| | 16,397 |
| | 15,164 |
|
| Loss (gain) on asset disposals | | (5 | ) | | 28 |
| | 2 |
| | (16 | ) |
| Total operating costs and expenses | | 107,990 |
| | 90,469 |
| | 322,389 |
| | 264,892 |
|
| Operating income | | 22,636 |
| | 17,001 |
| | 64,479 |
| | 58,487 |
|
| Interest expense, net | | 7,124 |
| | 3,409 |
| | 16,657 |
| | 9,892 |
|
| (Income) loss from equity method investments | | (1,584 | ) | | 308 |
| | (3,005 | ) | | 743 |
|
| Other income, net | | (1 | ) | | — |
| | (1 | ) | | — |
|
| Total non-operating costs and expenses | | 5,539 |
| | 3,717 |
| | 13,651 |
| | 10,635 |
|
| Income before income tax expense | | 17,097 |
| | 13,284 |
| | 50,828 |
| | 47,852 |
|
| Income tax expense | | 174 |
| | 133 |
| | 333 |
| | 360 |
|
| Net income attributable to partners | | $ | 16,923 |
| | $ | 13,151 |
| | $ | 50,495 |
| | $ | 47,492 |
|
| Comprehensive income attributable to partners | | $ | 16,923 |
| | $ | 13,151 |
| | $ | 50,495 |
| | $ | 47,492 |
|
EBITDA(1) | | $ | 29,683 |
| | $ | 22,049 |
| | $ | 83,882 |
| | $ | 72,908 |
|
| | |
|
| | | | | | |
| Less: General partner's interest in net income, including incentive distribution rights | | 4,745 |
| | 3,259 |
| | 13,406 |
| | 8,303 |
|
| Limited partners' interest in net income | | $ | 12,178 |
| | $ | 9,892 |
| | $ | 37,089 |
| | $ | 39,189 |
|
| | | | | | | | | |
Net income per limited partner unit (2): | | | | | | | | |
| Common units - (basic) | | $ | 0.50 |
| | $ | 0.41 |
| | $ | 1.52 |
| | $ | 1.61 |
|
| Common units - (diluted) | | $ | 0.50 |
| | $ | 0.41 |
| | $ | 1.52 |
| | $ | 1.60 |
|
| Subordinated units - Delek (basic and diluted) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.64 |
|
| | | | | | | | | |
Weighted average limited partner units outstanding (2): | | | | | | | | |
| Common units - (basic) | | 24,361,457 |
| | 24,303,740 |
| | 24,341,921 |
| | 21,878,935 |
|
| Common units - (diluted) | | 24,389,582 |
| | 24,380,334 |
| | 24,382,426 |
| | 21,962,733 |
|
| Subordinated units - Delek (basic and diluted) | | — |
| | — |
| | — |
| | 2,408,610 |
|
(1) For a definition of EBITDA, see "How We Evaluate Our Operations—EBITDA and Distributable Cash Flow" above.
(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 Note 7 to our accompanying condensed consolidated financial statements for further discussion.
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Reconciliation of EBITDA to net income: | | | | | | | | |
| Net income | | $ | 16,923 |
| | $ | 13,151 |
| | $ | 50,495 |
| | $ | 47,492 |
|
| Add: | | | | | | | | |
| Income tax expense | | 174 |
| | 133 |
| | 333 |
| | 360 |
|
| Depreciation and amortization | | 5,462 |
| | 5,356 |
| | 16,397 |
| | 15,164 |
|
| Interest expense, net | | 7,124 |
| | 3,409 |
| | 16,657 |
| | 9,892 |
|
EBITDA (1) | | $ | 29,683 |
| | $ | 22,049 |
| | $ | 83,882 |
| | $ | 72,908 |
|
| | | | | | | | | |
| Reconciliation of net cash from operating activities to distributable cash flow: | | | | | | | | |
| Net cash provided by operating activities | | $ | 30,493 |
| | $ | 29,172 |
| | $ | 77,904 |
| | $ | 86,761 |
|
| Changes in assets and liabilities | | (8,460 | ) | | (9,979 | ) | | (11,141 | ) | | (22,513 | ) |
Maintenance and regulatory capital expenditures (2) | | (698 | ) | | (718 | ) | | (5,011 | ) | | (2,351 | ) |
Reimbursement from Delek for capital expenditures (3) | | 419 |
| | 726 |
| | 4,254 |
| | 1,528 |
|
| Accretion of asset retirement obligations | | (73 | ) | | (68 | ) | | (219 | ) | | (199 | ) |
| Deferred income taxes | | (39 | ) | | — |
| | (158 | ) | | — |
|
| Gain (loss) on asset disposals | | 5 |
| | (28 | ) | | (2 | ) | | 16 |
|
Distributable cash flow (1) | | $ | 21,647 |
| | $ | 19,105 |
| | $ | 65,627 |
| | $ | 63,242 |
|
(1) For a definition of EBITDA and distributable cash flow, please see "How We Evaluate Our Operations—EBITDA and Distributable Cash Flow""Non-GAAP Measures" above.
(2) Maintenance and regulatory 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 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.
(3) For the three and nine month periods ended September 30, 2017 and 2016, Delek reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our condensed consolidated financial statements).
|
| | | | | | |
| | | | | | 28 | |
Segment Data:
The following is a summary of business segment capital expenditures for the periods indicated (in thousands):
Management's Discussion and Analysis
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Capital spending (excluding business combinations) | | | | | | | | |
| Pipelines and Transportation | | $ | 2,918 |
| | $ | 2,613 |
| | $ | 6,715 |
| | $ | 4,037 |
|
| Wholesale Marketing and Terminalling | | $ | 868 |
| | $ | 464 |
| | $ | 1,981 |
| | $ | 972 |
|
A discussion and analysis of the factors contributing to our results of operations is presented below. 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.
Effective in the fourth quarter 2022, we have revised our reportable segments accordingly. The new reportable segments consist of Gathering and Processing, Wholesale Marketing and Terminalling, Storage and Transportation, and Investments in Pipeline Joint Ventures. The primary change in our segmentation as compared to prior presentations is that, now that we have substantially expanded our gathering activities, certain legacy gathering activities and operations are now managed as part of the Gathering and Processing segment. Additionally, we are also now segregating out certain non-segment specific costs and expenses and, when applicable, immaterial operating segments that may not fit into our existing reportable segments as Corporate and Other activities.
Consolidated Results of Operations — Comparison of the Three Months Ended September 30, 2017three months ended March 31, 2023 compared to the Three Months Ended September 30, 2016
three months ended March 31, 2022
The table below presents a summary of our consolidated results of operations and our segment operating performance for the three months ended September 30, 2017 and 2016.operations. The discussion immediately following presents the consolidated results of operations (in thousands).:
| | | | | | | | | | | | | | | | | |
| Consolidated |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 | | |
| Net revenues: | | | | | | | | | |
| Affiliate | | | | | $ | 124,999 | | | $ | 123,754 | | | |
| Third-Party | | | | | 118,526 | | | 82,827 | | | |
| Total Consolidated | | | | | 243,525 | | | 206,581 | | | |
| Cost of materials and other | | | | | 126,096 | | | 126,194 | | | |
| Operating expenses (excluding depreciation and amortization presented below) | | | | | 24,740 | | | 18,107 | | | |
| General and administrative expenses | | | | | 7,510 | | | 5,095 | | | |
| Depreciation and amortization | | | | | 21,105 | | | 10,335 | | | |
| Other operating income, net | | | | | 142 | | | 12 | | | |
| Operating income | | | | | $ | 63,932 | | | $ | 46,838 | | | |
| Interest expense, net | | | | | 32,581 | | | 14,250 | | | |
| Income from equity method investments | | | | | (6,316) | | | (7,026) | | | |
| Other (income) expense, net | | | | | (2) | | | (1) | | | |
| Total non-operating expenses, net | | | | | 26,263 | | | 7,223 | | | |
| Income before income tax expense | | | | | 37,669 | | | 39,615 | | | |
| Income tax expense | | | | | 302 | | | 101 | | | |
| Net income attributable to partners | | | | | $ | 37,367 | | | $ | 39,514 | | | |
|
| | | | | | | | |
| | | Three Months Ended |
| | | September 30, |
| | | 2017 | | 2016 |
| Pipelines and Transportation | | | | |
| Net Sales: | | | | |
| Affiliate | | $ | 27,805 |
| | $ | 25,238 |
|
| Third-Party | | 3,177 |
| | 3,388 |
|
| Total Pipelines and Transportation | | 30,982 |
| | 28,626 |
|
| Operating costs and expenses: | | | | |
| Cost of goods sold | | 4,883 |
| | 4,811 |
|
| Operating expenses | | 8,573 |
| | 7,678 |
|
| Segment contribution margin | | $ | 17,526 |
| | $ | 16,137 |
|
| | | | | |
| Wholesale Marketing and Terminalling | | | | |
| Net Sales: | | | | |
| Affiliate | | $ | 12,326 |
| | $ | 11,122 |
|
| Third-Party | | 87,318 |
| | 67,722 |
|
| Total Wholesale Marketing and Terminalling | | 99,644 |
| | 78,844 |
|
| Operating costs and expenses: | | | | |
| Cost of goods sold | | 84,237 |
| | 68,716 |
|
| Operating expenses | | 2,089 |
| | 1,573 |
|
| Segment contribution margin | | $ | 13,318 |
| | $ | 8,555 |
|
| | | | | |
| Consolidated | | | | |
| Net Sales: | | | | |
| Affiliate | | $ | 40,131 |
| | $ | 36,360 |
|
| Third-Party | | 90,495 |
| | 71,110 |
|
| Net sales | | 130,626 |
| | 107,470 |
|
| Operating costs and expenses: | | | | |
| Cost of goods sold | | 89,120 |
| | 73,527 |
|
| Operating expenses | | 10,662 |
| | 9,251 |
|
| Contribution margin | | 30,844 |
| | 24,692 |
|
| General and administrative expenses | | 2,751 |
| | 2,307 |
|
| Depreciation and amortization | | 5,462 |
| | 5,356 |
|
| Gain on asset disposals | | (5 | ) | | 28 |
|
| Operating income | | $ | 22,636 |
| | $ | 17,001 |
|
Net SalesRevenues
Q1 2023 vs. Q1 2022
We generated net sales of $130.6Net revenues increased by $36.9 million, foror 17.9%, in the third quarter of 2017three months ended March 31, 2023 compared to $107.5 million for the third quarter of 2016, an increase of $23.1 million, or 21.5%.three months ended March 31, 2022. The increase was primarily attributabledriven by the following:
•increased revenues of $44.3 million as a result of our Delaware Gathering operations, which began in June 2022;
•increase in volumes associated with Midland Gathering operations due to increasesnew connections finalized during 2022;
•increase in trucking transportation revenue primarily due to new third-party revenue streams; and
•partially offset by decreases in the average sales prices per gallon and average volumes of gasoline and diesel sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel and in volumes sold in our west Texas marketing operations. The average sales pricesdecreased by $0.33 per gallon and $0.04 per gallon, respectively; and
◦the volume of gasoline and diesel sold increased $0.28decreased by 2.8 million gallons and 0.9 million gallons, respectively.
| | |
29 | |
Management's Discussion and Analysis
Cost of Materials and Other
Q1 2023 vs. Q1 2022
Cost of materials and other decreased by $0.1 million, or 0.1%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by the following:
•increase in cost of materials and other of $22.6 million as a result of our Delaware Gathering operations, which began in June 2022; and
•partially offset by decreases in the average cost per gallon and $0.31 per gallon, respectively, during the third quarter of 2017 compared to the third quarter of 2016. The increaseaverage volumes of gasoline and diesel volumes sold was 0.9 million gallons and 2.2 million gallons, respectively.in our West Texas marketing operations:
Cost of Goods Sold
Cost of goods sold was $89.1 million for the third quarter of 2017 compared to $73.5 million for the third quarter of 2016, an increase of $15.6 million, or 21.2%. 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 $0.18sold decreased by $0.22 per gallon and $0.22$0.10 per gallon, respectively, during the third quarter of 2017 compared to the third quarter of 2016. The increase of gasolinerespectively; and diesel volumes purchased was 0.9 million gallons and 2.2 million gallons, respectively.
Operating Expenses
Operating expenses were $10.7 million for the third quarter of 2017 compared to $9.3 million for the third quarter of 2016, an increase of $1.4 million, or 15.3%. The increase in operating expenses was primarily due to increases in maintenance and labor costs associated with certain of our tanks and pipelines as a result of planned maintenance activity and increased usage due to additional customers using our pipeline assets.
Contribution Margin
Contribution margin for the third quarter of 2017 was $30.8 million compared to $24.7 million for the third quarter of 2016, an increase of $6.1 million, or 24.9%. The increase in contribution margin was primarily attributable to improved contribution margin in our west Texas operations as a result ofcontinued 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 in contribution margin was increased throughput driving both increased fees associated with our marketing agreement with Delek and increased sales to third parties on our Paline Pipeline.
General and Administrative Expenses
General and administrative expenses were $2.8 million for the third quarter of 2017 compared to $2.3 million for the third quarter of 2016, an increase of $0.5 million, or 19.2%. The increase in general and administrative expenses was primarily due to increases in certain direct employee costs allocated to us in connection with an increase in employee headcount.
Depreciation and Amortization
Depreciation and amortization was $5.5 million for the third quarter of 2017 compared to $5.4 million for the third quarter of 2016, an increase of $0.1 million, or 2.0%. 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 throughout 2016 and the first three quarters of 2017.
Interest Expense
Interest expense was $7.1 million for the third quarter of 2017 compared to $3.4 million for the third quarter of 2016, an increase of $3.7 million, or 109.0%. This increase was primarily attributable to increases in interest costs associated with the issuance of the 2025 Notes and higher interest rates under our revolving credit facility.
Income Tax Expense
Income tax expense was $0.2 million for the third quarter of 2017 compared to $0.1 million for the third quarter of 2016. Our effective tax rate was 1.0% for the third quarter of 2017, compared to 1.0% for the third quarter of 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 represents amounts incurred for state income taxes.
Consolidated Results of Operations — Comparison of the Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016
The table below presents a summary of our consolidated results of operations and our segment operating performance for the nine months September 30, 2017 and 2016. The discussion immediately following presents the consolidated results of operations.
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| Pipelines and Transportation | | | |
| Net Sales: | | | |
| Affiliate | $ | 81,972 |
| | $ | 77,680 |
|
| Third-Party | 7,910 |
| | 15,739 |
|
| Total Pipelines and Transportation | 89,882 |
| | 93,419 |
|
| Operating costs and expenses: | | | |
| Cost of goods sold | 13,691 |
| | 14,401 |
|
| Operating expenses | 24,661 |
| | 22,317 |
|
| Segment contribution margin | $ | 51,530 |
| | $ | 56,701 |
|
| | | | |
| Wholesale Marketing and Terminalling | | | |
| Net Sales: | | | |
| Affiliate | $ | 34,602 |
| | $ | 34,134 |
|
| Third-Party | 262,384 |
| | 195,826 |
|
| Total Wholesale Marketing and Terminalling | 296,986 |
| | 229,960 |
|
| Operating costs and expenses: | | | |
| Cost of goods sold | 253,058 |
| | 198,980 |
|
| Operating expenses | 6,325 |
| | 6,128 |
|
| Segment contribution margin | $ | 37,603 |
| | $ | 24,852 |
|
| | | | |
| Consolidated | | | |
| Net Sales: | | | |
| Affiliate | $ | 116,574 |
| | $ | 111,814 |
|
| Third-Party | 270,294 |
| | 211,565 |
|
| Net sales | 386,868 |
| | 323,379 |
|
| Operating costs and expenses: | | | |
| Cost of goods sold | 266,749 |
| | 213,381 |
|
| Operating expenses | 30,986 |
| | 28,445 |
|
| Contribution margin | 89,133 |
| | 81,553 |
|
| General and administrative expenses | 8,255 |
| | 7,918 |
|
| Depreciation and amortization | 16,397 |
| | 15,164 |
|
| Gain on asset disposals | 2 |
| | (16 | ) |
| Operating income | $ | 64,479 |
| | $ | 58,487 |
|
Net Sales
We generated net sales of $386.9 million for the nine months ended September 30, 2017 compared to $323.4 million for the nine months ended September 30, 2016, an increase of $63.5 million, or 19.6%. 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 $0.37 per gallon, respectively, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Gallons of gasoline and diesel sold in west Texas increased 3.6decreased by 2.8 million gallons and 3.00.9 million gallons, respectively, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Partially offsetting the increase was a decline in fees on our Paline Pipeline System. During the nine months ended September 30, 2017, the Paline Pipeline System was a FERC regulated pipeline with a tariff established for potential shippers, compared to the nine months ended September 30, 2016, when the pipeline capacity was under contract with two third parties for a monthly fee.
Cost of Goods Sold
Cost of goods sold was $266.7 million for the nine months ended September 30, 2017 compared to $213.4 million for the nine months ended September 30, 2016, an increase of $53.3 million, or 25.0%. 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 $0.28 per gallon and $0.31 per gallon, respectively, during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. Gallons of gasoline and diesel purchased in west Texas increased 3.6 million gallons and 3.0 million gallons, respectively, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
Operating Expenses
Operating expenses were $31.0 million for the nine months ended September 30, 2017 compared to $28.4 million for the nine months ended September 30, 2016, an increase of $2.6 million, or 8.9%. The increase in operating expenses 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. Partially offsetting these increases were a reduction in operating expenses for one of our terminal locations at which we incurred costs related to internal tank contamination during the nine months ended September 30, 2016 and decreases in maintenance costs at our Memphis Terminal.
Contribution Margin
Contribution margin for the nine months ended September 30, 2017 was $89.1 million compared to $81.6 million for the nine months ended September 30, 2016, an increase of $7.5 million, or 9.3%. The increase in contribution margin was primarily attributable to improved contribution margin in our west Texas operations as a result ofincreased 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 in contribution margin were increased fees associated with our marketing agreement with Delek as a result of increased throughput, volume increases at our Nashville and Tyler Terminals and a reduction in operating expenses at our Memphis and El Dorado Terminals. Partially offsetting these increases was a decline in fees on our Paline Pipeline System as described above.
Operating Expenses
Q1 2023 vs. Q1 2022
Operating expenses increased by $6.6 million, or 36.6%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by operating expenses associated with our Delaware Gathering operations which began in June 2022.
General and Administrative Expenses
Q1 2023 vs. Q1 2022
General and administrative expenses were $8.3increased by $2.4 million, foror 47.4%, in the ninethree months ended September 30, 2017March 31, 2023 compared to $7.9 million for the ninethree months ended September 30, 2016, an increase of $0.4 million, or 4.3%. The increaseMarch 31, 2022, primarily driven by additional expenses associated with our Delaware Gathering operations which began in general and administrative expense was primarily due to increases in certain direct employee costs allocated to us in connection with an increase in employee headcount.June 2022.
Depreciation and Amortization
Q1 2023 vs. Q1 2022
Depreciation and amortization was $16.4increased by $10.8 million, foror 104.2%, in the ninethree months ended September 30, 2017March 31, 2023 compared to $15.2 million for the ninethree months ended September 30, 2016,March 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.
Interest Expense
Q1 2023 vs. Q1 2022
During the three months ended March 31, 2023 we incurred $32.6 million of interest expense, compared to $14.3 million during the three months ended March 31, 2022, an increase of $1.2$18.3 million, or 8.1%. 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 throughout 2016 and during the nine months ended September 30, 2017.
Interest Expense
Interest expense was $16.7 million for the nine months ended September 30, 2017 compared to $9.9 million for the nine months ended September 30, 2016, an increase of $6.8 million, or 68.4%128.6%. This increase was primarily attributabledriven by the following:
•increased borrowings under the DKL Credit Facility to increasesfund the Delaware Gathering Acquisition; and
•increase in interest costs associated with the issuance of the 2025 Notes and higherfloating interest rates underapplicable to the DKL Credit Facility and DKL Term Facility.
Results from Equity Method Investments
Q1 2023 vs. Q1 2022
During the three months ended March 31, 2023 we recognized income of $6.3 million from equity method investments, compared to $7.0 million during the three months ended March 31, 2022, a decrease of $0.7 million, or 10.1%. This decrease was primarily driven by the following:
•decrease in income from our revolving credit facility.Red River and Caddo equity method investments due to lower throughput volumes and resulting revenue increases; and
•partially offset by increase in income from our Rio equity method investment.
| | |
30 | |
Income Tax Expense
Income tax expense was $0.3 million the nine months ended September 30, 2017Management's Discussion and $0.4 million for the nine months ended September 30, 2016 . Our effective tax rate was 0.7% for the nine months ended September 30, 2017, compared to 0.8% for the nine months ended September 30, 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 represents amounts incurred for state income taxes.
Analysis
Operating Segments
We review operating results in twofour reportable segments: (i) pipelinesgathering and transportation andprocessing; (ii) wholesale marketing and terminalling.terminalling; (iii) storage and transportation; and (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 contribution margin. Segment contribution marginEBITDA, except for the investments in pipeline joint ventures segment, which is defined asmeasured based on net sales less cost of goods sold and operating expenses, excluding depreciation and amortization.income. Segment reporting is more fully discussed in more detail in Note 119 to our accompanying condensed consolidated financial statements.
PipelinesGathering and TransportationProcessing Segment
Our pipelinesgathering and transportationprocessing segment assets provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services to Delek Holdings and third parties. These assets include include:
•the Lion Pipeline System, pipeline assets used to support Delek Holdings' El Dorado refinery (the "El Dorado Assets")
•the SALAgathering system that supports transportation of crude oil to the El Dorado Refinery (the "El Dorado Gathering System, System")
•the Paline Pipeline System
•the East Texas Crude Logistics System
•the Tyler-Big Sandy 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,
•refined product pipeline capacity leased from Enterprise TE Products Pipeline Company LLC("Enterprise") that runs from El Dorado, Arkansas to our Memphis terminal and the Big Spring Pipeline. In addition to these operating systems, we own 123 trucks and 205 trailers used to haul primarily crude oil and other products for related and third parties.Pipeline
•pipelines acquired in the Big Spring Logistics Assets Acquisition
•assets acquired in the Midland Gathering Assets Acquisition
•assets acquired in the Delaware Gathering Acquisition
The following tabletables and discussion present the results of operations and certain operating statistics of the pipelinesgathering and transportationprocessing segment for the three and nine months ended September 30, 2017March 31, 2023 and 2016:2022:
| | | | | | | | | | | | | | | | | |
| Gathering and Processing |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net Revenues | $ | 92,432 | | | $ | 42,044 | | | | | | | |
| Cost of materials and other | $ | 23,024 | | | $ | 1,274 | | | | | | | |
| Operating expenses (excluding depreciation and amortization) | $ | 14,222 | | | $ | 8,782 | | | | | | | |
| Segment EBITDA | $ | 55,445 | | | $ | 32,081 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Throughputs (average bpd) |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
| El Dorado Assets: | | | | | | | | | |
| Crude pipelines (non-gathered) | 63,528 | | | 72,872 | | | | | | | |
| Refined products pipelines to Enterprise Systems | 55,003 | | | 59,522 | | | | | | | |
| El Dorado Gathering System | 13,872 | | | 16,156 | | | | | | | |
| East Texas Crude Logistics System | 10,508 | | | 16,056 | | | | | | | |
| Midland Gathering System | 222,112 | | | 100,325 | | | | | | | |
| Plains Connection System | 240,597 | | | 162,007 | | | | | | | |
| | | | | | | |
| Delaware Gathering Assets Volumes |
| Three Months Ended March 31, |
| 2023 | | |
Natural Gas Gathering and Processing (Mcfd(1)) | 74,716 | | | |
Crude Oil Gathering (bpd(2)) | 103,725 | | | |
Water Disposal and Recycling (bpd(2)) | 88,182 | | | |
(1) Mcfd - average thousand cubic feet per day.
(2) bpd - average barrels per day.
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Throughputs (average bpd) | | | | | | | | |
| Lion Pipeline System: | | | | | | | | |
| Crude pipelines (non-gathered) | | 60,247 |
| | 55,217 |
| | 59,653 |
| | 55,951 |
|
| Refined products pipelines to Enterprise Systems | | 51,623 |
| | 47,974 |
| | 50,933 |
| | 51,794 |
|
SALA Gathering System | | 15,997 |
| | 17,237 |
| | 16,160 |
| | 18,172 |
|
| East Texas Crude Logistics System | | 15,260 |
| | 17,026 |
| | 15,006 |
| | 13,108 |
|
| | |
31 | |
Management's Discussion and Analysis
Comparison of the Three Months Ended September 30, 2017three months ended March 31, 2023 compared to the Three Months Ended September 30, 2016
three months ended March 31, 2022
Net SalesRevenues
Q1 2023 vs. Q1 2022
Net salesrevenues for the pipelinesgathering and transportationprocessing segment were $31.0increased by $50.4 million, foror 119.8%, in the third quarter of 2017three months ended March 31, 2023 compared to $28.6the three months ended March 31, 2022, driven primarily by the following:
•increased revenues of $44.3 million for the third quarter of 2016, an increase of $2.4 million, or 8.2%. The increase was primarily attributable to increased sales to third parties on our Paline Pipeline as a result of increased throughput.our Delaware Gathering operations, which began in June 2022; and
•increase in volumes associated with Midland Gathering operations due to new connections finalized during 2022.
Cost of Goods SoldMaterials and Other
Q1 2023 vs. Q1 2022
Cost of goods sold was $4.9 millionmaterials and other for the third quarter of 2017gathering and processing segment increased by $21.8 million, or 1,707.2%, in the three months ended March 31, 2023 compared to $4.8 million for the third quarter of 2016, an increase of $0.1 million, or 1.5%. The three months ended March 31, 2022, driven primarily by the following:
•increase in cost of goods sold was attributable to increased transportation costs related to our trucking assets.
Operating Expenses
Operating expenses were $8.6materials and other totaling $22.6 million for the third quarter of 2017 compared to $7.7 million for the third quarter of 2016, an increase of $0.9 million, or 11.7%. The increase in operating expenses was primarily due to increases in maintenance and labor costs associated with certain of our tanks and pipelines as a result of planned maintenance activity and increased usage on our pipeline assets.Delaware Gathering operations, which began in June 2022.
Operating Expenses
Contribution MarginQ1 2023 vs. Q1 2022
Contribution marginOperating expenses for the pipelinesgathering and transportationprocessing segment was $17.5increased by $5.4 million, or 56.8% of our consolidated segment contribution margin61.9%, in the third quarter of 2017, compared to $16.1 million, or 65.4% of our consolidated segment contribution margin, in the third quarter of 2016, an increase of $1.4 million, or 8.6%. The increase in the pipelines and transportation segment contribution margin was primarily attributable to the increase in net sales related to our Paline Pipeline System as described above.
Comparison of the Nine Months Ended September 30, 2017three months ended March 31, 2023 compared to the Nine Months Ended September 30, 2016
Net Sales
Net sales for the pipelines and transportation segment were $89.9 million for the ninethree months ended September 30, 2017 comparedMarch 31, 2022, primarily driven by the following:
•increase due to $93.4additional expenses associated with our Delaware Gathering operations, which began in June 2022.
EBITDA
Q1 2023 vs. Q1 2022
EBITDA increased by $23.4 million, foror 72.8%, in the ninethree months ended September 30, 2016, a decrease of $3.5 million, or 3.8%. The decrease was primarily attributable to declines in fees on our Paline Pipeline System. During the nine months ended September 30, 2017, the Paline Pipeline System was a FERC regulated pipeline with a tariff established for potential shippers,March 31, 2023 compared to the ninethree months ended September 30, 2016, whenMarch 31, 2022, primarily driven by the pipeline capacity was under contract with two third parties for a monthly fee.following:
Cost of Goods Sold
Cost of goods sold was $13.7 million for the nine months ended September 30, 2017 compared to $14.4 million for the nine months ended September 30, 2016, a decrease of $0.7 million, or 4.9%. The decrease in cost of goods sold was attributable to lower pipeline allowance losses on our Paline Pipeline System, reduced costs•Additional EBITDA 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, Delaware Gathering operations.
Operating Expenses
Operating expenses were $24.7 million for the nine months ended September 30, 2017 compared to $22.3 million for the nine months ended September 30, 2016, an increase of $2.4 million, or 10.5%. The increase in operating expenses was primarily due to increases in labor and utilities costs associated with certain of our pipelines as a result of increased usage. Also contributing to the increase were higher maintenance costs associated with certain of our tanks at our tank farms.
| | |
32 | |
Contribution Margin
Contribution margin for the pipelinesManagement's Discussion and transportation segment was $51.5 million, or 57.8% of our consolidated segment contribution margin, in the nine months ended September 30, 2017, compared to $56.7 million, or 69.5% of our consolidated segment contribution margin, in the nine months ended September 30, 2016, a decrease of $5.2 million, or 9.1%. 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.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’sDelek Holdings’ refining operations and to independent third parties.
The tablefollowing tables and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three and nine months ended September 30, 2017March 31, 2023 and 2016:2022:
| | | | | | | | | | | | | | | | | |
| Wholesale Marketing and Terminalling |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net Revenues | $ | 112,309 | | | $ | 130,776 | | | | | | | |
| Cost of materials and other | $ | 87,482 | | | $ | 106,832 | | | | | | | |
| Operating expenses (excluding depreciation and amortization presented below) | $ | 4,608 | | | $ | 4,532 | | | | | | | |
| Segment EBITDA | $ | 21,954 | | | $ | 20,734 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating Information |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
East Texas - Tyler Refinery sales volumes (average bpd) (1) | 34,816 | | | 70,578 | | | | | | | |
| Big Spring marketing throughputs (average bpd) | 78,380 | | | 75,549 | | | | | | | |
| West Texas marketing throughputs (average bpd) | 8,696 | | | 9,913 | | | | | | | |
| West Texas marketing gross margin per barrel | $ | 2.58 | | | $ | 3.04 | | | | | | | |
Terminalling throughputs (average bpd) (2) | 93,305 | | | 137,622 | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Operating Information: | | | | | | | | |
East Texas - Tyler Refinery sales volumes (average bpd) | | 74,357 |
| | 67,812 |
| | 71,917 |
| | 68,137 |
|
| West Texas marketing throughputs (average bpd) | | 12,929 |
| | 12,162 |
| | 13,647 |
| | 13,039 |
|
| West Texas marketing margin per barrel | | $ | 4.00 |
| | $ | 1.16 |
| | $ | 3.62 |
| | $ | 1.24 |
|
Terminalling throughputs (average bpd) | | 127,229 |
| | 120,099 |
| | 123,780 |
| | 121,791 |
|
(2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, our El Dorado and North Little Rock, Arkansas terminals and our Memphis and Nashville, Tennessee terminals.
Comparison of the Three Months Ended September 30, 2017three months ended March 31, 2023 compared to the Three Months Ended September 30, 2016
three months ended March 31, 2022
Net SalesRevenues
Q1 2023 vs. Q1 2022
Net salesrevenues for the wholesale marketing and terminalling segment were $99.6decreased by $18.5 million, foror 14.1%, in the third quarter of 2017three months ended March 31, 2023 compared to $78.8 million for the third quarterthree months ended March 31, 2022, primarily driven by the following:
•decreases in the average sales prices per gallon and the average volumes of 2016, an increase of $20.8 million, or 26.4%. The increase was primarily attributable to increasesgasoline and diesel sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel sold decreased by $0.33 per gallon and in volumes sold in our west Texas marketing operations. The following charts show summaries of $0.04 per gallon, respectively; and
◦the average sales prices
per gallonvolumes of gasoline and diesel sold decreased by 2.8 million gallons and finished products volume impacting our west Texas operations.0.9 million gallons, respectively.
Cost of Goods Sold
Cost of goods sold for our wholesale marketing and terminalling segment was $84.2 million in the third quarter of 2017, compared to $68.7 million in the third quarter of 2016, an increase of $15.5 million, or 22.6%. The increase in cost of goods sold was attributable to increases in the average cost per gallon of gasoline and diesel and in volumes purchased in our west Texas marketing operations. See the following chart for a summary of the average purchase prices per gallon of gasoline and diesel impacting our west Texas operations.
Operating Expenses
Operating expenses were $2.1 million in the third quarter of 2017, compared to $1.6 million in the third quarter of 2016, an increase of $0.5 million, or 32.8%. The increase in operating expenses was primarily due to increases in employee costs allocated to us in connection with an increase in employee headcount and planned maintenance expenditures at our Memphis terminal. Also contributing to the increase were extraordinary maintenance costs incurred at our Nashville terminal due to flooding.
Contribution Margin
Contribution margin for the wholesale marketing and terminalling segment was $13.3 million, or 43.2% of our consolidated contribution margin, in the third quarter of 2017, compared to $8.6 million, or 34.6% of our consolidated contribution margin, in the third quarter of 2016, an increase of $4.7 million, or 55.7%. The increase in contribution margin was primarily attributable to improved contribution margin in our west Texas operations as a result ofincreased 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 in contribution margin were increased fees associated with our marketing agreement with Delek as a result of increased throughput.
Comparison of the Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016
Net Sales
Net sales for the wholesale marketing and terminalling segment were $297.0 million for the nine months ended September 30, 2017 compared to $230.0 million for the nine months ended September 30, 2016, an increase of $67.0 million, or 29.1%. 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 following charts show summaries of the average sales prices per gallon of gasoline and diesel and finishedrefined products volume impacting our westWest Texas operations duringfor the ninethree months ended September 30, 2017 compared to the nine months ended September 30, 2016.March 31, 2023 and 2022.
| | |
33 | |
Management's Discussion and Analysis
Cost of Goods Sold
Cost of goods soldMaterials and Other
Q1 2023 vs. Q1 2022
Cost of materials and other for ourthe wholesale marketing and terminalling segment was $253.1decreased by $19.4 million, foror 18.1%, in the ninethree months ended September 30, 2017,March 31, 2023 compared to $199.0 million for the ninethree months ended September 30, 2016, an increaseMarch 31, 2022, primarily driven by the following:
•decreases in the average cost per gallon and the average volumes of $54.1 million, or 27.2%. The increasegasoline and diesel sold in cost of goods sold was attributable to increases in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold decreased by $0.22 per gallon and in$0.10 per gallon, respectively; and
◦the average volumes purchased in our west Texas marketing operations. See theof gasoline and diesel sold increased by 2.8 million gallons and 0.9 million gallons, respectively.
The following chart below forshows a summary of the average purchase prices per gallon of gasoline and diesel purchased in our West Texas operations for the three months ended March 31, 2023 and 2022. Refer to the Refined Products Volume - Gallons chart above for a summary of volumes impacting our westWest Texas operations during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.operations.
Operating Expenses
Q1 2023 vs. Q1 2022
Operating expenses were $6.3 million in the nine months ended September 30, 2017, compared to $6.1 million in the nine months ended September 30, 2016, an increase of $0.2 million or 3.2%. The increase in operating expenses in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to increases in employee costs allocated to us in connection with an increase in employee headcount. Partially offsetting the increase were a reduction in operating expenses for one of our terminal locations at which we incurred costs related to internal tank contamination during the third quarter of 2016 and decreases in maintenance costs at our Memphis Terminal.
Contribution Margin
Contribution margin for the wholesale marketing and terminalling segment was $37.6increased by $0.1 million, or 42.2% of our consolidated contribution margin,1.7%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
EBITDA
Q1 2023 vs. Q1 2022
EBITDA for the ninewholesale marketing and terminalling segment increased by $1.2 million, or 5.9%, in the three months ended September 30, 2017,March 31, 2023 compared to $24.9the three months ended March 31, 2022.
| | |
34 | |
Management's Discussion and Analysis
Storage and Transportation Segment
Our storage and transportation segment assets provide transportation and storage services to Delek Holdings and third parties. These assets include:
•El Dorado Rail Offloading Racks
•the El Dorado Tank Assets
•the Tyler Tank Assets and Tyler Crude Tank
•storage assets acquired in the Big Spring Logistics Assets Acquisition
•assets acquired in the Trucking Assets Acquisition
•Greenville Storage Facility
Additionally, we own or lease 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties.
The following tables and discussion present the results of operations and certain operating statistics of the storage and transportation segment for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
| Storage and Transportation |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net revenues | $ | 38,784 | | | $ | 33,761 | | | | | | | |
| Cost of materials and other | $ | 18,604 | | | $ | 18,328 | | | | | | | |
| Operating expenses (excluding depreciation and amortization presented below) | $ | 5,560 | | | $ | 4,176 | | | | | | | |
| Segment EBITDA | $ | 13,422 | | | $ | 11,108 | | | | | | | |
Comparison of the three months ended March 31, 2023 compared to the three months ended March 31, 2022
Net Revenues
Q1 2023 vs. Q1 2022
Net revenues for the storage and transportation segment increased by $5.0 million, or 30.5%14.9%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022, driven primarily by the following:
•increase in trucking transportation revenue primarily due to new third-party revenue streams.
Cost of our consolidated contribution margin,Materials and Other
Q1 2023 vs. Q1 2022
Cost of materials and other for the ninestorage and transportation segment increased by $0.3 million, or 1.5%, in the three months ended September 30, 2016, an increase of $12.8March 31, 2023 compared to the three months ended March 31, 2022.
Operating Expenses
Q1 2023 vs. Q1 2022
Operating expenses for the storage and transportation segment increased by $1.4 million, or 51.3%. The33.1%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by the following:
•increases in lease expense.
Q1 2023 vs. Q1 2022
EBITDA increased by $2.3 million, or 20.8%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by the following:
•Additional third-party revenue streams from trucking transportation.
| | |
35 | |
increaseManagement's Discussion and Analysis
Investments in contribution margin was primarily attributablePipeline Joint Ventures Segment
The Investments in Pipeline Joint Ventures segment relates to improved contribution marginstrategic Joint Venture investments, accounted for as equity method investments, to support the Delek Holdings operations in our west Texas operations asterms 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 ofincreased drilling activity 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 region, which has improved market conditionsrevenue 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 8 to our accompanying condensed consolidated financial statements.
Refer to Consolidated Results of Operations above for details and increased demand. Additionally, contribution margindiscussion of the investments in our west Texas operations benefited from higher margins during a period of product supply disruptions associated with Hurricane Harvey. Also contributing topipeline joint ventures segment for the increase were increased fees associated with our marketing agreement with Delek as a result of increased throughput and increases in contribution margin at our terminals as a result of a reduction in maintenance costs at our Memphis and El Dorado terminals. Further contributing to the increase was a reduction in operating expenses for one of our terminal locations at which we incurred costs related to internal tank contamination during the third quarter of 2016.three months ended March 31, 2023.
.
Liquidity and Capital Resources
Sources of Capital
We expectconsider the following when assessing our ongoing sourcesliquidity and capital resources:
| | | | | |
(i) cash generated from operations; | (iii) potential issuance of additional equity; and |
(ii) borrowings under our revolving credit facility; | (iv) potential issuance of additional debt securities. |
At March 31, 2023 our total liquidity amounted to $140.4 million comprised of liquidity$129.4 million in unused credit commitments under the DKL Credit Facility and $11.0 million in cash and cash equivalents. We have the ability to includeincrease the DKL Credit Facility to $1.0 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 to fund ongoing working capital requirements, pay 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 the 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, 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.
If market conditions were to change, for instance due to the uncertainty created by the Russia-Ukraine War, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be unfavorably impacted.
We continuously review our liquidity and capital resources. If market conditions were to change, for 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 revolving credit facilitydebt agreements. Such actions include seeking alternative financing solutions and potential issuancesenacting cost reduction measures. Refer to the Business Overview section of additional equitythis MD&A for a complete discussion of the uncertainties identified by management and debt securities. the actions taken to respond to these uncertainties.
We believe that cash generated from these sourceswe were in compliance with the covenants in all our debt facilities as of March 31, 2023. See Note 6 to our condensed consolidated financial statements for a complete discussion of our third-party indebtedness.
Cash Distributions
On April 28, 2023, the board of directors of our general partner declared a distribution of $1.025 per common unit (the "Distribution"), which equates to approximately $44.7 million per quarter, or approximately $178.7 million per year, based on the number of common units outstanding as of May 8, 2023. The Distribution will be sufficientpaid on May 15, 2023 to satisfycommon unitholders of record on May 8, 2023 and represents a 4.6% increase over the anticipated cash requirements associatedfirst quarter 2023 distribution. We have set a distribution growth guidance of 5% for the full year 2023. This increase in the distribution is consistent with our existing operations, including minimum quarterlyintent to maintain an attractive distribution growth profile over the long term. Although our Partnership Agreement requires that we distribute all of our available cash distributions, for at least the next 12 months.each quarter, we do not otherwise have a legal obligation to distribute any particular amount per common unit.
| | |
36 | |
Management's Discussion and Analysis
The table below summarizes the quarterly distributions related to our quarterly financial results:the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | Total Quarterly Distribution Per Limited Partner Unit | | Total Quarterly Distribution Per Limited Partner Unit, Annualized | | Total Cash Distribution (in thousands) | | Date of Distribution | | Unitholders Record Date |
| March 31, 2022 | $0.980 | | $3.92 | | $42,604 | | May 12, 2022 | | May 5, 2022 |
| June 30, 2022 | $0.985 | | $3.94 | | $42,832 | | August 11, 2022 | | August 4, 2022 |
| September 30, 2022 | $0.990 | | $3.96 | | $43,057 | | November 10, 2022 | | November 4, 2022 |
| December 31, 2022 | $1.020 | | $4.08 | | $44,440 | | February 9, 2023 | | February 2, 2023 |
| March 31, 2023 | $1.025 | | $4.10 | | $44,664 | | May 15, 2023 (1) | | May 8, 2023 |
|
| | | | | | | | | | | | | | | | |
| Quarter Ended | | Total Quarterly Distribution Per Limited Partner Unit | | Total Quarterly Distribution Per Limited Partner Unit, Annualized | | Total Cash Distribution, including general partner interest and IDRs (in thousands) | | Date of Distribution | | Unitholders Record Date |
| September 30, 2016 | | $ | 0.655 |
| | $ | 2.62 |
| | $ | 19,302 |
| | November 14, 2016 | | November 7, 2016 |
| December 31, 2016 | | $ | 0.680 |
| | $ | 2.72 |
| | $ | 20,537 |
| | February 14, 2017 | | February 3, 2017 |
| March 31, 2017 | | $ | 0.690 |
| | $ | 2.76 |
| | $ | 21,024 |
| | May 12, 2017 | | May 5, 2017 |
| June 30, 2017 | | $ | 0.705 |
| | $ | 2.82 |
| | $ | 21,783 |
| | August 11, 2017 | | August 4, 2017 |
| September 30, 2017 | | $ | 0.715 |
| | $ | 2.86 |
| | $ | 22,270 |
| | November 14, 2017 (1) | | November 7, 2017 |
(1) Expected date of distribution.distribution
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 Note 7 to the condensed consolidated financial statements in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for additional information.
Cash Flows
The following table sets forth a summary of our consolidated cash flows for the ninethree months ended September 30, 2017March 31, 2023 and 20162022 (in thousands): |
| | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2017 | | 2016 |
| Cash Flow Data: | | | | |
| Cash flows provided by operating activities | | $ | 77,904 |
| | $ | 86,761 |
|
| Cash flows used in investing activities | | (21,721 | ) | | (60,161 | ) |
| Cash flows used in financing activities | | (50,952 | ) | | (26,600 | ) |
| Net increase in cash and cash equivalents | | $ | 5,231 |
| | $ | — |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Net cash provided by operating activities | $ | 29,190 | | | $ | 47,920 | |
| Net cash used in investing activities | (26,979) | | | (12,476) | |
| Net cash provided by (used in) financing activities | 783 | | | (37,010) | |
| Net increase (decrease) in cash and cash equivalents | $ | 2,994 | | | $ | (1,566) | |
Cash Flows from Operating Activities
Net cash provided by operating activities was $77.9decreased by $18.7 million for the ninethree months ended September 30, 2017,March 31, 2023 compared to cash provided of $86.8 million for the ninethree months ended September 30, 2016.March 31, 2022. The decrease in cash flows providedreceipts from customer activities increased by operations was due$44.1 million and cash payments to increases in accounts receivablesuppliers and income from equity method investments. Accounts receivablefor allocations to Delek Holdings for salaries increased as a result of increases to net sales in our west Texas operations. Incomeby $47.3 million. In addition, cash dividends received from equity method investments was $3.0increased by $2.6 million during the first nine months of 2017, compared to a loss of $0.7 million during the first nine months of 2016. Partially offsetting these increases were decreases in inventory and other current assets. Net incomecash paid for the nine months ended September 30, 2017 was $50.5 million, compared to $47.5 million in the same period of 2016.debt interest increased by $18.1 million.
Cash Flows from Investing Activities
Net cash used in investing activities increased by $14.5 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Purchases of property, plant and equipment increased $17.2 million primarily associated with growth projects in our gathering and processing segment. Such increase was $21.7partially offset by $1.8 million decrease in purchases of intangibles and $0.9 million increase in distributions received from equity method investments.
Financing Activities
Net cash provided by financing activities increased by $37.8 million for the first ninethree months of 2017,ended March 31, 2023 compared to $60.2 million used in the ninethree months ended September 30, 2016. The decrease in cash used in investing activitiesMarch 31, 2022. This increase was primarily due to decreases in contributions made to our joint ventures.driven by net borrowings under the revolving credit facility which increased $44.0 million. Partially offsetting these decreases were increasesthis increase was an increase in our capital expenditures. We contributed approximately $3.5 million in cash to our joint ventures during the nine months ended September 30, 2017, compared to contributions of approximately $54.7 million during the nine months ended September 30, 2016 for the construction of two pipeline systems and ancillary assets. We purchased the Big Spring Pipeline during the nine months ended September 30, 2017 for $9.0 million. We did not have any acquisitions during the nine months ended September 30, 2016. Cash used in investing activities during the nine months ended September 30, 2017 includes the cash portion of our capital expenditures, which was $9.2 million. Total capital expenditures during the first nine months of 2017 were approximately $8.7 million, compared to capital expendituresnet payments on term loan of $3.8 million made during the nine months ended September 30, 2016. Capital expenditures made during the nine months ended September 30, 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 nine months ended September 30, 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.
Cash Flows from Financing Activities
Net cash used in financing activities was $51.0$2.0 million in the nine months ended September 30, 2017, compared to cash used of $26.6 million in the nine months ended September 30, 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 $63.6 million during the nine months ended September 30, 2017, compared to quarterly cash distributions totaling $40.0 million during the nine months ended September 30, 2016. We made net payments of $233.8 million under our Second Amended and Restated Credit Agreement (defined below) during the nine months ended September 30, 2017, compared to net proceeds of $23.4 million in the nine months ended September 30, 2016. Offsetting the cash used in financing activities during the nine months ended September 30, 2017 were net proceeds under the 2025 Notes and reimbursement of capital expenditures by Delek. The Partnership received net proceeds, after deducting the initial purchasers' discounts, commissions and offering expenses, of $242.3 million from the issuance of the 2025 Notes. Reimbursements of capital expenditures from Delek amounted to $4.3 million during the nine months ended September 30, 2017, compared to $1.5 million in the nine months ended September 30, 2016.paid.
Cash Position and Indebtedness
Debt Overview
As of September 30, 2017, we had $5.3 million cash and cash equivalents andMarch 31, 2023, we had total indebtedness of $401.3$1,716.9 million. Unused credit commitmentsThe increase of $46.1 million in our long-term debt balance compared to the balance at December 31, 2022 resulted from the borrowings under the Second AmendedDKL Credit Facility during the three months ended March 31, 2023. As of March 31, 2023, our total indebtedness consisted of:
•An aggregate principal amount of $770.6 million under the DKL Revolving Facility ("revolving credit facility"), due on October 13, 2027, with an average borrowing rate of 7.57%, which was amended and Restated Credit Agreement were $532.7restated on October 13, 2022.
•An aggregate principal amount of $296.3 million, and we had lettersunder the DKL Term Facility, due on October 13, 2024, with an average borrowing rate of credit issued8.41%.
•An aggregate principal amount of $8.5 million. $250.0 million, under the 2025 Notes (6.75% senior notes), due in 2025, with an effective interest rate of 7.19%.
•An aggregate principal amount of $400.0 million, under the 2028 Notes (7.125% senior notes), due in 2028, with an effective interest rate of 7.40%.
We believe we were in compliance with the applicable covenants in the Second Amended and Restated Credit Agreement (as defined below)all debt facilities as of September 30, 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 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 at a discount. 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 proceeds to pay down a portion of the outstanding balance under the Partnership's revolving credit facility.
March 31, 2023. See Note 56 to our accompanying condensed consolidated financial statements in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a complete discussion of our third-party indebtedness.
| | |
37 | |
Management's Discussion and Analysis
Agreements Governing Certain Indebtedness of Delek Holdings
Although we are not contractually bound byDelek Holdings' level of indebtedness, the terms of its borrowings and are not liable for Delek’s debt under itsany future 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 impactratings could adversely affect our ability to use the full capacity undergrow our revolving credit facility in the future. Delek, due to its majority ownership and control ofbusiness, our general partner, has the ability to prevent us from taking actions that would causemake cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek to violate any covenant in itsHoldings' level of indebtedness, financial performance and credit arrangements or otherwise be in default under any of its credit arrangements.
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 nine months ended September 30, 2017 were $8.7 million,timing and extent of which approximately $6.7 million wasregulatory maintenance, sustaining maintenance, and growth capital projects. These categories are described below:
•Regulatory maintenance projects in the gathering and processing segment are those expenditures expected to be spent inon certain of our pipelines to maintain their operational integrity pursuant to applicable environmental and transportation segment and $2.0 million was spentother regulatory requirements. Regulatory projects in ourthe wholesale marketing and terminalling segment. Oursegment relates to scheduled 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 expenditure budget is approximately $17.0 millionexpenditures represent capitalizable expenditures for 2017.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 terminals, to maintain equipment reliability, integrity and safety and to maintain compliance with environmental laws and regulations. Delek Holdings 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 accompanying 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 accordance 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 additional debt or equity securities.
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 ninethree months ended September 30, 2017March 31, 2023 and planned capital expenditures for the full year 20172023 by segment and by major category (in thousands):category:
| | | | | | | | | | | |
| (in thousands) | Full Year 2023 Forecast | | Three Months Ended March 31, 2023 |
| Gathering and Processing |
| Regulatory | $ | — | | | $ | — | |
| Sustaining | — | | | — | |
| Growth | 64,075 | | | 32,789 | |
| Gathering and Processing Segment Total | $ | 64,075 | | | $ | 32,789 | |
| Wholesale Marketing and Terminalling |
| Regulatory | $ | 10,475 | | | $ | 61 | |
| Sustaining | 3,000 | | | 2,931 | |
| Growth | 125 | | | 124 | |
| Wholesale Marketing and Terminalling Segment Total | $ | 13,600 | | | $ | 3,116 | |
| Storage and Transportation |
| Regulatory | $ | 2,625 | | | $ | 24 | |
| Sustaining | 1,000 | | | 172 | |
| Growth | — | | | — | |
| Storage and Transportation Segment Total | $ | 3,625 | | | $ | 196 | |
| Total Capital Spending | $ | 81,300 | | | $ | 36,101 | |
|
| | | | | | | | |
| | | Full Year
2017 Forecast | | Nine Months Ended September 30, 2017 |
| Regulatory | | $ | 3,343 |
| | $ | 883 |
|
Maintenance (1) | | 6,840 |
| | 4,449 |
|
| Discretionary projects | | 6,806 |
| | 3,364 |
|
| Total capital spending | | $ | 16,989 |
| | $ | 8,696 |
|
| | |
(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 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 3 to our condensed consolidated financial statements).
|
In the third quarter of 2017, we decreased our capital spending forecast for 2017 to $17.0 million, down from the prior forecast of $21.5 million. We decreased our forecast as a result of changes to the anticipated completion dates of discretionary projects associated primarily with the upgrade and expansion of certain of our pipeline and truck unloading assets. For the full year 2017, we plan to spend approximately $17.0 million, of which $12.7 million is budgeted to the pipelines and transportation segment and $4.3 million to the wholesale marketing and terminalling segment. We plan to spend approximately $6.8 million for discretionary projects in 2017, of which $4.2 million will be spent in the pipelines and transportation segment and $2.6 million in the wholesale marketing and terminalling segment. The majority of the $4.2 million budgeted to discretionary projects in the pipelines and transportation segment relates to business development projects on certain of our pipeline and trucking assets. We plan to spend approximately $6.8 million for maintenance projects in 2017, of which $6.0 million is expected to be spent in the pipelines and transportation segment and $0.8 million in the wholesale marketing and terminalling segment. The majority of the $6.0 million budgeted for maintenance projects in the pipelines and transportation segment relates to the improvement and replacement of certain of our tanks.
Under the Omnibus Agreement, Delek reimburses 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 of our assets in excess of specified amounts, as disclosed in the full agreement filed as Exhibit 10.3 to our Current Report on Form 8-K, filed with the SEC on April 6, 2015 and in the amendment filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, filed with the SEC on August 5, 2015.
The amount of our capital expenditure budget 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q.
| | |
38 | |
Management's Discussion and Analysis
ITEM 3.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 September 30, 2017 and December 31, 2016, we had open derivative contracts representing 96,000 barrels and 93,000 barrels of refined petroleum products, respectively. We recognized gains (losses) associated with commodity derivatives not designated as hedging instruments of $(1.5) million and $(0.4) millionfor the three and nine months ended September 30, 2017, respectively, and $(0.3) million and $(1.7) million for the three and nine months ended September 30, 2016, respectively. These amounts were recorded to cost of goods sold in the accompanying condensed consolidated statements of income. Please see Note 13 to our accompanying condensed consolidated financial statements for additional detail related to our derivative instruments.
Impact of Changing 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 September 30, 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.
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 $1,066.9 million as of March 31, 2023. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt outstanding as of September 30, 2017March 31, 2023 would be to change interest expense by approximately $1.6$10.7 million.
Inflation
From timeInflationary factors, such as increases in the costs of our inputs, operating expenses, and interest rates may adversely affect our operating results. During the first quarterly period in 2023, our results of operations were negatively affected by higher natural gas costs, higher labor costs and supply chain disruptions, in part, by the uncertain economic environment, and macroeconomic and geopolitical events and trends. We expect these cost pressures and supply chain challenges to time, wecontinue into fiscal year 2023. In addition, current or future governmental policies may use certain derivative instruments to hedgeincrease the risk of inflation, which could further increase costs and may have an adverse effect on our exposure to floating interest rates. Additionally, 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 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. These requirements were eliminated in connection with the amendment and restatement of our revolving credit facility in July 2013, but 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 three and nine months ended September 30, 2016.costs.
ITEM 4.CONTROLS AND PROCEDURES.PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management has evaluated,disclosure controls and procedures are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under 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, under the supervision and with the participation of our principal executivemanagement, including the Principal Executive Officer and principal financial officers,Chief Financial Officer, of the effectiveness of the design and operation 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 disclosedas of the end of the reporting period.
We acquired 3 Bear effective June 1, 2022, and have included the operating results and assets and liabilities of 3 Bear in our condensed consolidated financial statements as of March 31, 2023. As permitted by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms including, without limitation,SEC guidance for newly acquired businesses, management’s assessment of our disclosure controls and procedures designed to ensuredid not include an assessment of those disclosure controls and procedures of 3 Bear that information required to be disclosedare subsumed by us ininternal control over financial reporting. 3 Bear accounted for approximately 38.4% of the reports that we file or submit undertotal assets of the Exchange Act is accumulatedPartnership as of March 31, 2023 and communicated toapproximately 18.2% of total revenues of the Partnership for the three months ended March 31, 2023.Other than our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control over Financial Reporting
There hasinternal controls for 3 Bear, there have been no changechanges in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our last fiscalthe first quarter of 2023 that hashave materially affected or isare reasonably likely to materially affect our internal control over financial reporting.
| | |
39 | |
PART II.
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
AlthoughIn the ordinary conduct of our business, we may,are from time to time be involved in litigationsubject to lawsuits, investigations and claims, whether regulatoryincluding, 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 arising out of our operations in the normal course of business,enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party to any litigation that will have a material adverse impacteffect on our business, financial condition or results of operations or cash flows.operations. See Note 10 to our accompanying condensed consolidated financial statements, which is incorporated by reference in this Item 1, for additional information.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors identified in the Partnership’s fiscal 2022 Annual Report on Form 10-K.
ITEM 5. OTHER INFORMATION
None.
On November 7, 2017, Alan P. Moret was appointed as President of Delek Logistics GP, LLC, the general partner of Delek Logistics Partners, LP, (our "general partner") effective on that date. Previously, Mr. Moret, 63, served as Executive Vice President of our general partner beginning in July 2017, as Interim Chief Executive Officer of Alon USA from January 2017 to June 30, 2017 and as Senior Vice President of Supply at Alon USA since 2008.
In connection with the foregoing, our general partner, Mr. Moret and Delek entered into a Third Amendment, to be effective December 1, 2017 (the “Third Amendment”), to Mr. Moret’s Second Amended and Restated Employment Agreement with Delek and Alon USA, which was effective July 1, 2017 (the “Prior Agreement”). The Third Amendment provides for Mr. Moret’s employment, as President, for a term commencing on December 1, 2017 and ending on June 30, 2019, or such later end date as mutually agreed by the parties; that Mr. Moret shall be paid a base salary of no less than $400,000 per year, and that Mr. Moret is eligible to earn an annual bonus under the Delek Annual Incentive Plan of no less, on a percentage of annual salary basis, than any other similarly situated Delek officer. Additionally, Mr. Moret will be eligible to participate in Delek's long-term incentive plans that may be in effect from time to time for Delek and its subsidiaries, on terms commensurate with his position and duties, as determined by the Board on an annual basis.
ITEM 6.6. EXHIBITS
|
| | | | | | | | | | |
| Exhibit No. | | Description |
10.1 |
| § | | Second Amendment, dated as of July 1, 2017, entered into by and among Alon USA GP, LLC, Alan P. Moret and Delek US Holdings, Inc., to the Amended and Restated Employment Agreement with Alon USA Energy, Inc., effective May 7, 2015 (incorporated by reference to Exhibit 10.1 to the Partnership’s 8-K filed August 4, 2017).
|
|
# | * | | |
|
# | * | | |
|
## | ** | | |
|
## | ** | | |
| 101 |
| | | The following materials from Delek Logistics Partners, LP’sLP's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017March 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2023 and December 31, 20162022 (Unaudited), (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2017March 31, 2023 and 20162022 (Unaudited), (iii) Condensed Consolidated Statement of Partners' Equity (Deficit) for the three months ended March 31, 2023 and 2022 (Unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2023 and 20162022 (Unaudited), and (iv)(v) Notes to Condensed Consolidated Financial Statements (Unaudited).
|
| 104 | | | The cover page from Delek Logistics Partners, LP's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 has been formatted in Inline XBRL. |
| | | | | | | | |
| # | | Filed herewith |
| ## | | Furnished herewith |
| | |
* | | Filed herewith |
** | | Furnished herewith |
§ | | Management contract or compensatory plan or arrangement40 | |
SIGNATURES
Pursuant to the requirements 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: Delek Logistics GP, LLC
Its General Partner
By: /s/ Avigal Soreq
Avigal Soreq
President
(Principal Executive Officer)
By: /s/ Reuven Spiegel
Reuven Spiegel
Director, Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Robert Wright
Robert Wright
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Dated: May 9, 2023
|
| |
Delek Logistics Partners, LP |
By: | Delek Logistics GP, LLC |
| Its General Partner |
| |
By: | /s/ Ezra Uzi Yemin |
| Ezra Uzi Yemin |
| Chairman and Chief Executive Officer41 | (Principal Executive Officer)
|
| |
By: | /s/ Kevin Kremke |
| Kevin Kremke |
| Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Dated: November 9, 2017
