UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
| For the quarterly period ended | 9/30/2022 | |||||||||||||
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to | ||||||||
Commission file number 001-35721
DELEK LOGISTICS PARTNERS, LP
(Exact name of registrant as specified in its charter)
| Delaware |  | 45-5379027 | |||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
7102 Commerce Way | Brentwood | Tennessee | 37027 | ||||||||
(Address of principal executive offices) | (Zip Code) | ||||||||||
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
| Common Units Representing Limited Partnership Interests | DKL | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☑ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At October 28, 2022, there were 43,492,179 common limited partner units outstanding.
Table of Contents
Delek Logistics Partners, LP
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2022
Item 3. Quantitative and Qualitative Disclosures about Market Risk | |||||||||||||||||||||||
Item 4. Controls and Procedures | |||||||||||||||||||||||
2 | | ||
Financial Statements
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except unit and per unit data)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 14,945 | $ | 4,292 | |||||||
| Accounts receivable | 53,351 | 15,384 | |||||||||
| Inventory | 2,490 | 2,406 | |||||||||
| Other current assets | 2,424 | 951 | |||||||||
| Total current assets | 73,210 | 23,033 | |||||||||
| Property, plant and equipment: | |||||||||||
| Property, plant and equipment | 1,178,334 | 715,870 | |||||||||
| Less: accumulated depreciation | (302,734) | (266,482) | |||||||||
| Property, plant and equipment, net | 875,600 | 449,388 | |||||||||
| Equity method investments | 248,005 | 250,030 | |||||||||
| Customer relationship intangible, net | 203,966 | — | |||||||||
| Marketing contract intangible, net | 111,169 | 116,577 | |||||||||
| Rights-of-way | 55,230 | 37,280 | |||||||||
| Goodwill | 26,609 | 12,203 | |||||||||
| Operating lease right-of-use assets | 24,329 | 20,933 | |||||||||
| Other non-current assets | 20,122 | 25,627 | |||||||||
| Total assets | $ | 1,638,240 | $ | 935,071 | |||||||
| LIABILITIES AND DEFICIT | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 53,053 | $ | 8,160 | |||||||
| Accounts payable to related parties | 173,170 | 64,423 | |||||||||
| Interest payable | 18,012 | 5,024 | |||||||||
| Excise and other taxes payable | 6,759 | 5,280 | |||||||||
| Current portion of operating lease liabilities | 7,775 | 6,811 | |||||||||
| Accrued expenses and other current liabilities | 7,189 | 7,117 | |||||||||
| Total current liabilities | 265,958 | 96,815 | |||||||||
| Non-current liabilities: | |||||||||||
| Long-term debt | 1,448,772 | 898,970 | |||||||||
| Asset retirement obligations | 9,152 | 6,476 | |||||||||
| Operating lease liabilities, net of current portion | 11,798 | 14,071 | |||||||||
| Other non-current liabilities | 16,817 | 22,731 | |||||||||
| Total non-current liabilities | 1,486,539 | 942,248 | |||||||||
| Equity (Deficit): | |||||||||||
Common unitholders - public; 9,180,901 units issued and outstanding at September 30, 2022 (8,774,053 at December 31, 2021) | 168,911 | 166,067 | |||||||||
Common unitholders - Delek Holdings; 34,311,278 units issued and outstanding at September 30, 2022 (34,696,800 at December 31, 2021) | (283,168) | (270,059) | |||||||||
| Total deficit | (114,257) | (103,992) | |||||||||
| Total liabilities and deficit | $ | 1,638,240 | $ | 935,071 | |||||||
See accompanying notes to the condensed consolidated financial statements
3 | | ||
Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(in thousands, except unit and per unit data)
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
Affiliates (1) | $ | 127,150 | $ | 123,519 | $ | 375,270 | $ | 308,435 | |||||||||||||||
| Third party | 166,875 | 66,108 | 392,086 | 202,583 | |||||||||||||||||||
| Net revenues | 294,025 | 189,627 | 767,356 | 511,018 | |||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Cost of materials and other | 177,740 | 105,129 | 480,295 | 274,995 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 25,065 | 17,073 | 62,892 | 46,286 | |||||||||||||||||||
| Depreciation and amortization | 19,067 | 9,666 | 41,876 | 29,393 | |||||||||||||||||||
| Total cost of sales | 221,872 | 131,868 | 585,063 | 350,674 | |||||||||||||||||||
| Operating expenses related to wholesale business (excluding depreciation and amortization presented below) | 836 | 515 | 2,105 | 1,741 | |||||||||||||||||||
| General and administrative expenses | 11,959 | 5,898 | 30,826 | 15,933 | |||||||||||||||||||
| Depreciation and amortization | 473 | 490 | 1,421 | 1,469 | |||||||||||||||||||
| Other operating (income) expense, net | (132) | 273 | (120) | 54 | |||||||||||||||||||
| Total operating costs and expenses | 235,008 | 139,044 | 619,295 | 369,871 | |||||||||||||||||||
| Operating income | 59,017 | 50,583 | 148,061 | 141,147 | |||||||||||||||||||
| Interest expense, net | 22,559 | 14,529 | 53,621 | 35,924 | |||||||||||||||||||
| Income from equity method investments | (8,567) | (7,261) | (22,666) | (17,952) | |||||||||||||||||||
| Other income, net | (36) | (115) | (39) | (118) | |||||||||||||||||||
| Total non-operating expenses, net | 13,956 | 7,153 | 30,916 | 17,854 | |||||||||||||||||||
| Income before income tax expense (benefit) | 45,061 | 43,430 | 117,145 | 123,293 | |||||||||||||||||||
| Income tax expense (benefit) | 387 | (194) | 793 | 156 | |||||||||||||||||||
| Net income attributable to partners | $ | 44,674 | $ | 43,624 | $ | 116,352 | $ | 123,137 | |||||||||||||||
| Comprehensive income attributable to partners | $ | 44,674 | $ | 43,624 | $ | 116,352 | $ | 123,137 | |||||||||||||||
| Net income per limited partner unit: | |||||||||||||||||||||||
| Basic | $ | 1.03 | $ | 1.00 | $ | 2.68 | $ | 2.83 | |||||||||||||||
| Diluted | $ | 1.03 | $ | 1.00 | $ | 2.67 | $ | 2.83 | |||||||||||||||
| Weighted average limited partner units outstanding: | |||||||||||||||||||||||
| Basic | 43,485,779 | 43,454,535 | 43,477,801 | 43,447,739 | |||||||||||||||||||
| Diluted | 43,515,960 | 43,468,289 | 43,499,837 | 43,457,857 | |||||||||||||||||||
| Cash distributions per common limited partner unit | $ | 0.990 | $ | 0.950 | $ | 2.955 | $ | 3.800 | |||||||||||||||
(1) See Note 3 for a description of our material affiliate revenue transactions.
See accompanying notes to the condensed consolidated financial statements
4 | | ||
Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Statements of Partners' Equity (Deficit) (Unaudited)
(in thousands)
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at June 30, 2022 | $ | 168,611 | $ | (285,070) | $ | (116,459) | |||||||||||
Cash distributions (1) | (9,229) | (33,797) | (43,026) | ||||||||||||||
Net income attributable to partners | 9,430 | 35,244 | 44,674 | ||||||||||||||
Other | 99 | 455 | 554 | ||||||||||||||
| Balance at September 30, 2022 | $ | 168,911 | $ | (283,168) | $ | (114,257) | |||||||||||
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at June 30, 2021 | $ | 164,679 | $ | (272,525) | $ | (107,846) | |||||||||||
| Cash distributions | (8,237) | (32,661) | (40,898) | ||||||||||||||
Net income attributable to partners | 8,745 | 34,879 | 43,624 | ||||||||||||||
Other | 94 | 273 | 367 | ||||||||||||||
| Balance at September 30, 2021 | $ | 165,281 | $ | (270,034) | $ | (104,753) | |||||||||||
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at December 31, 2021 | $ | 166,067 | $ | (270,059) | $ | (103,992) | |||||||||||
Cash distributions (1) | (26,779) | (101,251) | (128,030) | ||||||||||||||
| Net income attributable to partners | 24,543 | 91,809 | 116,352 | ||||||||||||||
| Delek Holdings unit sale to public | 5,110 | (5,110) | — | ||||||||||||||
| Other | (30) | 1,443 | 1,413 | ||||||||||||||
| Balance at September 30, 2022 | $ | 168,911 | $ | (283,168) | $ | (114,257) | |||||||||||
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at December 31, 2020 | $ | 164,614 | $ | (272,915) | $ | (108,301) | |||||||||||
| Cash distributions | (24,153) | (96,246) | (120,399) | ||||||||||||||
| Net income attributable to partners | 24,673 | 98,464 | 123,137 | ||||||||||||||
| Other | 147 | 663 | 810 | ||||||||||||||
| Balance at September 30, 2021 | $ | 165,281 | $ | (270,034) | $ | (104,753) | |||||||||||
(1) Cash distributions include $0.2 million related to distribution equivalents on vested phantom units for the three and nine months ended September 30, 2022.
See accompanying notes to the condensed consolidated financial statements
5 | | ||
Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 116,352 | $ | 123,137 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 43,297 | 30,862 | |||||||||
| Non-cash lease expense | 13,584 | 6,967 | |||||||||
| Amortization of customer contract intangible assets | 5,408 | 5,408 | |||||||||
| Amortization of deferred revenue | (1,332) | (1,475) | |||||||||
| Amortization of deferred financing costs and debt discount | 2,743 | 2,169 | |||||||||
| Income from equity method investments | (22,666) | (17,952) | |||||||||
| Dividends from equity method investments | 22,954 | 14,849 | |||||||||
| Other non-cash adjustments | 1,784 | 1,413 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (9,108) | (2,745) | |||||||||
| Inventories and other current assets | 1,260 | 109 | |||||||||
| Accounts payable and other current liabilities | 18,875 | 12,323 | |||||||||
| Accounts receivable/payable to related parties | 108,747 | 47,483 | |||||||||
| Non-current assets and liabilities, net | (4,416) | (272) | |||||||||
| Net cash provided by operating activities | 297,482 | 222,276 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property, plant and equipment | (76,852) | (12,352) | |||||||||
| Business Combination, net of cash acquired | (625,413) | — | |||||||||
| Proceeds from sales of property, plant and equipment | 143 | 275 | |||||||||
| Purchases of intangible assets | (4,702) | (746) | |||||||||
| Distributions from equity method investments | 1,737 | 6,245 | |||||||||
| Equity method investment contributions | — | (1,393) | |||||||||
| Net cash used in investing activities | (705,087) | (7,971) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Distributions to common unitholders - public | (26,779) | (24,153) | |||||||||
| Distributions to common unitholders - Delek Holdings | (101,251) | (96,246) | |||||||||
| Proceeds from revolving credit facility | 966,300 | 236,000 | |||||||||
| Payments on revolving credit facility | (417,400) | (721,700) | |||||||||
| Proceeds from issuance of senior notes | — | 400,000 | |||||||||
| Deferred financing costs paid | (701) | (6,216) | |||||||||
| Payments on financing lease liabilities | (1,911) | (1,369) | |||||||||
| Net cash provided by (used) in financing activities | 418,258 | (213,684) | |||||||||
| Net increase in cash and cash equivalents | 10,653 | 621 | |||||||||
| Cash and cash equivalents at the beginning of the period | 4,292 | 4,243 | |||||||||
| Cash and cash equivalents at the end of the period | $ | 14,945 | $ | 4,864 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 37,890 | $ | 19,170 | |||||||
| Income taxes | $ | 43 | $ | — | |||||||
| Non-cash investing activities: | |||||||||||
| (Decrease) increase in accrued capital expenditures and other | $ | (1,019) | $ | 1,638 | |||||||
| Non-cash financing activities: | |||||||||||
| Non-cash lease liability arising from obtaining right of use assets during the period | $ | 9,553 | $ | 8,750 | |||||||
See accompanying notes to the condensed consolidated financial statements
6 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Organization and Basis of Presentation
As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole.
The Partnership is a Delaware limited partnership formed in April 2012 by Delek US Holdings, Inc. ("Delek Holdings") and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner"). On April 8, 2022, DKL Delaware Gathering, LLC, a subsidiary of the Partnership, entered into a Membership Interest Purchase Agreement (the “3 Bear Purchase Agreement”) with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (“3 Bear”), related to the Seller’s crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin of New Mexico (the “3 Bear Acquisition”). The 3 Bear Acquisition was completed on June 1, 2022 (the "Acquisition Date"). See Note 2 for further information.
The Partnership provides gathering, pipeline and other transportation services primarily for crude oil and natural gas customers, storage, wholesale marketing and terminalling services primarily for intermediate and refined product customers, and water disposal and recycling services through its owned assets and joint ventures located primarily in the Permian Basin (including the Delaware sub-basin) and other select areas in the Gulf Coast region.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with 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, 2021 (our "Annual Report on Form 10-K"), filed with the U.S. Securities and Exchange Commission (the "SEC") on February 25, 2022 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, 2021 included in our Annual Report on Form 10-K.
All adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been included. All intercompany accounts and transactions have been eliminated. Such intercompany transactions do not include those with Delek Holdings or our general partner, which are presented as related parties in these accompanying condensed consolidated financial statements. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the current period presentation.
Accounting Pronouncements Not Yet Adopted
ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
In March 2020, the FASB issued an amendment which is intended to provide temporary optional expedients and exceptions to GAAP guidance on contracts, hedge accounting and other transactions affected by the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank rates. This guidance is effective for all entities any time beginning on March 12, 2020 through December 31, 2022 and may be applied from the beginning of an interim period that includes the issuance date of the ASU. The adoption of this guidance will not have a material impact on the Partnership's condensed consolidated financial statements and related disclosures.
7 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2 - Acquisitions
3 Bear Acquisition
We completed the 3 Bear Acquisition on June 1, 2022, in which we acquired crude oil and natural gas gathering, processing, and transportation and storage operations, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico. The purchase price for the 3 Bear Acquisition was $628.1 million. The 3 Bear Acquisition was financed through a combination of cash on hand and borrowings under the DKL Credit Facility.
For the three and nine months ended September 30, 2022, we incurred $4.2 million and $10.6 million, respectively, in incremental direct acquisition and integration costs that principally consist of legal, advisory and other professional fees. Such costs are included in general and administrative expenses in the accompanying condensed consolidated statements of income.
Our consolidated financial and operating results reflect the 3 Bear Acquisition operations beginning June 1, 2022. Our results of operations included revenue and net income of $60.9 million and $8.3 million, respectively, for the three months ended September 30, 2022 and $81.5 million and $9.8 million, respectively, for the nine months ended September 30, 2022.
The 3 Bear Acquisition was accounted for using the acquisition method of accounting, whereby the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their fair values. The excess of the consideration paid over the fair value of the net assets acquired was recorded as goodwill.
Determination of Purchase Price
The table below presents the purchase price (in thousands):
| Base purchase price: | $ | 624,700 | |||
Add: closing net working capital (as defined in the 3 Bear Purchase Agreement) | 3,390 | ||||
Less: closing indebtedness (as defined in the 3 Bear Purchase Agreement) | (80,618) | ||||
| Cash paid for the adjusted purchase price | 547,472 | ||||
| Cash paid to payoff 3 Bear credit agreement (as defined in the 3 Bear Purchase Agreement) | 80,618 | ||||
| Purchase price | $ | 628,090 | |||
8 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchase Price Allocation
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed in the 3 Bear Acquisition as of June 1, 2022 (in thousands):
| Assets acquired: | ||||||||
| Cash and cash equivalents | $ | 2,677 | ||||||
| Accounts receivables, net | 28,859 | |||||||
| Inventories | 1,831 | |||||||
| Other current assets | 986 | |||||||
| Property, plant and equipment | 382,800 | |||||||
| Operating lease right-of-use assets | 7,427 | |||||||
| Goodwill | 14,406 | |||||||
Customer relationship intangible, net (1) | 210,000 | |||||||
Rights-of-way (1) | 13,490 | |||||||
| Other non-current assets | 500 | |||||||
| Total assets acquired | 662,976 | |||||||
| Liabilities assumed: | ||||||||
| Accounts payable | 8,020 | |||||||
| Accrued expenses and other current liabilities | 22,145 | |||||||
| Current portion of operating lease liabilities | 1,029 | |||||||
| Asset retirement obligations | 2,261 | |||||||
| Operating lease liabilities, net of current portion | 1,431 | |||||||
| Total liabilities assumed | 34,886 | |||||||
| Fair value of net assets acquired | $ | 628,090 | ||||||
(1)The acquired intangible assets amount includes the following identified intangibles:
•Customer relationship intangible that is subject to amortization with a preliminary fair value of $210.0 million, which will be amortized over an 11.6-year useful life. We recognized amortization expense for the three and nine months ended September 30, 2022 is $4.5 million and $6.0 million, respectively. The estimated amortization is $18.0 million for each of the five succeeding fiscal years.
•Rights-of-way intangible that is subject to amortization with a preliminary fair value of $13.5 million, which will be amortized over the weighted-average useful life of 25.4 years. We recognized amortization expense for the three and nine months ended September 30, 2022 of $0.2 million. The estimated amortization is $0.6 million for each of the five succeeding fiscal years.
These fair value estimates are preliminary and therefore, the final fair value of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all necessary information has become available, the final working capital adjustment is complete, and we finalize our valuations. To the extent possible, estimates have been considered and recorded, as appropriate, for the items above based on the information available as of September 30, 2022. We will continue to evaluate these items until they are satisfactorily resolved and adjust our purchase price allocation accordingly, within the allowable measurement period (not to exceed one year from the date of acquisition), as defined by Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805").
The fair value of property, plant and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recently published data and adjusting replacement cost for physical deterioration, functional and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties.
The fair value of customer relationships was based on the income approach. Key assumptions in the income approach include projected revenue attributable to customer relationships, attrition rate, operating margins and discount rates.
The fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.
The fair values of all other current assets and payables were equivalent to their carrying values due to their short-term nature.
The goodwill recognized in the 3 Bear 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 3 Bear Acquisition is included in the 3 Bear operations segment.
9 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unaudited Pro Forma Financial Information
The following table summarizes the unaudited pro forma financial information of the Partnership assuming the 3 Bear 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 3 Bear 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 3 Bear Acquisition, (ii) incremental depreciation resulting from the estimated fair values of acquired property, 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 3 Bear Acquisition. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the 3 Bear 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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands, except per unit data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Net sales | $ | 294,025 | $ | 235,521 | $ | 865,874 | $ | 618,547 | ||||||||||||||||||
| Net income attributable to partners | $ | 48,703 | $ | 37,174 | $ | 117,430 | $ | 86,894 | ||||||||||||||||||
| Net income per limited partner unit: | ||||||||||||||||||||||||||
| Basic income per unit | $ | 1.12 | $ | 0.86 | $ | 2.70 | $ | 2.00 | ||||||||||||||||||
| Diluted income per unit | $ | 1.12 | $ | 0.86 | $ | 2.70 | $ | 2.00 | ||||||||||||||||||
Note 3 - Related Party Transactions
Commercial Agreements
The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which we provide various services, including crude oil gathering and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings. Most of these agreements have an initial term ranging from to ten years, which may be extended for various renewal terms at the option of Delek 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, however, 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 our material commercial agreements and other agreements with 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:
Slurry Clarifying Services Agreement
We executed a series of agreements with DK Trading & Supply, LLC (“DKT&S”) and Alon Refining Krotz Springs, whereby the Partnership will operate and maintain a facility, located within the Krotz Springs, Louisiana refinery, to process slurry for DKT&S. Using a process that incorporates horizontal and vertical centrifuges, we will remove metals, ash, and other solids from the slurry. The clarified product can then be sold to DKT&S or one of its affiliates. As consideration for the processing services, we will receive a fixed rate per barrel processing fee in addition to a margin-based payment. The Partnership and DKT&S have agreed to a minimum delivery commitment volume to be processed in the facility. The initial term of the agreement is for a period of three years, and thereafter, will continue a year-to-year basis unless canceled by either party.
Omnibus Agreement
The Partnership entered into an omnibus agreement with Delek Holdings, Delek Logistics Operating, LLC, Lion Oil Company, LLC (formerly known as Lion Oil Company) and certain of the Partnership's and Delek Holdings' other subsidiaries on November 7, 2012, which has been amended from time to time in connection with acquisitions from Delek Holdings (collectively, as amended, the "Omnibus Agreement"). The Omnibus Agreement governs the provision of certain operational services and reimbursement obligations, among other
10 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
matters, between the Partnership and Delek Holdings, and obligates us to pay an annual fee of $4.6 million to Delek Holdings for its provision of centralized corporate services to the Partnership.
Pursuant to the terms of the Omnibus Agreement, we are reimbursed by Delek Holdings for certain capital expenditures. These amounts are recorded in other long-term liabilities and are amortized to revenue over the life of the underlying revenue agreement corresponding to the asset. We were reimbursed a nominal amount by Delek Holdings during the nine months ended September 30, 2022. There were no reimbursements by Delek Holdings during the three months ended September 30, 2022, or three and nine months ended September 30, 2021. Additionally, we are reimbursed or indemnified, as the case may be, for costs incurred in excess of certain amounts related to certain asset failures, pursuant to the terms of the Omnibus Agreement. As of September 30, 2022, there was no receivable from related parties for these matters and a nominal receivable from related parties for these matters as of December 31, 2021. These reimbursements are recorded as reductions to operating expense. There were no reimbursements for these matters in each of the three and nine month periods ended September 30, 2022. We were reimbursed a nominal amount for these matters in each of the three and nine month periods ended September 30, 2021.
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 2022. Total fees paid to the Partnership were $0.4 million and $1.2 million for the three and nine months ended September 30, 2022 and 2021, respectively, which are recorded 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, wholesale marketing and products terminalling services provided primarily to Delek Holdings based on regulated tariff rates or contractually based fees and product sales. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek Holdings, or our general partner, as the case may be, for the services provided to us under the Partnership Agreement. These expenses could also include reimbursement and indemnification amounts from Delek Holdings, as provided under the Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek Holdings for direct or allocated costs and expenses incurred by Delek Holdings on behalf of the Partnership and for charges Delek Holdings incurred for the management and operation of our logistics assets, including an annual fee for various centralized corporate services, which are included in general and administrative expenses. In addition to these transactions, we purchase refined products and bulk biofuels from Delek Holdings, the costs of which are included in cost of materials and other.
A summary of revenue, purchases from affiliates and expense transactions with Delek Holdings and its affiliates are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | $ | 127,150 | $ | 123,519 | $ | 375,270 | $ | 308,435 | |||||||||||||||
| Purchases from Affiliates | $ | 124,714 | $ | 89,852 | $ | 374,329 | $ | 229,810 | |||||||||||||||
Operating and maintenance expenses | $ | 16,478 | $ | 10,656 | $ | 39,741 | $ | 30,217 | |||||||||||||||
General and administrative expenses | $ | 4,556 | $ | 2,681 | $ | 10,708 | $ | 6,794 | |||||||||||||||
Quarterly Cash Distributions
In February, May and August 2022, we paid quarterly cash distributions of $42.4 million, $42.6 million and $42.8 million, respectively, of which $33.8 million, $33.6 million and $33.8 million, respectively, were paid to Delek Holdings. In February, May and August 2021, we paid quarterly cash distributions of $39.5 million, $40.0 million and $40.8 million, respectively, of which $31.6 million, $32.0 million and $32.7 million, respectively, were paid to Delek Holdings. On October 25, 2022, our board of directors declared a quarterly cash distribution totaling $43.1 million, based on the available cash as of the date of determination, for the end of the third quarter of 2022, payable on November 10, 2022, of which $34.0 million is expected to be paid to Delek Holdings.
11 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4 - Revenues
Within our pipeline and transportation and wholesale marketing and terminalling segments, we generate revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate products and feed stocks; for distributing, transporting and storing refined products; for marketing refined products output of Delek Holdings' Tyler and Big Spring refineries; and for wholesale marketing in the West Texas area. A significant portion of our revenue is derived from long-term commercial agreements with Delek Holdings, which provide for annual fee adjustments for increases or decreases in the CPI, PPI or 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 $1,178.3 million net property, plant, and equipment balance as of September 30, 2022, $429.4 million is subject to operating leases under our commercial agreements. These agreements do not include options for the lessee to purchase our leasing equipment, nor do they include any material residual value guarantees or material restrictive covenants.
As of the 3 Bear Acquisition, our revenue-generating activities include crude oil and natural gas gathering, processing and transportation operations, as well as water disposal and recycling operations, with third parties in the Delaware Basin of New Mexico. For natural gas gathering and processing contracts in which we perform midstream services and also purchase the processed products, we determine if the economic control of the commodities has passed from the producer to us, before or after we perform our services (if at all), to determine whether we are principal or agent in the ultimate sale of the processed product. As a result of these activities, we generate two principal types of revenues:
•Product sales revenue - comprised of residual products as a result of our gathering services where 3 Bear meets the definition of the principal rather than an agent, and where such revenue is recognized upon satisfaction of the performance obligation, which is generally upon delivery
•Gathering services revenue - comprised of fees charged for one or more of the following services: gathering, processing and transportation of natural gas; gathering, transportation and storage of NGLs; gathering, recycling and disposal of wastewater; and transportation, storage and distribution of crude oil, refined products and other hydrocarbon-based products. The contractual fees are generally related to the volume of natural gas, NGLs, water, crude oil or refined products that are gathered, transported, stored or processed and therefore is not directly impacted by commodity prices.
The following tables represent a disaggregation of revenue for the pipeline and transportation and wholesale marketing and terminalling segments for the periods indicated (in thousands):
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Pipelines and Transportation | Wholesale Marketing and Terminalling | 3 Bear Operations | Consolidated | ||||||||||||||||||||
| Service Revenue - Third Party | $ | 5,883 | $ | — | $ | 10,857 | $ | 16,740 | |||||||||||||||
Service Revenue - Affiliate (1) | 4,050 | 9,075 | — | 13,125 | |||||||||||||||||||
| Product Revenue - Third Party | — | 102,703 | 47,432 | 150,135 | |||||||||||||||||||
| Product Revenue - Affiliate | — | 24,185 | 2,593 | 26,778 | |||||||||||||||||||
| Lease Revenue - Affiliate | 75,345 | 11,902 | — | 87,247 | |||||||||||||||||||
| Total Revenue | $ | 85,278 | $ | 147,865 | $ | 60,882 | $ | 294,025 | |||||||||||||||
(1) Net of $1.8 million of amortization expense for the three months ended September 30, 2022, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
| Three Months Ended September 30, 2021 | |||||||||||||||||
| Pipelines and Transportation | Wholesale Marketing and Terminalling | Consolidated | |||||||||||||||
| Service Revenue - Third Party | $ | 5,323 | $ | 139 | $ | 5,462 | |||||||||||
Service Revenue - Affiliate (1) | 4,484 | 9,241 | 13,725 | ||||||||||||||
| Product Revenue - Third Party | — | 60,645 | 60,645 | ||||||||||||||
| Product Revenue - Affiliate | — | 34,325 | 34,325 | ||||||||||||||
| Lease Revenue - Affiliate | 66,395 | 9,075 | 75,470 | ||||||||||||||
| Total Revenue | $ | 76,202 | $ | 113,425 | $ | 189,627 | |||||||||||
(1) Net of $1.8 million of amortization expense for the three months ended September 30, 2021, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Pipelines and Transportation | Wholesale Marketing and Terminalling | 3 Bear Operations | Consolidated | ||||||||||||||||||||
| Service Revenue - Third Party | $ | 15,978 | $ | — | $ | 15,457 | $ | 31,435 | |||||||||||||||
Service Revenue - Affiliate (1) | 12,065 | 25,863 | — | 37,928 | |||||||||||||||||||
| Product Revenue - Third Party | — | 300,177 | 60,474 | 360,651 | |||||||||||||||||||
| Product Revenue - Affiliate | — | 82,774 | 5,555 | 88,329 | |||||||||||||||||||
| Lease Revenue - Affiliate | 213,646 | 35,367 | — | 249,013 | |||||||||||||||||||
| Total Revenue | $ | 241,689 | $ | 444,181 | $ | 81,486 | $ | 767,356 | |||||||||||||||
(1) Net of $5.4 million of amortization expense for the nine months ended September 30, 2022, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.
| Nine Months Ended September 30, 2021 | |||||||||||||||||
| Pipelines and Transportation | Wholesale Marketing and Terminalling | Consolidated | |||||||||||||||
| Service Revenue - Third Party | $ | 12,021 | $ | 358 | $ | 12,379 | |||||||||||
Service Revenue - Affiliate (1) | 9,505 | 25,877 | 35,382 | ||||||||||||||
| Product Revenue - Third Party | — | 190,204 | 190,204 | ||||||||||||||
| Product Revenue - Affiliate | — | 54,453 | 54,453 | ||||||||||||||
| Lease Revenue - Affiliate | 190,086 | 28,514 | 218,600 | ||||||||||||||
| Total Revenue | $ | 211,612 | $ | 299,406 | $ | 511,018 | |||||||||||
(1) Net of $5.4 million of amortization expense for the nine months ended September 30, 2021, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.
As of September 30, 2022, we expect to recognize $1.4 billion in future lease revenues, for periods up to financial year 2030, 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 to ten years, which may be extended for various renewal terms. We disclose information about remaining performance obligations that have original expected durations of greater than one year.
Our unfulfilled performance obligations as of September 30, 2022 were as follows (in thousands):
| Remainder of 2022 | $ | 74,716 | ||||||
| 2023 | 291,514 | |||||||
| 2024 | 209,108 | |||||||
| 2025 | 183,804 | |||||||
| 2026 and thereafter | 604,928 | |||||||
| Total expected revenue on remaining performance obligations | $ | 1,364,070 | ||||||
13 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 5 - Net Income Per Unit
Basic net income per unit applicable to limited partners is computed by dividing limited partners' interest in net income by the weighted-average number of outstanding common units.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. As of September 30, 2022, the only potentially dilutive units outstanding consist of unvested phantom units.
Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The expected date of distribution for the distributions earned during the period ended September 30, 2022 is November 10, 2022.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income attributable to partners | $ | 44,674 | $ | 43,624 | $ | 116,352 | $ | 123,137 | |||||||||||||||
| Less: Limited partners' distribution | 43,057 | 41,286 | 128,493 | 122,100 | |||||||||||||||||||
| Earnings in excess (deficit) of distributions | $ | 1,617 | $ | 2,338 | $ | (12,141) | $ | 1,037 | |||||||||||||||
| Limited partners' earnings on common units: | |||||||||||||||||||||||
| Distributions | $ | 43,057 | $ | 41,286 | $ | 128,493 | $ | 122,100 | |||||||||||||||
| Allocation of earnings in excess (deficit) of distributions | 1,617 | 2,338 | (12,141) | 1,037 | |||||||||||||||||||
| Total limited partners' earnings on common units | $ | 44,674 | $ | 43,624 | $ | 116,352 | $ | 123,137 | |||||||||||||||
| Weighted average limited partner units outstanding: | |||||||||||||||||||||||
| Basic | 43,485,779 | 43,454,535 | 43,477,801 | 43,447,739 | |||||||||||||||||||
| Diluted | 43,515,960 | 43,468,289 | 43,499,837 | 43,457,857 | |||||||||||||||||||
| Net income per limited partner unit: | |||||||||||||||||||||||
| Basic | $ | 1.03 | $ | 1.00 | $ | 2.68 | $ | 2.83 | |||||||||||||||
Diluted (1) | $ | 1.03 | $ | 1.00 | $ | 2.67 | $ | 2.83 | |||||||||||||||
(1) Outstanding common units totaling 3,862 were excluded from the diluted earnings per unit calculation for the nine months ended September 30, 2022. There were no outstanding common units excluded from the diluted earnings per unit calculation for the three and nine months ended September 30, 2021.
Note 6 - Inventory
Inventories consisted of $2.5 million and $2.4 million of refined petroleum products as of September 30, 2022 and December 31, 2021, respectively, each of which are net of lower of cost or net realizable value reserve of a nominal amount. Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We recognize lower of cost or net realizable value charges as a component of cost of materials and other in the consolidated statements of income and comprehensive income.
Note 7 - Long-Term Obligations
Outstanding borrowings, net of unamortized debt discounts and certain deferred financing costs, under the Partnership’s existing debt instruments are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
Delek Logistics 2028 Notes (1) | $ | 394,968 | $ | 394,302 | |||||||
Delek Logistics Credit Facility (2) | 806,405 | 258,000 | |||||||||
Delek Logistics 2025 Notes (3) | 247,399 | 246,668 | |||||||||
| $ | 1,448,772 | $ | 898,970 | ||||||||
(1)Net of deferred financing costs of $5.0 million and $5.7 million at September 30, 2022 and December 31, 2021, respectively.
(2)Net of deferred financing costs of $0.5 million at September 30, 2022.
(3)Net of deferred financing costs of $2.0 million and $2.5 million and debt discount of $0.6 million and $0.8 million at September 30, 2022 and December 31, 2021, respectively.
14 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
7.125% Senior Notes due 2028
On May 24, 2021, the Partnership and our wholly owned subsidiary Delek Logistics Finance Corp. ("Finance Corp." and together with the Partnership, the "Issuers") issued $400.0 million in aggregate principal amount of 7.125% senior notes due 2028 (the "2028 Notes") at par, pursuant to an indenture with U.S. Bank, National Association as trustee. The 2028 Notes are general unsecured senior obligations of the Issuers and are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's subsidiaries other than Finance Corp., and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2028 Notes rank equal in right of payment with all existing and future senior indebtedness of the Issuers, and senior in right payment to any future subordinated indebtedness of the Issuers. The 2028 Notes will mature on June 1, 2028, and interest on the 2028 Notes is payable semi-annually in arrears on each June 1 and December 1, commencing December 1, 2021.
At any time prior to June 1, 2024, the Issuers may redeem up to 35% of the aggregate principal amount of the 2028 Notes with the net cash proceeds of one or more equity offerings by the Partnership at a redemption price of 107.125% of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to June 1, 2024, the Issuers may also redeem all or part of the 2028 Notes at a redemption price of the principal amount plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on June 1, 2024, the Issuers may, subject to certain conditions and limitations, redeem all or part of the 2028 Notes, at a redemption price of 103.563% of the redeemed principal for the twelve-month period beginning on June 1, 2024, 101.781% for the twelve-month period beginning on June 1, 2025, and 100.00% beginning on June 1, 2026 and thereafter, plus accrued and unpaid interest, if any.
In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations, the Issuers will be obligated to make an offer for the purchase of the 2028 Notes from holders at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
As of September 30, 2022, we had $400.0 million in outstanding principal amount under the 2028 Notes, and the effective interest rate was 7.40%.
DKL Credit Facility
On September 28, 2018, the Partnership entered into a third amended and restated senior secured revolving credit agreement (hereafter, the "DKL Credit Facility") with Fifth Third Bank ("Fifth Third"), as administrative agent, and a syndicate of lenders with total lender commitments of $850.0 million. The DKL Credit Facility contains a dual currency borrowing tranche that permits draw downs in U.S. or Canadian dollars. The DKL Credit Facility also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of $1.0 billion, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent. The obligations under the DKL Credit Facility remain secured by first priority liens on substantially all of the Partnership's and its subsidiaries' tangible and intangible assets.
The DKL Credit Facility has a maturity date of September 28, 2023. Borrowings denominated in U.S. dollars bear interest at either a U.S. dollar prime rate, plus an applicable margin, or Secured Overnight Financing Rate ("SOFR"), plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars bear interest at either a Canadian dollar prime rate, plus an applicable margin, or the Canadian Dealer Offered Rate, plus an applicable margin, at the election of the borrowers.
The applicable margin in each case and the fee payable for any unused revolving commitments vary based upon the Partnership's most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the DKL Credit Facility. At September 30, 2022, the weighted average interest rate for our borrowings under the facility was approximately 5.64%. Additionally, the DKL Credit Facility requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of September 30, 2022, this fee was 0.50% per year.
In August 2020, the Partnership entered into a First Amendment to the DKL Credit Facility which, among other things, permitted the transfer of cash and equity consideration for the elimination of incentive distribution rights held by Delek Logistics GP, LLC, our general partner. It also modified the total leverage ratio and the senior leverage ratio (each as defined in the DKL Credit Facility) calculations to reduce the total funded debt (as defined in the DKL Credit Facility) component thereof by the total amount of unrestricted consolidated cash and cash equivalents on the balance sheet of the Partnership and its subsidiaries up to $20.0 million.
In May 2022, the Partnership entered into Second and Third Amendments to the DKL Credit Facility which, among other things, provided for the transition from a LIBOR benchmark to a term Secured Overnight Financing Rate benchmark (“Term SOFR”) with credit spread adjustments for 1-month and 3-month Term SOFR loans, and provided consent and flexibility related to the previously announced 3 Bear Acquisition with respect to certain covenants in the DKL Credit Facility. We believe we were in compliance with all covenant requirements as of September 30, 2022.
Further, on May 26, 2022, the Partnership entered into a Fourth Amendment (the “Fourth Amendment”) to the DKL Credit Facility. Among other things, the Fourth Amendment: (i) increased the U.S. Revolving Credit Commitments (as defined in the DKL Credit Facility) by an amount equal to $150.0 million, for an aggregate amount of $1,000.0 million, (ii) increased the U.S. L/C Sublimit (as defined in the DKL
15 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Credit Facility) to an aggregate amount equal to $90.0 million and (iii) increased the U.S. Swing Line Sublimit (as defined in the DKL Credit Facility) to an aggregate amount equal to $18.0 million.
On October 13, 2022, the Partnership entered into a fourth amended and restated DKL Credit Facility (the "2022 DKL Credit Facility") with Fifth Third, as administrative agent and a syndicate of lenders. The 2022 DKL Credit Facility, among other things, (i) increased total aggregate commitments to $1.2 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and $25.0 million for swing line loans (the “DKL Revolving Facility”) with an extended maturity date of October 13, 2027, and (B) a new senior secured term loan in the original principal amount of $300.0 million (the “DKL Term Facility”), (ii) reset the accordion feature under the DKL Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of the Partnership and one or more existing or new lenders and (ii) provided for the DKL Term Facility be drawn in full on October 13, 2022, with a maturity date of October 13, 2024 and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances. The DKL Term Facility requires four quarterly amortization payments of $3.8 million in 2023 and three quarterly amortization payments of $7.5 million in 2024.
Borrowings under the DKL Revolving Facility bear interest at the election of the Partnership at either a U.S. dollar prime rate, plus an applicable margin ranging from 1.00% to 2.00% depending on the Partnership’s Total Leverage Ratio (as defined in the DKL Credit Agreement), or a SOFR rate plus a credit spread adjustment of 0.10% for one-month interest periods and 0.25% for three-month interest periods plus an applicable margin ranging from 2.00% to 3.00% depending on the Partnership’s Total Leverage Ratio. Unused revolving commitments under the DKL Revolving Facility incur a commitment fee that ranges from 0.30% to 0.50% depending on the Partnership’s Total Leverage Ratio. Borrowings under the DKL Term Facility bear interest at the election of the Partnership at either a U.S. dollar prime rate, plus an applicable margin of 2.50% for the first year of the DKL Term Facility and 3.00% for the second year of the DKL Term Facility, or a SOFR rate plus a credit spread adjustment of 0.10% for one-month interest periods and 0.25% for three-month interest periods plus an applicable margin of 3.50% for the first year of the Term Facility and 4.00% for the second year of the DKL Term Facility.
The 2022 DKL Credit Facility contains affirmative and negative covenants and events of default, which the Partnership considers customary and are similar to those in our predecessor DKL Credit Facility. Under the financial covenants in the 2022 DKL Credit Facility, the Partnership cannot:
•permit, as of the last day of each fiscal quarter, the Total Leverage Ratio (as defined in the DKL Credit Facility) to be greater than 5.25 to 1.00; provided, that during any Temporary Increase Period (as defined in the DKL Credit Facility, the Partnership cannot permit the foregoing ratio to be greater than 5.50 to 1.00 (a Temporary Increase Period with respect to the 3 Bear Acquisition (as defined in the DKL Credit Facility) is in effect through March 31, 2023);
•permit, as of the last day of each fiscal quarter, the Senior Leverage Ratio (as defined in the DKL Credit Facility) to be greater than 3.75 to 1.00;
•permit, as of the last day of each fiscal quarter, the interest coverage ratio to be equal to or less than 2.00 to 1.00.
The obligations under the 2022 DKL Credit Facility remain secured by a first priority lien on substantially all of the Partnership’s and its subsidiaries’ tangible and intangible assets.
As of September 30, 2022, the Partnership had $806.9 million of outstanding borrowings under the DKL Credit Facility, with no letters of credit in place. Unused credit commitments under the DKL Credit Facility as of September 30, 2022 were $193.1 million.
6.750% Senior Notes Due 2025
On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly-owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued $250.0 million in aggregate principal amount of 6.75% senior notes due 2025 (the “2025 Notes”) at a discount. The 2025 Notes are general unsecured senior obligations of the Issuers. The 2025 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Finance Corp., the "Guarantors") and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2025 Notes rank equal in right of 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. The 2025 Notes will mature on May 15, 2025, and interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15.
The Issuers may, subject to certain conditions and limitations, redeem all or part of the 2025 Notes at a redemption price of 101.688% of the redeemed principal during the twelve-month period beginning on May 15, 2022 and 100.00% beginning on May 15, 2023 and thereafter, plus accrued and unpaid interest, if any. In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations, the Issuers will be obligated to make an offer for the purchase of the 2025 Notes from holders at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
On April 25, 2018, we made an offer to exchange the 2025 Notes and the related guarantees that were validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradeable, as required under the terms of the original indenture.
16 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
The terms of the exchange notes that were issued in May 2018 as a result of the exchange (also referred to as the "2025 Notes") are substantially identical to the terms of the original 2025 Notes.
As of September 30, 2022, we had $250.0 million in outstanding principal amount of the 2025 Notes. As of September 30, 2022, the effective interest rate related to the 2025 Notes was approximately 7.19%.
Note 8 - Equity
We had 9,180,901 common limited partner units held by the public outstanding as of September 30, 2022. Additionally, as of September 30, 2022, Delek Holdings owned an 78.9% limited partner interest in us, consisting of 34,311,278 common limited partner units.
On April 14, 2022, we filed a shelf registration statement with the SEC, which was declared effective on April 29, 2022, which provides the Partnership the ability to offer up to $200.0 million of our common limited partner units from time to time and through one or more methods of distribution, subject to market conditions and our capital needs.
On December 22, 2021, Delek Holdings issued a press release regarding a program to sell up to 434,590 common limited partner units representing limited partner interests in the Partnership. We did not sell any securities under this program and we did not receive any proceeds from the sale of the securities by Delek Holdings.
Equity Activity
The table below summarizes the changes in the number of limited partner units outstanding from December 31, 2021 through September 30, 2022.
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at December 31, 2021 | 8,774,053 | 34,696,800 | 43,470,853 | ||||||||||||||
Unit-based compensation awards (1) | 21,326 | — | 21,326 | ||||||||||||||
| Delek Holdings resale of units | 385,522 | (385,522) | — | ||||||||||||||
| Balance at September 30, 2022 | 9,180,901 | 34,311,278 | 43,492,179 | ||||||||||||||
(1) Unit-based compensation awards are presented net of 6,368 units withheld for taxes as of September 30, 2022.
Issuance of Additional Securities
Our Partnership Agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders. Costs associated with the issuance of securities are allocated to all unitholders' capital accounts based on their ownership interest at the time of issuance.
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 will receive. Our distributions earned with respect to a given period are declared subsequent to quarter end.
The table below summarizes the quarterly distributions related to our quarterly financial results:
| Quarter Ended | Total Quarterly Distribution Per Limited Partner Unit | Total Cash Distribution (in thousands) | Date of Distribution | Unitholders Record Date | ||||||||||||||||||||||
| September 30, 2021 | $ | 0.950 | $ | 41,286 | November 10, 2021 | November 5, 2021 | ||||||||||||||||||||
| December 31, 2021 | $ | 0.975 | $ | 42,384 | February 8, 2022 | February 1, 2022 | ||||||||||||||||||||
| 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 (1) | November 4, 2022 | ||||||||||||||||||||
(1) Expected date of distribution.
Note 9 - Equity Based Compensation
The Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") was adopted by the Delek Logistics GP, LLC board of directors in connection with the completion of our initial public offering in November 2012. The LTIP is administered by the Conflicts Committee of the board of our general partner. Equity-based compensation expense is included in general and administrative expenses in the
17 | | ||
accompanying condensed consolidated statements of income and comprehensive income and is immaterial for the three and nine months ended September 30, 2022 and 2021.
On June 9, 2021, the LTIP was amended to increase the number of units representing limited partner interest in the Partnership (the "Common Units") authorized for issuance by 300,000 Common Units to 912,207 Common Units. Additionally, the term of the LTIP was extended to June 9, 2031.
Note 10 - Equity Method Investments
In May 2019, the Partnership, through its wholly owned indirect subsidiary DKL Pipeline, LLC (“DKL Pipeline”), entered into a Contribution and Subscription Agreement (the “Contribution Agreement”) with Plains Pipeline, L.P. (“Plains”) and Red River Pipeline Company LLC (“Red River”). Pursuant to the Contribution Agreement, DKL Pipeline contributed $124.7 million, substantially all of which was financed by borrowings under the DKL Credit Facility, to Red River in exchange for a 33% membership interest in Red River and DKL Pipeline’s admission as a member of Red River. In addition, we contributed $0.4 million of startup capital pursuant to the Amended and Restated Limited Liability Company Agreement. Red River, which owns a crude oil pipeline running from Cushing, Oklahoma to Longview, Texas, completed a planned expansion project to increase the pipeline capacity and commenced operations on the completed expansion project in 2020. During the nine months ended September 30, 2022, we made no capital contributions. During the nine months ended September 30, 2021, we made additional capital contributions totaling $1.4 million based on capital calls received.
Summarized unaudited financial information for Red River on a 100% basis is shown below (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Current Assets | $ | 36,029 | $ | 28,735 | |||||||
| Non-current Assets | $ | 396,618 | $ | 403,692 | |||||||
| Current liabilities | $ | 10,169 | $ | 10,040 | |||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | $ | 25,340 | $ | 19,349 | $ | 69,475 | $ | 46,136 | |||||||||||||||
| Gross profit | $ | 17,210 | $ | 12,027 | $ | 46,476 | $ | 26,367 | |||||||||||||||
| Operating income | $ | 15,469 | $ | 11,871 | $ | 44,381 | $ | 25,866 | |||||||||||||||
| Net income | $ | 15,509 | $ | 11,853 | $ | 44,386 | $ | 25,843 | |||||||||||||||
We have two joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek Holdings. We own a 50% membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC") to operate one of these pipeline systems (the "Caddo Pipeline") and a 33% membership interest in the entity formed with Rangeland Energy II, LLC ("Rangeland Energy") to operate the other pipeline system (the "Rio Pipeline"). During 2018, Rangeland Energy was acquired by Andeavor (which was subsequently acquired by Marathon Petroleum Corporation) and the legal entity in which we have an equity investment became Andeavor Logistics Rio Pipeline LLC ("Andeavor Logistics").
Combined summarized unaudited financial information for these two equity method investees on a 100% basis is shown below (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Current assets | $ | 19,561 | $ | 15,010 | |||||||
| Non-current assets | $ | 234,715 | $ | 242,599 | |||||||
| Current liabilities | $ | 3,688 | $ | 1,492 | |||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | $ | 11,949 | $ | 12,090 | $ | 32,402 | $ | 35,316 | |||||||||||||||
| Gross profit | $ | 7,014 | $ | 6,757 | $ | 18,472 | $ | 20,462 | |||||||||||||||
| Operating income | $ | 6,284 | $ | 6,300 | $ | 16,474 | $ | 19,022 | |||||||||||||||
| Net Income | $ | 6,306 | $ | 6,300 | $ | 16,501 | $ | 19,023 | |||||||||||||||
18 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Partnership's investments in these three entities were financed through a combination of cash from operations and borrowings under the DKL Credit Facility. The Partnership's investment balances in these joint ventures were as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Red River | $ | 143,729 | $ | 144,041 | |||||||
| CP LLC | 61,461 | 61,670 | |||||||||
| Andeavor Logistics | 42,815 | 44,319 | |||||||||
| Total Equity Method Investments | 248,005 | 250,030 | |||||||||
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 our equity method investments, we determined that these entities do not represent variable interest entities and consolidation is not required. We have the ability to exercise significant influence over each of these joint ventures through our participation in the management committees, which make all significant decisions. However, since all significant decisions require the consent of the other investor(s) without regard to economic interest, we have determined that we have joint control and have applied the equity method of accounting. Our investment in these joint ventures is reflected in our pipelines and transportation segment.
Note 11 - Segment Data
We aggregate our operating segments into four reportable segments: (i) pipelines and transportation; (ii) wholesale marketing and terminalling; (iii) 3 Bear operations; and (iv) investment in pipeline joint ventures. Based on the manner in which the Partnership’s Chief Operating Decision Maker (“CODM”) is currently reviewing the financial and operating information and metrics of the business of and for the three and nine months ended September 30, 2022, inclusive of the 3 Bear Acquisition, the acquisition of 3 Bear resulted in a new operating segment as of and for the period from the Acquisition Date through September 30, 2022, which is deemed to be reportable based on our quantitative assessment. While this new operating segment has certain common characteristics with our pipelines and transportation reportable segment, it also involves new operations (including natural gas gathering, processing and transportation as well as water disposal and recycling) and operates in new geographic location. Additionally, the Acquisition occurred on June 1, 2022, and integration efforts continue to be in process as of September 30, 2022. For these reasons, the 3 Bear operating segment has been presented as a separate reportable segment as of and for the three and nine months ended September 30, 2022. As we continue to integrate the 3 Bear operations in the coming quarters and refine how we manage those operations in the context of our overall business, it is possible that segment presentation could change.
Our operating segments adhere to the accounting policies used for our consolidated financial statements. Our operating segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on segment contribution margin, with the exception of investments in pipeline joint ventures segment, which is measured based on net income. Segment contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization. The following is a summary of business segment operating performance as measured by contribution margin, with the exception of investments in pipeline joint ventures segment, which is measured based on equity method income (loss), for the periods indicated (in thousands):
19 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
| (in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Pipelines and Transportation | |||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Affiliate | $ | 79,395 | $ | 70,879 | $ | 225,711 | $ | 199,591 | |||||||||||||||
| Third party | 5,883 | 5,323 | 15,978 | 12,021 | |||||||||||||||||||
| Total pipelines and transportation | 85,278 | 76,202 | 241,689 | 211,612 | |||||||||||||||||||
| Cost of materials and other | 20,004 | 15,170 | 58,272 | 42,595 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 11,292 | 13,680 | 37,789 | 34,710 | |||||||||||||||||||
| Segment contribution margin | $ | 53,982 | $ | 47,352 | $ | 145,628 | $ | 134,307 | |||||||||||||||
| Depreciation and amortization | $ | 7,847 | $ | 8,056 | $ | 23,668 | $ | 24,918 | |||||||||||||||
| Capital spending | $ | 21,151 | $ | 2,570 | $ | 50,793 | $ | 9,946 | |||||||||||||||
| Wholesale Marketing and Terminalling | |||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Affiliate | $ | 45,162 | $ | 52,640 | $ | 144,004 | $ | 108,844 | |||||||||||||||
| Third party | 102,703 | 60,785 | 300,177 | 190,562 | |||||||||||||||||||
| Total wholesale marketing and terminalling | 147,865 | 113,425 | 444,181 | 299,406 | |||||||||||||||||||
| Cost of materials and other | 122,614 | 89,959 | 373,126 | 232,400 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 6,952 | 3,908 | 17,397 | 13,317 | |||||||||||||||||||
| Segment contribution margin | $ | 18,299 | $ | 19,558 | $ | 53,658 | $ | 53,689 | |||||||||||||||
| Depreciation and amortization | $ | 2,640 | $ | 2,100 | $ | 7,641 | $ | 5,944 | |||||||||||||||
| Capital spending | $ | 278 | $ | 1,566 | $ | 1,337 | $ | 4,580 | |||||||||||||||
| 3 Bear Operations | |||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Affiliate | $ | 2,593 | $ | — | $ | 5,555 | $ | — | |||||||||||||||
| Third party | 58,289 | — | 75,931 | — | |||||||||||||||||||
| Total 3 Bear | 60,882 | — | 81,486 | — | |||||||||||||||||||
| Cost of materials and other | 35,122 | — | 48,897 | — | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 7,657 | — | 9,811 | — | |||||||||||||||||||
| Segment contribution margin | $ | 18,103 | $ | — | $ | 22,778 | $ | — | |||||||||||||||
| Depreciation and amortization | $ | 9,053 | $ | — | $ | 11,988 | $ | — | |||||||||||||||
| Capital spending | $ | 10,531 | $ | — | $ | 15,642 | $ | — | |||||||||||||||
| Investments in Pipeline Joint Ventures | |||||||||||||||||||||||
| Income from equity method investments | $ | 8,567 | $ | 7,261 | $ | 22,666 | $ | 17,952 | |||||||||||||||
| Equity method investments contributions | $ | — | $ | — | $ | — | $ | (1,393) | |||||||||||||||
| Consolidated | |||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Affiliate | $ | 127,150 | $ | 123,519 | $ | 375,270 | $ | 308,435 | |||||||||||||||
| Third party | 166,875 | 66,108 | 392,086 | 202,583 | |||||||||||||||||||
| Total Consolidated | 294,025 | 189,627 | 767,356 | 511,018 | |||||||||||||||||||
| Cost of materials and other | 177,740 | 105,129 | 480,295 | 274,995 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 25,901 | 17,588 | 64,997 | 48,027 | |||||||||||||||||||
| Contribution margin | 90,384 | 66,910 | 222,064 | 187,996 | |||||||||||||||||||
| General and administrative expenses | 11,959 | 5,898 | 30,826 | 15,933 | |||||||||||||||||||
| Depreciation and amortization | 19,540 | 10,156 | 43,297 | 30,862 | |||||||||||||||||||
| Other operating (income) expense, net | (132) | 273 | (120) | 54 | |||||||||||||||||||
| Operating income | $ | 59,017 | $ | 50,583 | $ | 148,061 | $ | 141,147 | |||||||||||||||
| Capital spending and capital contributions to equity method investments | $ | 31,960 | $ | 4,136 | $ | 67,772 | $ | 14,526 | |||||||||||||||
Assets by segment are not a measure used to assess the performance of the company by the chief operating decision maker and thus are not disclosed.
20 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Property, plant and equipment, accumulated depreciation and depreciation expense for the Partnership's reportable segments, excluding the investment in pipeline joint ventures segment, as of and for the three and nine months ended September 30, 2022 were as follows (in thousands):
| Pipelines and Transportation | Wholesale Marketing and Terminalling | 3 Bear Operations | Consolidated | ||||||||||||||||||||
| Property, plant and equipment | $ | 657,788 | $ | 122,096 | $ | 398,450 | $ | 1,178,334 | |||||||||||||||
| Less: accumulated depreciation | (229,206) | (67,817) | (5,711) | (302,734) | |||||||||||||||||||
| Property, plant and equipment, net | $ | 428,582 | $ | 54,279 | $ | 392,739 | $ | 875,600 | |||||||||||||||
| Depreciation expense for the three months ended September 30, 2022 | $ | 7,847 | $ | 2,640 | $ | 4,284 | $ | 14,771 | |||||||||||||||
| Depreciation expense for the nine months ended September 30, 2022 | $ | 23,668 | $ | 7,641 | $ | 6,277 | $ | 37,586 | |||||||||||||||
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, 2022.
Note 12 - 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, financial reporting bases of assets and liabilities, the acquisition price of such partner's units and the taxable income allocation requirements under our Partnership Agreement. The Partnership is not a taxable entity for federal income tax purposes. While most states do not impose an entity level tax on partnership income, the Partnership is subject to entity level tax in both Tennessee and Texas.
Note 13 - Commitments and Contingencies
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our financial statements. See "Crude Oil and Other Releases" below for discussion of an enforcement action.
Environmental, Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the Environmental Protection Agency (the "EPA"), the United States Department of Transportation, the Occupational Safety and Health Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices and pollution prevention measures, as well as the safe operation of our pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our terminals, pipelines, saltwells, trucks and related operations, and may be subject to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters, which could include soil, surface water and groundwater contamination, air pollution, personal injury and property damage allegedly caused by substances which we 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 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
21 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
remediate a release, to comply with applicable laws and regulations and to resolve claims by governmental agencies or other persons for personal injury, property damage, response costs, or natural resources damages.
Crude Oil and Other Releases
During the nine months ended September 30, 2022, there were no significant releases.
In August 2021, a release of finished product from our Greenville pipeline occurred near Dixon, Texas (the "Greenville Dixon Release"). Cleanup operations, site maintenance and remediation on this release are currently on-going where such costs incurred as of September 30, 2022 totaled $4.0 million. The affected area is currently being treated to bring it to acceptable residential levels protective of groundwater. We believe additional costs associated with this release will be nominal.
On October 3, 2019, a release of diesel fuel involving one of our pipelines occurred near Sulphur Springs, Texas (the "Sulphur Springs Release"). Cleanup operations, site maintenance and remediation on this release have been completed with closure granted and ground water monitoring wells removed. We filed suit in January 2020 against a third party contractor, seeking damages related to this release; two related actions were filed in November and December 2020 by and against the contractor's insurance company seeking judgments related to insurance coverage. Those matters were settled during the three months ended September 30, 2022, for an amount of $3.7 million paid to the Partnership. We have not received notification that any legal action with respect to fines and penalties will be pursued by the regulatory agencies.
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 2022 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 September 30, 2022, 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. 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 they are 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 available insurance, indemnification or reimbursement, will have a material adverse effect upon our business, financial condition or results of operations.
During the nine months ended September 30, 2022, we recorded $1.7 million of crude oil and other releases remediation expenses, net of reimbursable expenses. During the nine months ended September 30, 2021, the crude oil and other releases remediation expenses, net of reimbursable costs, were immaterial.
Other Commitments
In connection with the Permian Gathering System Acquisition (formerly known as the Big Spring Gathering Acquisition), we agreed to expend $33.8 million to construct additional Receipt Points (the "Receipt Points") on our gathering pipeline at the request of Delek Holdings producers with which we have dedicated acreage agreements, to be owned and operated by the Partnership. Such Receipt Points, once completed, result in incremental pipeline revenues, subject to the minimum volume commitments and other terms of the throughput and deficiency commercial agreement with Delek Holdings, entered into in connection with this acquisition. As of September 30, 2022, the Partnership had no remaining commitments under the Receipt Point construction provision of the Permian Gathering System Acquisition agreement. Additionally, both Delek Holdings and the Partnership continue to identify and secure dedicated acreage and producer agreements that require construction of receipt points and also provide the opportunity for additional pipeline volumes, but that are not required under the original commitment. Related to these incremental agreements, the Partnership has begun construction or otherwise separately committed to construct receipt points where the estimated remaining costs to complete totaled $25.3 million as of September 30, 2022, all of which is expected to be expended during 2022.
Note 14 - Leases
We lease certain pipeline, transportation and compressor equipment. Certain of our easements and rights-of-way are also subject to operating lease accounting. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Our leases do not have any outstanding renewal options. Certain leases also include options to purchase the leased equipment.
Certain of our lease agreements include rates based on equipment usage and others include rate inflationary indices based increases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
22 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents additional information related to our operating leases in accordance ASC 842:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Lease Cost (1) | |||||||||||||||||||||||
| Operating lease cost | $ | 3,060 | $ | 3,659 | $ | 9,021 | $ | 9,768 | |||||||||||||||
| Short-term lease cost | 1,060 | 484 | 2,171 | 1,262 | |||||||||||||||||||
| Variable lease costs | — | 276 | 1,203 | 235 | |||||||||||||||||||
| Total lease cost | $ | 4,120 | $ | 4,419 | $ | 12,395 | $ | 11,265 | |||||||||||||||
| Other Information | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||||||||||||||
| Operating cash flows from operating leases | $ | (3,060) | $ | (3,659) | $ | (9,021) | $ | (9,768) | |||||||||||||||
Leased assets obtained in exchange for new operating lease liabilities (1) | $ | 1,120 | $ | 318 | $ | 9,553 | $ | 5,679 | |||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Weighted-average remaining lease term (years) for operating leases | 3.3 | 4.8 | |||||||||||||||||||||
Weighted-average discount rate (2) operating leases | 6.0 | % | 6.4 | % | |||||||||||||||||||
| Weighted-average remaining lease term (years) for financing lease | 1.4 | 6.7 | |||||||||||||||||||||
Weighted-average discount rate (2) financing lease | 1.9 | % | 3.2 | % | |||||||||||||||||||
(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.
Note 15 - Subsequent Events
Distribution Declaration
On October 25, 2022, our general partner's board of directors declared a quarterly cash distribution of $0.990 per common limited partner unit, payable on November 10, 2022, to unitholders of record on November 4, 2022.
23 | | ||
Management's Discussion and Analysis
ITEM 2. 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") on February 25, 2022 (the "Annual Report on Form 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.
Unless otherwise noted or the context requires otherwise, references in this report to "Delek Logistics Partners, LP," the "Partnership," "we," "us," "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, references in this report to "Delek Holdings" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than the Partnership and its subsidiaries and its general partner.
The Partnership announces material information to the public about the Partnership, its products and services and other matters through a variety of means, including filings with the Securities and Exchange Commission, press releases, public conference calls, the Partnership's website (www.deleklogistics.com), the investor relations section of the website (ir.deleklogistics.com), the news section of its website (www.deleklogistics.com/news), and/or social media, including its Twitter account (@DelekUSLogistics). The Partnership encourages investors and others to review the information it makes public in 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”). 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 COVID-19 Pandemic (or the "Pandemic") and 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;
•risks related to realizing the anticipated benefits of the 3 Bear Acquisition and how the failure to do so could adversely affect our business, financial results and operations;
•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 and the impact of the COVID-19 Pandemic on such demand;
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Management's Discussion and Analysis
•the effects of the military conflict that began with the Russian invasion of Ukraine (the "Russia-Ukraine War"), including the impact of sanctions brought by the United States and other countries against Russia or its allies;
•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 West Texas wholesale business;
•the suspension, reduction or termination of Delek Holdings' or its assignees' or third-party's obligations under our commercial agreements including the duration, fees or terms thereof;
•the results of our investments in joint ventures;
•the ability to secure commercial agreements with Delek Holdings or third parties upon expiration of existing agreements;
•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 equipment interruption or failure, or other events, including terrorism, sabotage or cyber attacks, at our facilities, Delek 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, 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 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 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;
•inability to complete growth projects on time and on budget;
•our ability to successfully integrate acquired businesses;
•disruptions due to acts of God, natural disasters, casualty losses, severe weather patterns, such as freezing conditions, cyber or other attacks on our electronic systems, and other matters beyond our 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 renewable identification numbers ("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 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.
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.
All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.
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Management's Discussion and Analysis
| Business Overview | ||
The Partnership primarily owns and operates crude oil, intermediate and refined products logistics and marketing 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. We recently acquired 100% of the interest in 3 Bear Delaware Holding – NM, LLC ("3 Bear"), 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. We are currently in the process of integrating these operations into our existing businesses and assessing the long-term impact to our reportable segments. See “2022 Strategic Developments” and Note 2 for further information about this acquisition. A substantial majority of our existing assets are both integral to and dependent upon the success of Delek Holdings' refining operations, as many of our assets are contracted exclusively to Delek Holdings in support of its Tyler, El Dorado and Big Spring refineries.
Business and Economic Environment Overview
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 during the third quarter 2022 as compared to the prior year. Our successful integration of 3 Bear 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, the Partnership is well positioned to continue to add value through our gathering and processing services as a result of integrating our 3 Bear operations which complement our existing Permian Gathering System assets. Our positioning allows our customers the ability to control quality and adds optionality to place barrels in a variety of markets. Through our joint venture projects, we have increased our supply network to take advantage of growth opportunities in expanding markets and added additional flexibility which has delivered realized value through the entire Delek Logistics system.
Expectations of an economic downturn as well as initiatives to reduce carbon footprints through energy transition to renewables, have softened the demand expectations for hydrocarbons and natural gas. 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. 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. Therefore, liquid transportation fuels will continue to be in high demand, and we aspire to be a leader in energy transformation while still providing affordable transportation fuels that improve the standard of living in the communities that we serve.
Our Reporting Segments and Assets
As of September 30, 2022, our business consists of the following four reportable segments:
Pipelines and Transportation | ||
The operational assets and investments in our pipelines and transportation segment consist of 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 Holdings' refining operations in Tyler, Texas, El Dorado, Arkansas and Big Spring, Texas. Additionally, the assets in this segment provide crude oil transportation services to certain third parties. In providing these services, we do not take ownership of the products or crude oil that we transport or store. Therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment.
The Partnership generates revenue in its pipelines and transportation segment by charging fees to customers, generally based on throughput or other relevant volumetric measures, for services associated with gathering, transporting, offloading and storing crude oil and refined products. Furthermore, a substantial majority of our pipelines and transportation segment revenues (and also contribution margin) is derived from commercial agreements with Delek Holdings with initial terms ranging from five to ten years, which gives us a contractual revenue base that we believe enhances the stability of our cash flows. As more fully described below, our commercial agreements with Delek Holdings typically include minimum volume or throughput commitments by Delek Holdings, which we believe will provide a stable revenue stream in the future. The fees charged under our agreements with Delek Holdings 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.
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Management's Discussion and Analysis
| Wholesale Marketing and Terminalling | ||
The operational assets in our wholesale marketing and terminalling segment consist of refined products terminals and pipelines in Texas, Tennessee, Arkansas and Oklahoma. We generate revenue in our wholesale marketing and terminalling segment by providing marketing services for the refined products output of the Tyler and Big Spring refineries, 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 Holdings.
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. Effective March 1, 2018, this segment also includes certain wholesale marketing and terminalling assets acquired from Delek Holdings, primarily located at or adjacent to the Big Spring Refinery. As of March 31, 2022, we generated revenue in our wholesale marketing and terminalling segment by (i) providing marketing services for the refined products output of the Tyler Refinery and the Big Spring Refinery, (ii) engaging in wholesale activity at our Abilene and San Angelo, Texas terminals, as well as at terminals owned by third parties, whereby we purchase light products for sale and exchange to third parties, and (iii) providing terminalling services to independent third parties and Delek Holdings.
| 3 Bear Operations | ||
The operational assets in our 3 Bear operations segment, which we acquired in connection with the 3 Bear 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. These assets support 3 Bear’s 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. Additionally, the combination of these services provides a comprehensive, integrated midstream service offering to producers.
With respect to our acquired 3 Bear operations segment, we generate two principal types of revenues:
•Product sales - comprised of residual products as a result of our gathering services where 3 Bear meets the definition of the principal rather than an agent, and where such revenue is recognized upon satisfaction of the performance obligation, which is generally upon delivery
•Gathering and processing services - comprised of fees charged for one or more of the following services under dedicated acreage and other long-term fee-based contracts: gathering, processing and transportation of natural gas; gathering, transportation and storage of NGLs; gathering, recycling and disposal of wastewater; and transportation, storage and distribution of crude oil, and other hydrocarbon-based products. The contractual fees are generally related to the volume of natural gas, NGLs, water, crude oil that is gathered, transported, stored or processed and therefore is not directly impacted by commodity prices.
| Investments in Pipeline Joint Ventures | ||
The Partnership owns a portion of three joint ventures (accounted for as equity method investments) that have constructed separate crude oil pipeline systems and related ancillary assets, which provide crude oil and refined product pipeline transportation to third parties and subsidiaries of Delek Holdings.
Because the 3 Bear Acquisition occurred in June 2022, integration efforts continue to be in process as of September 30, 2022. In connection with those efforts, management is continuing to: (1) review, refine and integrate operational and management reporting processes, controls, policies and procedures for the acquired operations; (2) develop an operator-view understanding of the nature of the acquired operations and the similarity/dissimilarity compared to our legacy operating segments; and (3) to evaluate the nature and level of discrete financial information on results of operations that will ultimately be used to manage the acquired operations on a long-term basis. As a result, it is possible that segment presentation could change in the near term and that such changes could include the creation of new or different reportable segments or changes to the view of aggregation into existing reportable segments which are not yet determinable.
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Management's Discussion and Analysis
2022 Strategic Developments
3 Bear Acquisition
On June 1, 2022, the Partnership, through its subsidiary DKL Delaware Gathering, LLC, acquired 100% of the limited liability company interests in 3 Bear related to the Seller’s 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 (the "3 Bear Acquisition"). The purchase price for 3 Bear was $628.1 million. The 3 Bear Acquisition was financed through a combination of cash on hand and borrowings under the Partnership's existing credit agreement. Through this strategic transaction, the Partnership expects to significantly increase its third party revenue and further diversify its customer and product mix, expand its footprint into the Delaware sub-basin of the Permian, and provide immediate accretion to Distributable Cash Flow. Additionally, we believe the addition of 3 Bear may provide access to expanded carbon capture opportunities.
Amendments to DKL Credit Facility
In May 2022, we entered into Second and Third Amendments to our Third Amended and Restated Credit Agreement, which provided for the transition from a LIBOR benchmark to a term Secured Overnight Financing Rate benchmark (“Term SOFR”) and also amended certain financial covenant calculations in order to provide flexibility in connection with the timing of the 3 Bear Acquisition. Additionally, on May 26, 2022, we entered into a Fourth Amendment to Third Amended and Restated Credit Agreement to, among other things, increase the U.S. Revolving Credit Commitments (as defined in the Credit Agreement) by an amount equal to $150 million under an existing accordion feature, for an aggregate amount of commitments under our Existing Credit Agreement of $1.0 billion. The exercise of the accordion feature gave us the flexibility to utilize borrowings under the Credit Agreement to help fund the acquisition of 3 Bear while continuing to maintain sufficient availability to continue to effectively manage our working capital needs and liquidity risk, and to evaluate longer term capitalization strategies.
On October 13, 2022, we entered into a Fourth Amended and Restated Credit Agreement with Fifth Third, as administrative agent and a syndicate of lenders (the "2022 DKL Credit Facility"). The 2022 DKL Credit Facility, among other things, (i) increased total aggregate commitments to $1.2 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and $25.0 million for swing line loans (the “DKL Revolving Facility”) with an extended maturity date of October 13, 2027, and (B) a new senior secured term loan in the original principal amount of $300.0 million (the “DKL Term Facility”), (ii) reset the accordion feature under the DKL Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of the Partnership and one or more existing or new lenders and (ii) provided for the DKL Term Facility be drawn in full on October 13, 2022, with a maturity date of October 13, 2024, and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances.
Slurry Clarifying Services Agreement
We executed a series of agreements with DK Trading & Supply, LLC (“DKT&S”) and Alon Refining Krotz Springs, whereby the Partnership will operate and maintain a facility, located within the Krotz Springs, Louisiana refinery, to process slurry for DKT&S. Using a process that incorporates horizontal and vertical centrifuges, we will remove metals, ash, and other solids from the slurry. The clarified product can then be sold to DKT&S or one of its affiliates. As consideration for the processing services, we will receive a fixed rate per barrel processing fee in addition to a margin-based payment. The Partnership and DKT&S have agreed to a minimum delivery commitment volume to be processed in the facility. The initial term of the agreement is for a period of three years, and thereafter, will continue a year-to-year basis unless canceled by either party.
Connectors Expansion Project
In connection with the Permian Gathering System Acquisition (formerly known as the Big Spring Gathering Acquisition), we agreed to expend $33.8 million to construct additional Receipt Points to our gathering pipeline at the request of Delek Holdings producers with which we have dedicated acreage agreements, to be owned and operated by the Partnership. Such Receipt Points, once completed, result in incremental pipeline revenues, subject to the minimum volume commitments and other terms of the throughput and deficiency commercial agreement with Delek Holdings, entered into in connection with this Acquisition. Additionally, both Delek Holdings and the Partnership continue to identify and secure dedicated acreage and producer agreements that require construction of receipt points and also provide the opportunity for additional pipeline volumes, but that are not required under the original commitment. Related to these incremental agreements, the Partnership has begun construction or otherwise separately committed to construct receipt points where the estimated remaining costs to complete totaled $25.3 million as of September 30, 2022, all of which is expected to be expended during 2022. See Note 13 for additional information.
Inflation Adjustments
On July 1, 2022, the tariffs on certain of our FERC regulated pipelines and the throughput fees and storage fees under certain of our agreements with Delek Holdings and third parties that are subject to adjustments using FERC indexing increased by approximately 8.7%, which was the amount of the change in the FERC oil pipeline index. The tariff on FERC regulated system acquired from 3 Bear has
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Management's Discussion and Analysis
historically been adjusted as of January 1 each year. Under certain of our agreements with Delek Holdings and third parties, the fees that are subject to adjustments using the consumer price index increased 7.1% and the fees that are subject to adjustments using the producer price index increased approximately 10.8%.
Commercial Agreements with Delek 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, 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 filed with the SEC on February 25, 2022 for a discussion of our material commercial agreements with Delek Holdings.
Other Transactions with Delek Holdings
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 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:
■volumes (including pipeline throughput and terminal volumes) | |||||
■contribution margin per barrel | |||||
■operating and maintenance expenses | |||||
■cost of materials and other | |||||
■EBITDA and distributable cash flow (as such terms are defined below). | |||||
| Volumes | ||
The amount of revenue we generate primarily depends on the volumes of crude oil, natural gas, natural gas liquids ("NGLs"), refined products, and produced water 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, natural gas, NGLs, 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:
•Utilization of our assets in excess of 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;
•our ability to successfully integrate the 3 Bear business and to successfully realize the anticipated benefits of the financial and operating synergies of the 3 Bear Acquisition, including our ability to serve existing customers and to identify and serve new customers in those related lines of business and geographic location; and
•our ability to make connections to third-party facilities and pipelines.
Contribution Margin per Barrel | ||
Because we do not allocate general and administrative expenses by segment, we measure the performance of our operating segments by the amount of contribution margin as generated in operations, except for the investments in pipeline joint ventures segment. Contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization.
For our wholesale marketing and terminalling segment, we also measure gross margin per barrel. Gross margin per barrel reflects the gross margin (net revenues less cost of materials and other) 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
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Management's Discussion and Analysis
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 refined products does not adjust as quickly as the purchase price. Our wholesale marketing gross margin may also be impacted by the fixed price ethanol agreements 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 include 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 include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business. 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 said 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 | ||
These 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; | (iii) the cost of pipeline capacity leased from any third parties; (iv) gains and losses related to our commodity hedging activities; and | |||||||
(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; | (v) all costs of natural gas purchases and other direct cost of product sales in our 3 Bear operations segment, including costs associate with condensate and skim oil, and to the extent applicable, the related transportation of such products. | |||||||
Financing | ||
The Partnership has declared a cash distribution to its unitholders at a distribution rate of $0.99 per unit for the quarter ended September 30, 2022 ($3.96 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of its available cash (as defined in the Partnership Agreement) to its unitholders quarterly. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our DKL Credit Facility and any potential future issuances of equity and debt securities. See Note 8 to the accompanying condensed consolidated financial statements for further discussion.
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 drilling 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 Longview, Texas area to Shreveport, Louisiana area; and
•The Red River Pipeline provides crude oil transportation and optionality from Cushing, 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.
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Management's Discussion and Analysis
Market Trends | ||
Fluctuations in crude oil, natural gas and NGLs prices and the prices of related refined and other hydrocarbon products impact operations in the midstream energy sector. For example, the prices of each of these products have the ability to influence drilling activity in many 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 direct impact on volumes transported through our gathering assets in the geologic basins in which we 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 pipelines and 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 risk 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 renew commercial agreements or result in liquidity or credit constraints that could impact our longer term relationship with them. That said, our recent acquisition of 3 Bear and 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 flows and to continue developing profitable growth projects that are needed to support future distribution growth.
Market Outlook for the Remainder of 2022
As we look to the remainder of the year, commodity markets are predicting a decline in demand as consumer purchasing continues to be eroded by inflation. Such conditions could spell a global economic downturn, which may upend markets in unexpected ways and make capital more difficult to come by. However, due to years of global underinvestment in oil production and the supply-constrained demand for oil and related commodity prices may continue to be strong, sitting at or near the higher end of the life-cycle. That said, domestic regulatory intervention could put pressure on profits of oil companies and may have unanticipated effects on the commodities markets and capital markets, as well as on exploration and production activities. We are continuously evaluating forward markets and have actively engaged cost and risk mitigation strategies to proactively take advantage of opportunities through disciplined capital allocation. We are committed to lowering our costs in all aspects of our business and challenging ourselves to achieve operating excellence by improving efficiency. We are continuously looking to improve our operating and general and administrative cost structure and are exploring a zero-based budgeting process for 2023. For these reasons, we continue to position the Company to expand our third-party revenue diversification as well as our midstream footprint and product offerings to take advantage of favorable volume environments while working to ensure steady-stream minimum volume income streams and cash flows that will provide sustainability in periods of market disruption. Additionally, we will continue to balance the cost of debt and cost of equity while continuing to exercise a longer-term sustainable view of capital allocation.
From a geographic positioning perspective, absent government intervention, industry analysts expect Brent crude oil, a global benchmark crude oil, to WTI differential to continue to be favorable for domestic exports throughout 2022, including the U.S. Gulf Coast region. Furthermore, while the likelihood of a favorable Midland-Cushing differential is constrained by overbuilt pipeline capacity, significant export developments and other factors could quickly shift differentials to be more favorable to our Permian-heavy gathering and logistics positioning.
The charts on the following page provide historical commodity pricing statistics for crude oil, refined product and natural gas.
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Management's Discussion and Analysis
Critical Accounting Estimates
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 estimates 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 estimates include estimates related to equity method investments impairment assessment. Additionally, we have identified the following critical accounting policy that impacts the nine months ended September 30, 2022:
Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and
32 | | ||
Management's Discussion and Analysis
apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
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 GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and 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. 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 provide information useful to investors in assessing our financial condition and results of operations and assists in evaluating our ongoing operating performance for current and comparative periods. 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 partnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other partnerships, thereby diminishing their utility. For a reconciliation of EBITDA and distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, please refer to "Results of Operations" below.
33 | | ||
Management's Discussion and Analysis
Summary of Financial and 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, 2022 and 2021, including a reconciliation of net income to EBITDA and net cash flow provided by operating activities to distributable cash flow.
Statement of Operations Data (in thousands, except unit and per unit amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Pipelines and transportation | $ | 85,278 | $ | 76,202 | $ | 241,689 | $ | 211,612 | |||||||||||||||
| Wholesale marketing and terminalling | 147,865 | 113,425 | 444,181 | 299,406 | |||||||||||||||||||
| 3 Bear | 60,882 | — | 81,486 | — | |||||||||||||||||||
| Total | 294,025 | 189,627 | 767,356 | 511,018 | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of materials and other | 177,740 | 105,129 | 480,295 | 274,995 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization) | 25,901 | 17,588 | 64,997 | 48,027 | |||||||||||||||||||
| General and administrative expenses | 11,959 | 5,898 | 30,826 | 15,933 | |||||||||||||||||||
| Depreciation and amortization | 19,540 | 10,156 | 43,297 | 30,862 | |||||||||||||||||||
| Other operating (income) expense, net | (132) | 273 | (120) | 54 | |||||||||||||||||||
| Total operating costs and expenses | 235,008 | 139,044 | 619,295 | 369,871 | |||||||||||||||||||
| Operating income | 59,017 | 50,583 | 148,061 | 141,147 | |||||||||||||||||||
| Interest expense, net | 22,559 | 14,529 | 53,621 | 35,924 | |||||||||||||||||||
| Income from equity method investments | (8,567) | (7,261) | (22,666) | (17,952) | |||||||||||||||||||
| Other income, net | (36) | (115) | (39) | (118) | |||||||||||||||||||
| Total non-operating costs and expenses | 13,956 | 7,153 | 30,916 | 17,854 | |||||||||||||||||||
| Income before income tax expense (benefit) | 45,061 | 43,430 | 117,145 | 123,293 | |||||||||||||||||||
| Income tax expense (benefit) | 387 | (194) | 793 | 156 | |||||||||||||||||||
| Net income attributable to partners | $ | 44,674 | $ | 43,624 | $ | 116,352 | $ | 123,137 | |||||||||||||||
EBITDA(1) | $ | 88,962 | $ | 69,917 | $ | 219,471 | $ | 195,487 | |||||||||||||||
| Net income per limited partner unit: | |||||||||||||||||||||||
| Basic | $ | 1.03 | $ | 1.00 | $ | 2.68 | $ | 2.83 | |||||||||||||||
| Diluted | $ | 1.03 | $ | 1.00 | $ | 2.67 | $ | 2.83 | |||||||||||||||
| Weighted average limited partner units outstanding: | |||||||||||||||||||||||
| Basic | 43,485,779 | 43,454,535 | 43,477,801 | 43,447,739 | |||||||||||||||||||
| Diluted | 43,515,960 | 43,468,289 | 43,499,837 | 43,457,857 | |||||||||||||||||||
(1) For a definition of EBITDA, please see "Non-GAAP Measures" above.
34 | | ||
Management's Discussion and Analysis
Non-GAAP Reconciliations
The following table provides a reconciliation of EBITDA and distributable cash flow to the most directly comparable U.S. GAAP measure, or net income and net cash from operating activities, respectively.
Reconciliation of net income to EBITDA (in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | 44,674 | $ | 43,624 | $ | 116,352 | $ | 123,137 | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Income tax expense (benefit) | 387 | (194) | 793 | 156 | |||||||||||||||||||
| Depreciation and amortization | 19,540 | 10,156 | 43,297 | 30,862 | |||||||||||||||||||
| Amortization of marketing contract intangible asset | 1,802 | 1,802 | 5,408 | 5,408 | |||||||||||||||||||
| Interest expense, net | 22,559 | 14,529 | 53,621 | 35,924 | |||||||||||||||||||
EBITDA (1) | $ | 88,962 | $ | 69,917 | $ | 219,471 | $ | 195,487 | |||||||||||||||
(1) For a definition of EBITDA, please see "Non-GAAP Measures" above.
Reconciliation of net cash from operating activities to distributable cash flow (in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 164,425 | $ | 74,752 | $ | 297,482 | $ | 222,276 | |||||||||||||||
| Changes in assets and liabilities | (94,450) | (16,256) | (115,358) | (56,898) | |||||||||||||||||||
| Distributions from equity method investments in investing activities | — | 845 | 1,737 | 6,245 | |||||||||||||||||||
| Non-cash lease expense | (2,100) | (2,460) | (13,584) | (6,967) | |||||||||||||||||||
Maintenance and regulatory capital expenditures (1) | (2,143) | (850) | (3,183) | (3,712) | |||||||||||||||||||
Reimbursement from Delek Holdings for capital expenditures (2) | 19 | 11 | 5 | 1,588 | |||||||||||||||||||
| Accretion of asset retirement obligations | (168) | (116) | (415) | (346) | |||||||||||||||||||
| Deferred income taxes | (76) | (138) | (76) | (203) | |||||||||||||||||||
| Gain (loss) on sale of assets | 132 | (273) | 120 | (54) | |||||||||||||||||||
Distributable cash flow (3) | $ | 65,639 | $ | 55,515 | $ | 166,728 | $ | 161,929 | |||||||||||||||
| (1) | 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. | ||||
| (2) | For the three and nine month periods ended September 30, 2022 and 2021, 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). | ||||
| (3) | For a definition of distributable cash flow, please see "Non-GAAP Measures" above. | ||||
35 | | ||
Management's Discussion and Analysis
Results of Operations
Consolidated Results of Operations — Comparison of the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021
The table below presents a summary of our consolidated results of operations. The discussion immediately following presents the consolidated results of operations (in thousands):
| Consolidated | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Revenues: | |||||||||||||||||||||||
| Affiliates | $ | 127,150 | $ | 123,519 | $ | 375,270 | $ | 308,435 | |||||||||||||||
| Third-Party | 166,875 | 66,108 | 392,086 | 202,583 | |||||||||||||||||||
| Total Consolidated | 294,025 | 189,627 | 767,356 | 511,018 | |||||||||||||||||||
| Cost of materials and other | 177,740 | 105,129 | 480,295 | 274,995 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 25,901 | 17,588 | 64,997 | 48,027 | |||||||||||||||||||
| Contribution margin | 90,384 | 66,910 | 222,064 | 187,996 | |||||||||||||||||||
| General and administrative expenses | 11,959 | 5,898 | 30,826 | 15,933 | |||||||||||||||||||
| Depreciation and amortization | 19,540 | 10,156 | 43,297 | 30,862 | |||||||||||||||||||
| Other operating (income) expense, net | (132) | 273 | (120) | 54 | |||||||||||||||||||
| Operating income | $ | 59,017 | $ | 50,583 | $ | 148,061 | $ | 141,147 | |||||||||||||||
Net Revenues
Q3 2022 vs. Q3 2021
Net revenues increased by $104.4 million, or 55.1%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increased revenues of $60.9 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; and
•increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel sold increased $0.57 per gallon and $1.44 per gallon, respectively; and
◦the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively.
•increases in pipeline throughputs, where the third quarter of 2021 was negatively impacted by the COVID-19 Pandemic.
YTD 2022 vs. YTD 2021
Net revenues increased by $256.3 million, or 50.2%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increased revenues of $81.5 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022;
•increases in the average sales prices per gallon of gasoline and diesel sold and volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel sold increased by $0.96 per gallon and $1.56 per gallon, respectively; and
◦the average volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons.
•increases in pipeline throughputs, where the nine months ended September 30, 2021 were negatively impacted by the COVID-19 Pandemic as well as severe weather events.
36 | | ||
Management's Discussion and Analysis
Cost of Materials and Other
Q3 2022 vs. Q3 2021
Cost of materials and other increased by $72.6 million, or 69.1%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increase in costs of materials and other totaling $35.1 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; and
•increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold increased $0.56 per gallon and $1.42 per gallon, respectively; and
◦the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively.
YTD 2022 vs. YTD 2021
Cost of materials and other increased by $205.3 million, or 74.7%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increase in costs of materials and other totaling $48.9 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; and
•increases in the average cost per gallon of gasoline and diesel sold and the volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold increased by $0.97 per gallon and $1.55 per gallon, respectively; and
◦the volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons.
Operating Expenses
Q3 2022 vs. Q3 2021
Operating expenses increased by $8.3 million, or 47.3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increase due to additional expenses associated with 3 Bear, which was acquired on June 1, 2022;
•increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended;
•increase in energy costs, due to higher natural gas prices; and
•increases in utilities, maintenance and other variable expenses due to higher throughput.
YTD 2022 vs. YTD 2021
Operating expenses increased by $17.0 million, or 35.3%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increase due to additional expenses associated with 3 Bear, which was acquired on June 1, 2022;
•increases in employee and outside service costs; and
•increases in variable expenses such as maintenance and materials costs due to higher throughput.
General and Administrative Expenses
Q3 2022 vs. Q3 2021
General and administrative expenses increased by $6.1 million, or 102.8%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by an increase in outside services costs primarily associated with the 3 Bear Acquisition.
YTD 2022 vs. YTD 2021
General and administrative expenses increased by $14.9 million, or 93.5%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by transaction costs incurred in connection with the 3 Bear Acquisition.
37 | | ||
Management's Discussion and Analysis
Depreciation and Amortization
Q3 2022 vs. Q3 2021
Depreciation and amortization increased by $9.4 million, or 92.4%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•the acquisition of property, plant and equipment and customer relationship intangible as part of the 3 Bear Acquisition.
YTD 2022 vs. YTD 2021
Depreciation and amortization increased by $12.4 million, or 40.3%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•the acquisition of property, plant and equipment and customer relationship intangible as part of the 3 Bear Acquisition.
Interest Expense
Q3 2022 vs. Q3 2021
During the third quarter of 2022 we incurred $22.6 million of interest expense, compared to $14.5 million during the third quarter of 2021, an increase of $8.1 million, or 56.0%. This increase was primarily driven by the following:
•increased borrowings under the DKL Credit Facility; and
•higher floating rate interests under the DKL Credit Facility.
YTD 2022 vs. YTD 2021
During the nine months ended September 30, 2022 we incurred $53.6 million of interest expense, compared to $35.9 million during the nine months ended September 30, 2021, an increase of $17.7 million, or 49.3%. This increase was primarily driven by the following:
•increased borrowings under the DKL Credit Facility to fund the 3 Bear Acquisition;
•higher fixed rate interest on the 2028 Notes compared to our floating interest rates under the DKL Credit Facility; and
•increase in floating interest rates applicable to the DKL Credit Facility.
Results from Equity Method Investments
Q3 2022 vs. Q3 2021
We recognized income of $8.6 million from equity method investments during the third quarter of 2022 compared to $7.3 million for the third quarter of 2021, an increase of $1.3 million, or 17.8%. This increase was primarily driven by the following:
•increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases.
YTD 2022 vs. YTD 2021
During the nine months ended September 30, 2022 we recognized income of $22.7 million from equity method investments, compared to $18.0 million for the nine months ended September 30, 2021, an increase of $4.7 million, or 26.1%. This increase was primarily driven by the following:
•increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases; and
•partially offset by decrease in income from Rio equity method investment.
38 | | ||
Management's Discussion and Analysis
Operating Segments
Our business consists of four reportable segments: (i) pipelines and transportation; (ii) wholesale marketing and terminalling; (iii) 3 Bear; and (iv) investment in pipeline joint ventures.
We review operating results in the following two reportable segments on a disaggregated basis: (i) pipelines and transportation and (ii) wholesale marketing and terminalling. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. The 3 Bear operations segment was added as a new reportable segment in the second quarter of 2022 in connection with the acquisition of this business on June 1, 2022 and includes the results of operations and cash flows of 3 Bear beginning on June 1, 2022. The Partnership is in the process of identifying its long-term plan for integrating 3 Bear into its existing segments and as a result, the Partnership’s operating segments may change in the near future. Management measures the operating performance of these reportable segments based on the segment contribution margin. Segment reporting is discussed in more detail in Note 11 to our accompanying condensed consolidated financial statements.
Pipelines and Transportation Segment
Our pipelines and transportation 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:
•the pipeline assets used to support Delek Holdings' El Dorado refinery (the "El Dorado Assets")
•the gathering system that supports transportation of crude oil to the El Dorado Refinery (the "El Dorado Gathering System")
•the Paline Pipeline System
•the East Texas Crude Logistics System
•the Tyler-Big Sandy Pipeline
•the El Dorado Tank Assets and El Dorado Rail Offloading Racks
•the Tyler Tank Assets and Tyler Crude Tank
•the Greenville-Mount Pleasant Pipeline and Greenville Storage Facility
•refined product pipeline capacity leased from Enterprise TE Products Pipeline Company ("Enterprise") that runs from El Dorado, Arkansas to our Memphis terminal and the Big Spring Pipeline
•pipelines and storage assets acquired in the Big Spring Logistics Assets Acquisition
•assets acquired in the Permian Gathering Assets Acquisition
•assets acquired in the Trucking Assets Acquisition
•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 pipelines and transportation segment for the three and nine months ended September 30, 2022 and 2021:
| Pipelines and Transportation | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Revenues: | |||||||||||||||||||||||
| Affiliates | $ | 79,395 | $ | 70,879 | $ | 225,711 | $ | 199,591 | |||||||||||||||
| Third-Party | 5,883 | 5,323 | 15,978 | 12,021 | |||||||||||||||||||
| Total Pipelines and Transportation | 85,278 | 76,202 | 241,689 | 211,612 | |||||||||||||||||||
| Cost of materials and other | 20,004 | 15,170 | 58,272 | 42,595 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 11,292 | 13,680 | 37,789 | 34,710 | |||||||||||||||||||
| Segment contribution margin | $ | 53,982 | $ | 47,352 | $ | 145,628 | $ | 134,307 | |||||||||||||||
| Throughputs (average bpd) | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| El Dorado Assets: | |||||||||||||||||||||||
Crude pipelines (non-gathered) | 87,653 | 81,929 | 81,795 | 60,344 | |||||||||||||||||||
Refined products pipelines to Enterprise Systems | 65,761 | 62,263 | 63,391 | 42,733 | |||||||||||||||||||
| El Dorado Gathering System | 14,354 | 14,086 | 16,150 | 14,056 | |||||||||||||||||||
| East Texas Crude Logistics System | 23,960 | 18,644 | 20,015 | 24,045 | |||||||||||||||||||
Permian Gathering System (1) | 121,304 | 84,325 | 107,699 | 79,251 | |||||||||||||||||||
| Plains Connection System | 184,254 | 131,571 | 166,864 | 120,905 | |||||||||||||||||||
| Trucking Assets | 15,763 | 11,450 | 13,606 | 10,655 | |||||||||||||||||||
(1) Formerly known as the Big Spring Gathering System. Excludes volumes that are being temporarily transported via trucks while connectors are under construction.
39 | | ||
Management's Discussion and Analysis
Comparison of the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021
Net Revenues
Q3 2022 vs. Q3 2021
Net revenues for the pipelines and transportation segment increased by $9.1 million, or 11.9%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increases in throughputs, where the third quarter of 2021 was negatively impacted by the COVID-19 Pandemic as well as severe weather events impacting Delek Holdings.
YTD 2022 vs. YTD 2021
Net revenues for the pipelines and transportation segment increased by $30.1 million, or 14.2%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increased revenues associated with the Slurry Clarifying Services Agreement, which was effective January 1, 2022;
•increases in throughputs due to the impact of the severe freezing conditions that affected most of the regions where we operate and increases in throughputs at the Paline Pipeline due to scheduled pipeline maintenance during nine months ended September 30, 2021 compared to the nine months ended September 30, 2022; and
•increased revenues at our BSR Crude Pipeline, as a result of Luther Station becoming operational in 2021.
Cost of Materials and Other
Q3 2022 vs. Q3 2021
Cost of materials and other for the pipelines and transportation segment increased by $4.8 million, or 31.9%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increases in transportation costs related to our trucking assets, including driver wages and benefits and fuel expenses proportionate to increase in fees, insurance, supplies and maintenance expenses.
YTD 2022 vs. YTD 2021
Cost of materials and other for the pipelines and transportation segment increased by $15.7 million, or 36.8%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increases in driver wages and benefits and fuel expense proportionate to increases in fees, insurance, supplies and maintenance expenses.
Operating Expenses
Q3 2022 vs. Q3 2021
Operating expenses for the pipelines and transportation segment decreased by $2.4 million, or 17.5%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increase in employee and outside service costs compared to same period prior year when cost cutting measures were implemented to respond to the COVID-19 Pandemic including delaying non-essential projects;
•increase in energy costs due to higher natural gas prices; and
•increase in utilities and other variable expenses due to higher throughputs.
YTD 2022 vs. YTD 2021
Operating expenses for the pipelines and transportation segment increased by $3.1 million, or 8.9%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increases in employee and outside service costs.
40 | | ||
Management's Discussion and Analysis
Contribution Margin
Q3 2022 vs. Q3 2021
Contribution margin for the pipelines and transportation segment increased by $6.6 million, or 14.0%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increases in revenue due to higher throughput volumes as explained above; and
•partially offset by increases in operating expenses.
YTD 2022 vs. YTD 2021
Contribution margin for the pipelines and transportation segment increased by $11.3 million, or 8.4%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increases in revenue due to higher throughput volumes as explained above; and
•partially offset by increases in operating expenses.
41 | | ||
Management's Discussion and Analysis
Wholesale Marketing and Terminalling Segment
We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties.
The 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, 2022 and 2021:
| Wholesale Marketing and Terminalling | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Revenues: | |||||||||||||||||||||||
| Affiliates | $ | 45,162 | $ | 52,640 | $ | 144,004 | $ | 108,844 | |||||||||||||||
| Third-Party | 102,703 | 60,785 | 300,177 | 190,562 | |||||||||||||||||||
| Total Wholesale Marketing and Terminalling | 147,865 | 113,425 | 444,181 | 299,406 | |||||||||||||||||||
| Cost of materials and other | 122,614 | 89,959 | 373,126 | 232,400 | |||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 6,952 | 3,908 | 17,397 | 13,317 | |||||||||||||||||||
| Segment contribution margin | $ | 18,299 | $ | 19,558 | $ | 53,658 | $ | 53,689 | |||||||||||||||
| Operating Information | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
East Texas - Tyler Refinery sales volumes (average bpd) (1) | 65,396 | 71,847 | 66,473 | 72,791 | |||||||||||||||||||
| Big Spring marketing throughputs (average bpd) | 74,238 | 81,880 | 76,135 | 76,680 | |||||||||||||||||||
| West Texas marketing throughputs (average bpd) | 10,082 | 10,560 | 10,023 | 10,033 | |||||||||||||||||||
| West Texas gross margin per barrel | $ | 4.23 | $ | 3.33 | $ | 3.84 | $ | 3.64 | |||||||||||||||
Terminalling throughputs (average bpd) (2) | 142,003 | 144,355 | 138,558 | 142,959 | |||||||||||||||||||
(1) | Excludes jet fuel and petroleum coke. | ||||
(2) | Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville, Tennessee terminals. | ||||
Comparison of the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021
Net Revenues
Q3 2022 vs. Q3 2021
Net revenues for the wholesale marketing and terminalling segment increased by $34.4 million, or 30.4%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel sold increased $0.57 per gallon and $1.44 per gallon, respectively; and
◦the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively.
YTD 2022 vs. YTD 2021
Net revenues for the wholesale marketing and terminalling segment increased by $144.8 million, or 48.4%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increases in the average sales prices per gallon of gasoline and diesel sold and volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations:
◦the average sales prices per gallon of gasoline and diesel sold increased by $0.96 per gallon and $1.56 per gallon, respectively; and
42 | | ||
Management's Discussion and Analysis
◦the average volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons.
The following charts show summaries of the average sales prices per gallon of gasoline and diesel and refined products volume impacting our West Texas operations.
Cost of Materials and Other
Q3 2022 vs. Q3 2021
Cost of materials and other for our wholesale marketing and terminalling segment increased by $32.7 million, or 36.3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold increased $0.56 per gallon and $1.42 per gallon, respectively; and
◦the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively.
YTD 2022 vs. YTD 2021
Cost of materials and other for our wholesale marketing and terminalling segment increased by $140.7 million, or 60.6%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
43 | | ||
Management's Discussion and Analysis
•increases in the average cost per gallon of gasoline and diesel sold and the volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold increased by $0.97 per gallon and $1.55 per gallon, respectively; and
◦the volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons.
The following chart shows a summary of the average prices per gallon of gasoline and diesel sold in our West Texas operations for the three and nine months ended September 30, 2022 and 2021. Refer to the Refined Products Volume chart above for a summary of volumes impacting our West Texas operations.
Operating Expenses
Q3 2022 vs. Q3 2021
Operating expenses for our wholesale marketing and terminalling segment increased by $3.0 million, or 77.9% in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following:
•increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended;
•increase in energy costs, due to higher natural gas prices; and
•increases in utilities, maintenance and other variable expenses due to higher throughput.
YTD 2022 vs. YTD 2021
Operating expenses for our wholesale marketing and terminalling segment increased by $4.1 million, or 30.6%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following:
•increases in employee and outside service costs; and
•increases in variable expenses such as maintenance and materials costs due to higher throughput.
Contribution Margin
Q3 2022 vs. Q3 2021
Contribution margin for the wholesale marketing and terminalling segment decreased by $1.3 million, or 6.4%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by an increase in cost of materials and other due to increases in average cost per gallon of diesel and gasoline sold as described above. Such decreases were offset by an increase in revenue due to increases in average price per gallon of diesel and gasoline as described above.
YTD 2022 vs. YTD 2021
The change in contribution margin for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was immaterial.
44 | | ||
Management's Discussion and Analysis
3 Bear Operations
| 3 Bear Operations | |||||||||||
| Three Months Ended September 30, 2022 | Period from June 1 through September 30, 2022 | ||||||||||
| Net Revenues: | |||||||||||
| Affiliates | $ | 2,593 | $ | 5,555 | |||||||
| Third-Party | 58,289 | 75,931 | |||||||||
| Total net revenues | 60,882 | 81,486 | |||||||||
| Cost of materials and other | 35,122 | 48,897 | |||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 7,657 | 9,811 | |||||||||
| Segment contribution margin | $ | 18,103 | $ | 22,778 | |||||||
| Volumes | |||||||||||
| Three Months Ended September 30, 2022 | Period from June 1 through September 30, 2022 | ||||||||||
Natural Gas Gathering and Processing (Mcfd(1)) | 64,429 | 115,721 | |||||||||
Crude Oil Gathering (bpd(2)) | 86,483 | 164,891 | |||||||||
Water Disposal and Recycling (bpd(2)) | 69,411 | 125,127 | |||||||||
(1) Mcfd - average thousand cubic feet per day.
(2) bpd - average barrels per day.
The 3 Bear operations segment includes the results of operations associated with crude oil and natural gas gathering, processing and transportation operations, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico, since the Acquisition Date, or June 1, 2022. As a result, there is no comparative financial and operating data related to the three months and nine months ended September 30, 2021, and the Partnership's consolidated results of operations for the three and nine months ended September 30, 2022 only reflect segment operations since June 1, 2022.
The revenues and contribution margin for the period from the Acquisition Date through September 30, 2022 are largely driven by production volumes and gathering activities, which are a function of both producer activities as well as our capacity, subject to the dedicated acreage agreements and the portions of acreage which have been developed, the extent to which connection points and interconnects have been brought on-line, and the extent to which maintenance or other planned or unplanned operational disruptions may occur. While the strong demand for crude oil and associated products have led to strong levels of production, we performed certain turnaround activities on our Libby plant associated with the expansion project during the month ended June 30, 2022 which reduced volumes of gathered natural gas and related wastewater during the month, and likewise reduced related product sales volumes, though favorable prices on condensate and skim oil largely offset product sales volume decreases. While periodic maintenance or other temporary disruptions may occur, the specific maintenance activities impacting these results were completed during June.
See Note 2 for information related to the acquisition and for pro forma financials for the three and nine months ended September 30, 2022. Refer to Consolidated Results of Operations above for details and discussion of the 3 Bear operations segment for the quarter ended September 30, 2022.
Investments in Pipeline Joint Ventures Segment
The investments in pipeline joint ventures segment relates to investments in entities for which we share joint control that support the Delek Holdings operations in terms of offering connection to takeaway pipelines, alternative crude supply sources and flow of high quality crude oil to the Delek Holdings refining system. As a result, Delek Holdings is a major shipper and customer on certain of the joint venture pipelines, with minimum volume commitment ("MVC") agreements, which cushion the joint venture entities during periods of low activity as recently experienced due to the impact of COVID-19 Pandemic and impact of the extreme weather events. The other joint venture owners are usually major shippers on the pipelines resulting in a majority of the revenue of the joint venture entities coming from MVC agreements with related entities.
Investments in pipeline joint ventures segment include the Partnership's joint ventures investments described in Note 10 to our accompanying condensed consolidated financial statements.
45 | | ||
Management's Discussion and Analysis
Liquidity and Capital Resources
Sources of Capital
We consider the following when assessing our liquidity 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 September 30, 2022 our total liquidity amounted to $208.0 million, comprised of $193.1 million in unused credit commitments under the DKL Credit Facility and $14.9 million in cash and cash equivalents, which represented an increase of $75.1 million from June 30, 2022. Historically, we have generated adequate cash 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. 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 the current COVID-19 Pandemic and 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 COVID-19 Pandemic or 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 or uncertainty created by the COVID-19 Pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our debt agreements. Management continues to actively respond to the impact of the COVID-19 Pandemic to enhance our liquidity position. Such actions include seeking alternative financing solutions and enacting cost reduction measures. Refer to the Business Overview section of this MD&A for a complete discussion of the uncertainties identified by management and the actions taken to respond to the COVID-19 Pandemic.
We believe we were in compliance with the covenants in all our debt facilities as of September 30, 2022. After considering the potential effect of the uncertainty created by the COVID-19 Pandemic on our operations, we currently expect to remain in compliance with our debt covenants. See Note 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness.
Amendments to DKL Credit Facility
In May 2022, we entered into Second and Third Amendments to our Third Amended and Restated Credit Agreement, which provided for the transition from a LIBOR benchmark to a term Secured Overnight Financing Rate benchmark (“Term SOFR”) and also amended certain financial covenant calculations in order to provide flexibility in connection with the timing of the 3 Bear Acquisition. Additionally, on May 26, 2022, we entered into a Fourth Amendment to Third Amended and Restated Credit Agreement to, among other things, increase the U.S. Revolving Credit Commitments (as defined in the Credit Agreement) by an amount equal to $150 million under an existing accordion feature, for an aggregate amount of commitments under our Existing Credit Agreement of $1 billion. The exercise of the accordion feature gave us the flexibility to utilize borrowings under the Credit Agreement to help fund the acquisition of 3 Bear while continuing to maintain sufficient availability to continue to effectively manage our working capital needs and liquidity risk, and to evaluate longer term capitalization strategies.
On October 13, 2022, we entered into a Fourth Amended and Restated Credit Agreement with Fifth Third, as administrative agent and a syndicate of lenders (the "2022 DKL Credit Facility"). The DKL Credit Facility, among other things, (i) increased total aggregate commitments to $1.2 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and $25.0 million for swing line loans (the “DKL Revolving Facility”) with an extended maturity date of October 13, 2027, and (B) a new senior secured term loan in the original principal amount of $300.0 million (the “DKL Term Facility”), (ii) reset the accordion feature under the DKL Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of the Partnership and one or more existing or new lenders and
46 | | ||
Management's Discussion and Analysis
(ii) provided for the DKL Term Facility be drawn in full on October 13, 2022, with a maturity date of October 13, 2024, and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances.
Cash Distributions
On October 25, 2022, the board of directors of our general partner declared a distribution of $0.99 per common unit (the "Distribution"), which equates to approximately $43.1 million per quarter, based on the number of common units expected to be outstanding as of November 4, 2022. The Distribution is expected to be paid on November 10, 2022 to common unitholders of record on November 4, 2022 and represents a 4.2% increase over the third quarter 2021 distribution. We have set a distribution growth guidance of 5% for the full year 2022. This increase in the distribution is consistent with our intent to maintain an attractive distribution growth profile over the long term. Although our Partnership Agreement requires that we distribute all of our available cash each quarter, we do not otherwise have a legal obligation to distribute any particular amount per common unit.
The table below summarizes the quarterly distributions related to 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, 2021 | $ | 0.920 | $ | 3.680 | $ | 39,968 | May 14, 2021 | May 10, 2021 | ||||||||||||||||||||||||
| June 30, 2021 | $ | 0.940 | $ | 3.760 | $ | 40,846 | August 11, 2021 | August 5, 2021 | ||||||||||||||||||||||||
| September 30, 2021 | $ | 0.950 | $ | 3.800 | $ | 41,286 | November 10, 2021 | November 5, 2021 | ||||||||||||||||||||||||
| December 31, 2021 | $ | 0.975 | $ | 3.900 | $ | 42,384 | February 8, 2022 | February 1, 2022 | ||||||||||||||||||||||||
| March 31, 2022 | $ | 0.980 | $ | 3.920 | $ | 42,604 | May 12, 2022 | May 5, 2022 | ||||||||||||||||||||||||
| June 30, 2022 | $ | 0.985 | $ | 3.940 | $ | 42,832 | August 11, 2022 | August 4, 2022 | ||||||||||||||||||||||||
| September 30, 2022 | $ | 0.990 | $ | 3.960 | $ | 43,057 | November 10, 2022 (1) | November 4, 2022 | ||||||||||||||||||||||||
(1) Expected date of distribution.
Cash Flows
The following table sets forth a summary of our consolidated cash flows for the nine months ended September 30, 2022 and 2021 (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash provided by operating activities | $ | 297,482 | $ | 222,276 | |||||||
| Net cash used in investing activities | (705,087) | (7,971) | |||||||||
| Net cash provided by (used) in financing activities | 418,258 | (213,684) | |||||||||
| Net increase in cash and cash equivalents | $ | 10,653 | $ | 621 | |||||||
Operating Activities
Net cash provided by operating activities was $297.5 million for the nine months ended September 30, 2022, compared to $222.3 million for the nine months ended September 30, 2021, resulting in a $75.2 million increase in net cash provided by operating activities. The cash receipts from customer activities increased by $250.1 million and cash payments to suppliers and for allocations from Delek Holdings for salaries increased by $164.3 million. In addition, cash dividends received from equity method investments increased by $8.1 million and cash paid for debt interest increased by $18.7 million.
Investing Activities
Net cash used in investing activities increased by $697.1 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The 3 Bear Acquisition, which closed on June 1, 2022, was partially financed through borrowings under the DKL Credit Facility amounting to $625.4 million, which was recorded in investing activities. There were no acquisitions during the nine months ended September 30, 2021. In addition, there were additions to property, plant and equipment amounting to $76.9 million, purchases of intangible assets amounting to $4.7 million and distributions from equity method investments amounting $1.7 million during the nine months ended September 30, 2022 compared to additions to property, plant and equipment amounting to $12.4 million, purchases of intangible assets amounting to $0.7 million and distributions from equity method investments amounting to $6.2 million during the nine months ended September 30, 2021. Additionally, there were no contributions to our equity method investments during the nine months ended September 30, 2022 compared to $1.4 million during the nine months ended September 30, 2021.
47 | | ||
Management's Discussion and Analysis
Financing Activities
Net cash provided by (used) in financing activities amounted to $418.3 million during the nine months ended September 30, 2022 compared to $213.7 million net cash provided by financing activities during the nine months ended September 30, 2021. We had net borrowings of $548.9 million under the revolving credit facility during the nine months ended September 30, 2022, compared to net repayments of $485.7 million under the revolving credit facility during the nine months ended September 30, 2021. We had no proceeds from senior notes during the nine months ended September 30, 2022, compared to proceeds of $400.0 million during the nine months ended September 30, 2021. We paid quarterly cash distributions totaling $128.0 million during the nine months ended September 30, 2022, compared to quarterly cash distributions totaling $120.4 million during the nine months ended September 30, 2021. In addition, we made payments on finance lease liability in the amount of $1.9 million during the nine months ended September 30, 2022, compared to payments on finance lease liability in the amount of $1.4 million during the nine months ended September 30, 2021.
Debt Overview
As of September 30, 2022, we had total indebtedness of $1,448.8 million comprised of $806.4 million under the amended and restated senior secured revolving agreement (the "DKL Credit Facility"), net of deferred financing costs, $247.4 million of 6.75% senior notes due 2025 (the “2025 Notes”), net of deferred financing costs and original issue discount, and $395.0 million of the 2028 Notes, net of deferred financing costs. Deferred financing costs on the DKL Credit Facility amounted to $0.5 million. Deferred financing costs and original issue discount on the 2025 Notes amounted to $2.0 million and $0.6 million, respectively. Deferred financing costs on the 2028 Notes amounted to $5.0 million. The increase of $549.8 million in our long-term debt balance compared to the balance at December 31, 2021 resulted primarily from the borrowings under the DKL Credit Facility during the nine months ended September 30, 2022:
•An aggregate principal amount of $806.4 million under the DKL Credit Facility ("revolving credit facility"), due on September 28, 2023, with an average borrowing rate of 5.64%, which was amended and restated on October 13, 2022. See Note 15 to our accompanying condensed consolidated financial statements for further information.
•An aggregate principal amount of $247.4 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 $395.0 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 covenants in all of our debt facilities as of September 30, 2022. See Note 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness.
Agreements Governing Certain Indebtedness of Delek Holdings
Although we are not contractually bound by and are not liable for Delek Holdings' debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, certain of Delek Holdings' credit arrangements require that Delek Holdings meet certain minimum covenant levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders' equity to adjusted total assets. Delek Holdings, due to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek Holdings to violate these and any other covenants in its credit arrangements or otherwise be in default under any of its credit arrangements. As a result we cannot assure you that such covenants will not impact our ability to use the full capacity under our revolving credit facility in the future. Delek Holdings' level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek Holdings' level of indebtedness, financial performance and credit ratings.
Equity Units Overview
On April 14, 2022, we filed a shelf registration statement with the SEC, which was declared effective on April 29, 2022, which provides the Partnership the ability to offer up to $200.0 million of our common limited partner units from time to time and through one or more methods of distribution, subject to market conditions and our capital needs.
Capital Spending
A key component of our long-term strategy is our capital expenditure program, which includes strategic consideration and planning for the timing and extent of regulatory maintenance, sustaining maintenance, and discretionary capital projects. These categories are described below:
•Regulatory maintenance projects in the pipelines and transportation segment are those expenditures expected to be spent on certain of our pipelines to maintain their operational integrity pursuant to applicable environmental and other regulatory requirements. Regulatory projects in the wholesale marketing and terminalling segment 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.
48 | | ||
Management's Discussion and Analysis
•Sustaining maintenance capital expenditures represent capitalizable expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets made to maintain our long-term operating income or operating capacity. Examples of maintenance 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 3 to our accompanying condensed consolidated financial statements). When not provided for under reimbursement agreements, such activities are generally funded by cash generated from operations.
•Discretionary 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 nine months ended September 30, 2022 and planned capital expenditures for the full year 2022 by segment and by major category (in thousands):
| Full Year 2022 Forecast | Nine Months Ended September 30, 2022 | ||||||||||
| Pipelines and Transportation | |||||||||||
| Regulatory | $ | 3,733 | $ | 1,945 | |||||||
| Maintenance | 1,431 | 371 | |||||||||
Discretionary (1) | 84,004 | 48,477 | |||||||||
| Pipelines and transportation segment total | $ | 89,168 | $ | 50,793 | |||||||
| Wholesale Marketing and Terminalling | |||||||||||
| Regulatory | $ | 909 | $ | 907 | |||||||
| Maintenance | 315 | — | |||||||||
Discretionary | 624 | 430 | |||||||||
| Wholesale marketing and terminalling segment total | $ | 1,848 | $ | 1,337 | |||||||
| 3 Bear | |||||||||||
| Regulatory | $ | — | $ | — | |||||||
| Maintenance | — | 753 | |||||||||
Discretionary (2) | 25,862 | 14,889 | |||||||||
| 3 Bear operations segment total | $ | 25,862 | $ | 15,642 | |||||||
Total capital spending (3) (4) | $ | 116,878 | $ | 67,772 | |||||||
(1) The majority of the $84.0 million for discretionary projects in the pipelines and transportation segment relates to current and forecasted remaining current year spend on development of our DPG Connectors Expansion Project, as discussed in the 2022 Strategic Developments section of Management Discussion and Analysis. Upon completion, these expenditures are expected to generate incremental cash flows under related dedicated acreage and throughput agreements. These capital expenditures are expected to be funded with cash from operations or borrowings under existing credit facilities and potential future issuances of equity and debt securities. The current year spend excludes approximately $12.0 million of capital expenditures that were prepaid in the fourth quarter 2021, but which assets were received and placed in service in 2022.
(2) The majority of the $25.9 million budgeted for discretionary projects in the 3 Bear operations segment is expected to be spent on expansions and connections of the assets acquired in the 3 Bear Acquisition. Upon completion, these expenditures are expected to generate incremental cash flows. These capital expenditures are expected to be funded with cash from operations or borrowings under existing credit facilities and potential future issuances of equity and debt securities.
(3) There were no capital contributions to equity method investments for the nine months ended September 30, 2022.
(4) The current year spend excludes approximately $8.1 million for equipment purchased during the nine months ended September 30, 2022 to be used in future expansion projects.
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.
49 | | ||
Management's Discussion and Analysis
Long-term Cash Requirements
Information regarding our known contractual obligations of the types described below, as of September 30, 2022, is set forth in the following table (in thousands):
| <1 Year | 1-3 Years | 3-5 Years | >5 Years | Total | |||||||||||||||||||||||||
Long term debt and notes payable | $ | 806,900 | $ | 250,000 | $ | — | $ | 400,000 | $ | 1,456,900 | |||||||||||||||||||
Interest (1) | 91,231 | 90,750 | 57,000 | 28,500 | 267,481 | ||||||||||||||||||||||||
| Finance lease obligation | 2,968 | 1,668 | — | — | 4,636 | ||||||||||||||||||||||||
Operating lease commitments (2) | 8,697 | 11,556 | 1,540 | 1,218 | 23,011 | ||||||||||||||||||||||||
| Total | $ | 909,796 | $ | 353,974 | $ | 58,540 | $ | 429,718 | $ | 1,752,028 | |||||||||||||||||||
(1) Includes expected interest payments on debt balances outstanding under the DKL Credit Facility and the 2025 and 2028 Notes at September 30, 2022. Floating interest rate debt is calculated using rates in effect on September 30, 2022.
(2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of September 30, 2022.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q.
50 | | ||
Management's Discussion and Analysis
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Impact of Changing Prices
Our revenues and cash flows, as well as estimates of future cash flows, are sensitive to changes in commodity prices. Shifts in the cost of crude oil, natural gas, NGLs, refined products and ethanol and related selling prices of these products can generate changes in our operating margins.
Interest Rate Risk
Debt that we incur under the DKL Credit Facility bears interest at floating rates and will expose us to interest rate risk. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt outstanding as of September 30, 2022 would be to change interest expense by approximately $8.1 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our 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 management, including the Principal Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the reporting period. Based on that evaluation, the Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as 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 consolidated financial statements as of September 30, 2022. As permitted by SEC guidance for newly acquired businesses, management’s assessment of the our disclosure controls and procedures did not include an assessment of those disclosure controls and procedures of 3 Bear that are subsumed by internal control over financial reporting. 3 Bear accounted for approximately 40.8% of the total assets of the Partnership as of September 30, 2022 and approximately 10.6% of total revenues of the Partnership for the six months ended September 30, 2022. Other than our internal controls for 3 Bear, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the third quarter of 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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Other Information
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including, environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations. See Note 13 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 2021 Annual Report on Form 10-K and the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, except as set forth below:
We may be unsuccessful in integrating the operations of the assets we have acquired or may acquire with our operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.
From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of completed or future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them, and new geographic areas and the diversion of management's attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.
On April 8, 2022, DKL Delaware Gathering, LLC (the “Purchaser”), a subsidiary of the Partnership, entered into a Membership Interest Purchase Agreement with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (the “3 Bear Acquisition”), related to the Seller’s crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico (the “3 Bear Purchase Agreement”). The Partnership also entered into a guaranty agreement with the Seller in order to guaranty the payment obligations of the Purchaser under the Purchase Agreement. These transactions were completed on June 1, 2022.
The 3 Bear Acquisition will require the management to devote significant attention and resources to integrating the 3 Bear business with our business. Potential difficulties that may be encountered in the integration process include, among others:
•the inability to successfully integrate the 3 Bear business into our business in a manner that permits us to achieve the revenue and cost savings that we announced as anticipated from the acquisition;
•complexities associated with managing the larger, integrated business;
•potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the 3 Bear Acquisition;
•integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and services;
•loss of key employees;
•integrating relationships with customers, vendors and business partners;
•performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the acquisition and integration of 3 Bear’s operations into the Partnership; and
•the disruption or loss in momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies.
Delays or difficulties in the integration process could adversely affect our business, financial results, financial condition and common unit price. Even if we are able to integrate our business operations successfully, there can be no assurance that the integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that we currently expect or have communicated from this integration or that these benefits will be achieved within the anticipated timeframe.
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The Russia-Ukraine War, and events occurring in response thereto, including sanctions brought by the United States and other countries against Russia and any expansion of hostilities, may have an adverse impact on our business, our future results of operations, and our overall financial performance.
The effects of the military conflict that began with the Russian invasion of Ukraine in February 2022 on our business, financial condition, and results of operations are impossible to predict. Sanctions brought by the United States and other countries against Russia or any of its allies, any escalation of the conflict, including the regional or global expansion of hostilities, and other future developments could significantly affect the global economy, lead to market volatility and supply chain disruptions, have an adverse impact on energy prices, including prices for crude oil, other feedstocks, and refined petroleum products, have an adverse impact on the margins from our petroleum product marketing operations, and have a material adverse effect on our business, financial condition, and results of operations.
The physical effects of climate change and severe weather present risks to our operations.
The potential physical effects of climate change and severe weather on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. We have systems in place to manage potential acute physical risks, including those that may be caused by climate change, but if any such events were to occur, they could have an adverse effect on our assets and operations. Examples of potential physical risks include floods, hurricane-force winds, wildfires, freezing temperatures and snowstorms. We have incurred, and will continue to incur, costs to protect our assets from physical risks, and to employ processes, to the extent available, to mitigate such risks.
Any extreme weather events may disrupt the ability to operate our facilities or to transport crude oil, refined petroleum or petrochemical and plastics products in these areas. Extended periods of such disruption could have an adverse effect on our results of operations. We could also incur substantial costs to prevent or repair damage to these facilities. Finally, depending on the severity and duration of any extreme weather events or climate conditions, our operations may need to be modified and material costs incurred, which could materially and adversely affect our business, financial condition and results of operations.
There are certain environmental hazards and risks inherent in our operations that could adversely affect those operations and our financial results.
The operation of refineries, pipelines, terminals and vessels is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or hazardous substances. If any of these events had previously occurred or occurs in the future in connection with any of our refineries, pipelines or refined petroleum products terminals, or in connection with any facilities that receive our wastes or byproducts for treatment or disposal, other than events for which we are indemnified, we could be liable for all costs and penalties associated with their remediation under federal, state, local and international environmental laws or common law, and could be liable for property damage to third parties caused by contamination from releases and spills.
ITEM 5. OTHER INFORMATION
None.
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Exhibits
ITEM 6. EXHIBITS
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| 101 | The following materials from Delek Logistics Partners, LP's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited), (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (Unaudited), (iii) Condensed Consolidated Statement of Partners' Equity (Deficit) for the three and nine months ended September 30, 2022 and 2021 (Unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited), and (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 September 30, 2022 has been formatted in Inline XBRL. | ||||||||||
| # | Filed herewith | |||||||
| ## | Furnished herewith | |||||||
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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 | |||||
| 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: November 8, 2022
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