UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended September 30, 2018 | ||||
or
o | 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
(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)
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 þ No o
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 þ No o
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 o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o | ||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At November 2, 2018, there were 24,395,183 common limited partner units and 497,861 general partner units outstanding.
Table of Contents
Delek Logistics Partners, LP
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2018
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, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable | ||||||||
Accounts receivable from related parties | ||||||||
Inventory | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property, plant and equipment: | ||||||||
Property, plant and equipment | ||||||||
Less: accumulated depreciation | ( | ) | ( | ) | ||||
Property, plant and equipment, net | ||||||||
Equity method investments | ||||||||
Goodwill | ||||||||
Intangible assets, net | ||||||||
Other non-current assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Excise and other taxes payable | ||||||||
Tank inspection liabilities | ||||||||
Pipeline release liabilities | ||||||||
Accrued expenses and other current liabilities | ||||||||
Total current liabilities | ||||||||
Non-current liabilities: | ||||||||
Long-term debt | ||||||||
Asset retirement obligations | ||||||||
Other non-current liabilities | ||||||||
Total non-current liabilities | ||||||||
Deficit: | ||||||||
Common unitholders - public; 9,101,137 units issued and outstanding at September 30, 2018 (9,088,587 at December 31, 2017) | ||||||||
Common unitholders - Delek; 15,294,046 units issued and outstanding at September 30, 2018 (15,294,046 at December 31, 2017) | ( | ) | ( | ) | ||||
General partner - 497,861 units issued and outstanding at September 30, 2018 (497,604 at December 31, 2017) | ( | ) | ( | ) | ||||
Total deficit | ( | ) | ( | ) | ||||
Total liabilities and deficit | $ | $ | ||||||
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, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net revenues: | ||||||||||||||||
Affiliates | $ | $ | $ | $ | ||||||||||||
Third party | ||||||||||||||||
Net revenues | ||||||||||||||||
Cost of sales: | ||||||||||||||||
Cost of materials and other | ||||||||||||||||
Operating expenses (excluding depreciation and amortization presented below) | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Total cost of sales | ||||||||||||||||
Operating expenses related to wholesale business (excluding depreciation and amortization presented below) | ||||||||||||||||
General and administrative expenses | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Loss (gain) on asset disposals | ( | ) | ||||||||||||||
Total operating costs and expenses | ||||||||||||||||
Operating income | ||||||||||||||||
Interest expense, net | ||||||||||||||||
Income from equity method investments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other expense (income), net | ( | ) | ( | ) | ||||||||||||
Total non-operating expenses, net | ||||||||||||||||
Income before income tax expense | ||||||||||||||||
Income tax expense | ||||||||||||||||
Net income attributable to partners | $ | $ | $ | $ | ||||||||||||
Comprehensive income attributable to partners | $ | $ | $ | $ | ||||||||||||
Less: General partner's interest in net income, including incentive distribution rights | ||||||||||||||||
Limited partners' interest in net income | $ | $ | $ | $ | ||||||||||||
Net income per limited partner unit: | ||||||||||||||||
Common units - (basic) | $ | $ | $ | $ | ||||||||||||
Common units - (diluted) | $ | $ | $ | $ | ||||||||||||
Weighted average limited partner units outstanding: | ||||||||||||||||
Common units - (basic) | ||||||||||||||||
Common units - (diluted) | ||||||||||||||||
Cash distributions per limited partner unit | $ | $ | $ | $ | ||||||||||||
See accompanying notes to the condensed consolidated financial statements
4
Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Amortization of customer contract intangible assets | ||||||||
Amortization of deferred revenue | ( | ) | ( | ) | ||||
Amortization of deferred financing costs and debt discount | ||||||||
Accretion of asset retirement obligations | ||||||||
Deferred income taxes | ||||||||
Income from equity method investments | ( | ) | ( | ) | ||||
Dividends from equity method investments | ||||||||
Loss on asset disposals | ||||||||
Unit-based compensation expense | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ||||||
Inventories and other current assets | ||||||||
Accounts payable and other current liabilities | ( | ) | ||||||
Accounts receivable/payable to related parties | ( | ) | ||||||
Non-current assets and liabilities, net | ( | ) | ( | ) | ||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Asset acquisitions, net of assumed ARO liabilities | ( | ) | ( | ) | ||||
Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
Proceeds from sales of property, plant and equipment | ||||||||
Purchases of intangible assets | ( | ) | ( | ) | ||||
Distributions from equity method investments | ||||||||
Equity method investment contributions | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of additional units to maintain 2% General Partner interest | ||||||||
Distributions to general partner | ( | ) | ( | ) | ||||
Distributions to common unitholders - public | ( | ) | ( | ) | ||||
Distributions to common unitholders - Delek | ( | ) | ( | ) | ||||
Distributions to Delek unitholders and general partner related to Big Spring Logistic Assets Acquisition | ( | ) | ||||||
Proceeds from revolving credit facility | ||||||||
Payments of revolving credit facility | ( | ) | ( | ) | ||||
Proceeds from issuance of senior notes | ||||||||
Deferred financing costs paid | ( | ) | ( | ) | ||||
Reimbursement of capital expenditures by Delek | ||||||||
Net cash provided by (used in) financing activities | ( | ) | ||||||
Net increase in cash and cash equivalents | ||||||||
Cash and cash equivalents at the beginning of the period | ||||||||
Cash and cash equivalents at the end of the period | $ | $ | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | $ | ||||||
Income taxes | $ | $ | ||||||
Non-cash investing activities: | ||||||||
Decrease in accrued capital expenditures | $ | ( | ) | $ | ( | ) | ||
Non-cash financing activities: | ||||||||
Sponsor contribution of fixed assets | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements
5
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 Old Delek (as defined below) and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner").
In January 2017, Delek US Holdings, Inc. ("Old Delek") (and various related entities) entered into an Agreement and Plan of Merger with Alon USA Energy, Inc. (NYSE: ALJ) ("Alon USA"), as subsequently amended on February 27 and April 21, 2017 (as so amended, the "Merger Agreement"). The related merger (the "Delek/Alon Merger") was effective July 1, 2017 (the “Effective Time”), resulting in a new post-combination consolidated registrant renamed Delek US Holdings, Inc. (“New Delek”), with Alon USA and Old Delek surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon USA pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Unless the context otherwise requires, references in this report to "Delek" refer collectively to Old Delek with respect to periods prior to July 1, 2017, or New Delek, with respect to periods on or after July 1, 2017, and any of Old Delek's or New Delek's, as applicable, subsidiaries, other than the Partnership and its subsidiaries and its general partner.
Effective March 1, 2018, the Partnership, through its wholly-owned subsidiary DKL Big Spring, LLC, acquired from Delek certain logistics assets primarily located at or adjacent to Delek's refinery near Big Spring, Texas (the "Big Spring Refinery") and Delek's light products distribution terminal located in Stephens County, Oklahoma (collectively, the "Big Spring Logistic Assets" and such transaction the "Big Spring Logistic Assets Acquisition"). See Note 2 for further information regarding the Big Spring Logistic Assets Acquisition.
Certain prior period amounts have been reclassified in order to conform to the current period presentation. Additionally, certain changes to presentation of the prior period statements of income have been made in order to conform to the current period presentation, primarily relating to the addition of a subtotal entitled 'cost of sales' which includes all costs directly attributable to the generation of the related revenue, as defined by GAAP, and the retitling of what was previously referred to as 'cost of goods sold' to 'cost of materials and other'. In connection with this change in presentation, we have revised our related accounting policy as follows:
Cost of Materials and Other and Operating Expenses
Cost of materials and other includes (i) all costs of purchased refined products, additives and related transportation of such products, (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance, (iii) the cost of pipeline capacity leased from a third-party, and (iv) gains and losses related to our commodity hedging activities.
Operating expenses include the costs associated with the operation of owned terminals and pipelines and terminalling expense at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business.
Depreciation and amortization is separately presented in our statement of income and disclosed by reportable segment in Note 12.
In August 2018, the Financial Accounting Standards Board (the "FASB") issued guidance related to disclosure requirements for fair value measurements. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We expect to adopt this guidance on or before the effective date and do not expect adopting this new guidance will have a material impact on our business, financial condition or results of operations.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
In August 2017, the FASB issued guidance to better align financial reporting for hedging activities with the economic objectives of those activities for both financial (e.g., interest rate) and commodity risks. The guidance was intended to create more transparency in the presentation of financial results, both on the face of the financial statements and in the footnotes, and simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Companies are required to apply the guidance on a modified retrospective transition method in which the cumulative effect of the change will be recognized within equity in the consolidated balance sheet as of the date of adoption. Early adoption is permitted, including in an interim period. If a company early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The modification accounting guidance applies if the value, vesting conditions or classification of the award changes. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance should be applied prospectively to an award modified on or after the adoption date. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The amendments in this guidance should be applied using either i) a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption or ii) a retrospective basis to each period presented in the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.
In January 2017, the FASB issued guidance concerning the goodwill impairment test that eliminates Step 2, which required a comparison of the implied fair value of goodwill of the reporting unit with the carrying amount of that goodwill for that reporting unit. It also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative assessment, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. As permitted under Accounting Standards Update 2017-04, we expect to early adopt this guidance in the fourth quarter of 2018 in connection with our 2018 goodwill impairment tests to be performed as of October 31, 2018. We do not anticipate that the adoption will have a material impact on our business, financial condition or results of operations.
In August 2016, the FASB issued guidance that clarifies eight cash flow classification issues pertaining to cash receipts and cash payments. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations, except for reclassifications of certain distributions received from equity method investees, due to us making an accounting policy election to classify distributions received from equity method investees using the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings (as adjusted for amortization of basis differences) recognized by the investor. When such an excess occurs, the current-period distribution up to this excess should be considered a return of investment and classified as cash inflows from investing activities. This resulted in a reclassification of $0.8 million of distributions received in the nine months ended September 30, 2017 from the line item entitled dividends from equity method investments in net cash provided by (used in) operating activities to the line item entitled distributions from equity method investments in net cash provided by (used in) investing activities in the condensed consolidated statements of cash flows.
In February 2016, the FASB issued guidance that requires the recognition of a lease liability and a right-of-use asset, initially measured at the present value of the lease payments, in the statement of financial condition for all leases with terms longer than one year. Subsequent guidance was issued to consider the impact of practical expedients. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt the new lease standard on January 1, 2019. We plan to elect the package of practical expedients which, among other things, allows us to carry forward the historical lease classification. We plan to also elect the practical expedient not to separate lease and non-lease components, which allows us to combine the components if certain criteria are met. Further, we plan to elect the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings at the date of adoption and to not recast our comparative periods. We do not plan to elect the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term.
As part of our efforts to prepare for adoption, beginning in 2018, we formed a project implementation team, as well as a project timeline, to evaluate the guidance. We have substantially completed our analysis of existing leases and the impact on our business processes and accounting systems. We continue to evaluate the impact of the guidance on our controls and financial statement disclosures, and expect to implement any changes to accommodate the new accounting and disclosure requirements prior to adoption on January 1, 2019. Because we are the lessor to primarily operating leases and the guidance does not substantially change the accounting for these leases, we anticipate adoption of the guidance will not have a material impact on our business, financial condition or results of operations.
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
In January 2016, the FASB issued guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. It will require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and will eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.
The Partnership has updated its policies as it relates to revenue recognition. Revenue is measured based on consideration specified in a contract with a customer. The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or by providing a service to a customer. The adoption of ASC 606 did not materially change our revenue recognition patterns. Revenues for products sold are generally recognized upon delivery of the product, which is when title and control of the product is transferred. Transaction prices for these products are typically at market rates for the product at the time of delivery. Service revenues are recognized as crude oil, intermediate and refined product are shipped through, delivered by or stored in our pipelines, trucks, terminals and storage facility assets, as applicable. We do not recognize product revenues for these services as the product does not represent a promised good in the context of ASC 606. All service revenues are based on regulated tariff rates or contractual rates. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
Certain agreements for gathering, transportation, storage, terminalling, and offloading with Delek are considered operating leases under ASC 840, Leases ("ASC 840"). We identified the separate lease and service components of our revenues under these leases and applied ASC 606 only to the service component, while the lease component continued to be accounted for under ASC 840. Refer to Note 4 for further information.
Up-front Payments to Customers
We record all up-front payments to customers in accordance with the provisions of ASC 606. We evaluate the nature of each payment, the rights and obligations under the related contract, and whether the payment meets the definition of an asset. When an asset is recognized for an up-front payment to a customer, the asset is amortized, as a reduction of revenue, in a manner that reflects the pattern and period over which the asset is expected to provide benefit.
Sales, Use and Excise Taxes
Note 2 - Acquisitions
Big Spring Logistic Assets Acquisition
Effective March 1, 2018, the Partnership, through its wholly-owned subsidiary DKL Big Spring, LLC, acquired the Big Spring Logistic Assets from Delek, which are primarily located at or adjacent to the Big Spring Refinery. The total purchase price was $170.8 million, subject to certain post-closing adjustments, financed through borrowings under the Partnership’s revolving credit facility.
The Big Spring Logistic Assets include:
• | Approximately |
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
• | An asphalt terminal and a light products terminal; |
• | Certain crude oil and refined product pipelines; and |
• | Other logistics assets, such as |
In connection with the closing of the transaction, Delek, the Partnership and various of their respective subsidiaries entered into and amended certain existing contracts, including entering into new pipelines, storage and throughput facilities and asphalt services agreements. The transaction and related agreements were approved by the Conflicts Committee of the Partnership's general partner, which is comprised solely of independent directors. See Note 3 for more detailed descriptions of these agreements.
The Big Spring Logistic Assets Acquisition was considered a transaction between entities under common control. Accordingly, the Big Spring Logistic Assets were recorded at amounts based on Delek's historical carrying value as of the acquisition date. The excess of the cash paid over the historical carrying value of the assets acquired from Delek amounted to $98.8 million and was recorded in equity. The historical carrying value of the Big Spring Logistic Assets as of the acquisition date was $72.0 million, which is net of $0.8 million of assumed asset retirement obligations. Prior periods have not been recast, as these assets did not constitute a business in accordance with Accounting Standard Update 2017-01, "Clarifying the Definition of a Business". We capitalized approximately $0.4 million of acquisition costs related to the Big Spring Logistic Assets Acquisition during the nine months ended September 30, 2018. We did not capitalize any acquisition costs during the three months ended September 30, 2018.
Marketing Contract Intangible Acquisition
Additionally, concurrent with the Big Spring Logistic Assets Acquisition, Delek, the Partnership and various of their respective subsidiaries entered into a new marketing agreement, whereby the Partnership markets certain finished products produced at or sold from the Big Spring Refinery to various customers in return for a marketing fee (the "Marketing Contract Intangible Acquisition"). We recorded a related contract intangible asset in the amount of $144.2 million based on the amount paid to enter into the contract, which represents the fair value of the intangible asset. The contract intangible asset will be amortized over a twenty year period as a component of net revenues from affiliates. The total consideration paid was financed through borrowings under the Partnership's revolving credit facility. This transaction and related marketing agreement were approved by the Conflicts Committee of the Partnership's general partner, which is comprised solely of independent directors. See Note 3 for a more detailed description of this marketing agreement.
Big Spring Acquisition
On September 15, 2017, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Plains Pipeline, L.P. an approximate 40 -mile pipeline and related ancillary assets (the "Big Spring Pipeline") (such transaction, the "Big Spring Acquisition") for approximately $9.0 million to complement our existing asset base. The Big Spring Pipeline originates in Big Spring, Texas and terminates in Midland, Texas. The Big Spring Acquisition was accounted for as an asset acquisition. The following table summarizes the allocation of the relative fair value assigned to the asset groups for the Big Spring Pipeline (in thousands):
Property, plant and equipment | $ | |||
Intangible assets (1) | ||||
Total | $ | |||
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3 - Related Party Transactions
Commercial Agreements
The Partnership has a number of long-term, fee based commercial agreements with Delek under which we provide various services, including crude oil gathering and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek. Most of these agreements have an initial term ranging from five to ten years , which may be extended for various renewal terms at the option of Delek. In November 2017, Delek opted to renew certain of these agreements for subsequent five-year terms expiring in November 2022. In the case of our marketing agreement with Delek in respect to the Tyler refinery, the initial term has been extended through 2026. The fees under each agreement are payable to us monthly by Delek or certain third parties to whom Delek has assigned certain of its rights and are generally subject to increase or decrease on July 1 of each year, by the amount of any change in various inflation-based indices, including the Federal Energy Regulatory Commission ("FERC") oil pipeline index or various iterations of the consumer price index ("CPI") and the producer price index ("PPI"); provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement. In most circumstances, if Delek or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek, and not any third party assignee, will be required to make a quarterly shortfall payment to us equal to the volume of the shortfall multiplied by the applicable fee, subject to certain exceptions as specified in the applicable agreement. Carry-over of any volumes or revenue in excess of such commitment to any subsequent quarter is not permitted.
See our Annual Report on Form 10-K for a more complete description of certain of our commercial agreements and other agreements with Delek.
10
Notes to Condensed Consolidated Financial Statements (Unaudited)
Asset/Operation | Initiation Date | Initial/Maximum Term (years) (1) | Service | Minimum Throughput Commitment (bpd) | Fee (2) | |||||
Pipelines, Storage and Throughput Facilities Agreement (Big Spring): | ||||||||||
Crude Oil and Refined Products Throughput | March 1, 2018 | 10/15 | Pipeline Throughput | $0.05/bbl | ||||||
Rail Offloading | March 1, 2018 | 10/15 | Offloading Services | $0.40/bbl | ||||||
Terminalling | March 1, 2018 | 10/15 | Dedicated Terminalling Services | $0.66/bbl | ||||||
Storage | March 1, 2018 | 10/15 | Storage | N/A | $1,374,630/month | |||||
Asphalt Services Agreement (Big Spring): | ||||||||||
Terminalling | March 1, 2018 | 10/15 | Dedicated Asphalt Terminalling | 1,020 to 2,380 based on seasonality | $8.30/bbl | |||||
Storage | March 1, 2018 | 10/15 | Storage | N/A | $456,490/month | |||||
Marketing Agreement (Big Spring): | ||||||||||
Marketing Services | March 1, 2018 | 10/15 | Dedicated Marketing and Selling | $0.50 - $0.71/bbl | ||||||
(1) Maximum term gives effect to the extension by (i) the Partnership of the Pipelines, Storage and Throughput Facilities Agreement and Asphalt Services Agreement pursuant to the terms thereof and (ii) Delek of the Marketing Agreement pursuant to the terms thereof. Maximum term excludes the impact of the automatic annual renewal of these agreements, unless terminated by either party, subsequent to the extension.
Big Spring Pipeline, Storage and Throughput Facilities Agreement
In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP, a Texas limited partnership and an indirect, wholly-owned subsidiary of Delek (“Alon USA, LP”), and DKL Big Spring, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Partnership, entered into the Pipelines, Storage and Throughput Facilities Agreement (Big Spring Refinery Logistic Assets and Duncan Terminal) (the “Logistics Agreement”). Under the Logistics Agreement, the Partnership will provide storage and throughput services at certain of the Big Spring Logistic Assets for Alon USA, LP. The Partnership will act as bailee of crude oil and refined petroleum products owned by Alon USA, LP or its assignee held in such assets owned and operated by the Partnership. The Partnership will charge fees to Alon USA, LP based on throughput volumes received or delivered ranging from $0.05 to $0.66 per barrel and related storage fees depending on the type of service or product. The fees under the Logistics Agreement may be adjusted annually for inflation. The initial term of the Logistics Agreement is ten years ; the Partnership has a one-time option to extend the Logistics Agreement for up to five additional years; and the Logistics Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.
Big Spring Asphalt Services Agreement
In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Partnership entered into the Big Spring Asphalt Services Agreement (the “Asphalt Services Agreement”). Under the Asphalt Services Agreement, the Partnership will provide asphalt storage and handling services at certain of the Big Spring Logistic Assets (such assets, the “Asphalt Facilities”). The Partnership will provide services to Alon USA, LP at the Asphalt Facilities and serve as bailee of all raw materials, and other hydrocarbons, used to make asphalt products owned by Alon
11
Notes to Condensed Consolidated Financial Statements (Unaudited)
USA, LP or its assignee held in the Asphalt Facilities. The Partnership will charge fees to Alon USA, LP based on throughput volumes delivered of $8.30 per barrel and related storage fees. The fees under the Asphalt Services Agreement may be adjusted annually for inflation. The initial term of the Asphalt Services Agreement is ten years ; the Partnership has a one-time option to extend the Asphalt Services Agreement for up to five additional years; and the Asphalt Services Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.
Big Spring Marketing Agreement
Concurrent with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Partnership entered into the Marketing Agreement (the “Marketing Agreement”). Under the Marketing Agreement, the Partnership will provide Alon USA, LP with services for the marketing and selling of certain refined petroleum products that are produced or sold from the Big Spring Refinery. The Partnership will charge Alon USA, LP fees for such marketing and selling services of $0.50 to $0.71 per barrel depending on the type of product. The fees under the Marketing Agreement may be adjusted annually for inflation. The initial term of the Marketing Agreement is ten years ; Alon USA, LP has a one-time option to extend the Marketing Agreement for up to five additional years; and the Marketing Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.
Omnibus Agreement
The Partnership entered into an omnibus agreement with Delek, our general partner, Delek Logistics Operating, LLC, Lion Oil Company and certain of the Partnership's and Delek's other subsidiaries on November 7, 2012, which was subsequently amended and restated on July 26, 2013, February 10, 2014, March 31, 2015 and August 3, 2015 and was further amended effective March 1, 2018 in connection with the Big Spring Logistic Assets Acquisition (collectively, as amended, the "Omnibus Agreement"). In conjunction with the March 1, 2018 amendment, our obligation to pay an annual fee to Delek for its provision of centralized corporate services to the Partnership was increased to $3.9 million annually.
Pursuant to the terms of the Omnibus Agreement, we were reimbursed by Delek for certain capital expenditures in the amount of $0.5 million and $3.2 million during the three and nine months ended September 30, 2018, respectively, and $0.4 million and $4.3 million during the three and nine months ended September 30, 2017, respectively. These amounts are recorded in other long-term liabilities and are amortized to revenue over the life of the underlying revenue agreement corresponding to the asset. 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. During the three and nine months ended September 30, 2018 we recorded increases to accounts receivable from related parties of $1.4 million and $8.0 million, respectively, for these matters for which we expect to be reimbursed, which were recorded as reductions to operating expense. We incurred $0.3 million of reimbursable costs for these matters during the nine months ended September 30, 2017. During the three months ended September 30, 2017, we recorded an adjustment of $(0.1 ) million for these matters.
Other Transactions
The Partnership is currently managing a long-term capital project on behalf of Delek for the construction of a gathering system in the Permian Basin and a long-haul crude oil pipeline that will originate in Midland, Texas and terminate in Houston, Texas (the "Delek Permian Gathering Project"). The Partnership incurs the costs in connection with the construction of the assets and is subsequently reimbursed by Delek. Amounts reimbursable by Delek are recorded in accounts receivable from related parties.
Summary of Transactions
Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers, wholesale marketing and products terminalling services provided primarily to Delek based on regulated tariff rates or contractually based fees and product sales. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek, or our general partner, as the case may be, for the services provided to us under the First Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). These expenses could also include reimbursement and indemnification amounts from Delek, as provided under the Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek for direct or allocated costs and expenses incurred by Delek on behalf of the Partnership and for charges Delek incurred for the management and operation of our logistics assets, including an annual fee for various centralized corporate services, which are included in general and administrative services. In addition to these transactions, we purchase finished products and bulk biofuels from Delek, the costs of which are included in cost of materials and other.
12
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | $ | $ | $ | $ | ||||||||||||
Purchases from affiliates | $ | $ | $ | $ | ||||||||||||
Operating and maintenance expenses | $ | $ | $ | $ | ||||||||||||
General and administrative expenses | $ | $ | $ | $ | ||||||||||||
Quarterly Cash Distributions
Note 4 - Revenues
We generate revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate products and feed stocks; for distributing, transporting and storing refined products; for marketing refined products output of Delek's 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, which provide for annual fee adjustments for increases or decreases in the CPI, PPI or FERC index (refer to Note 3 for a more detailed description of these agreements). In addition to the services we provide to Delek, 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, 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 meet the definition of a lease since: (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 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 606, we applied the new revenue recognition standard only to the service component of these leases. The bifurcation of the lease and service components was based on an analysis of lease-related and service-related costs for each contract, adjusted for representative profit margins. The lease component continues to be accounted for under the applicable lease accounting guidance.
Three Months Ended September 30, 2018 | ||||||||||||
Pipelines and Transportation | Wholesale Marketing and Terminalling | Consolidated | ||||||||||
Service Revenue - Third Party | $ | $ | $ | |||||||||
Service Revenue - Affiliate (1) | ||||||||||||
Product Revenue - Third Party | ||||||||||||
Product Revenue - Affiliate | ||||||||||||
Lease Revenue - Affiliate | ||||||||||||
Total Revenue | $ | $ | $ | |||||||||
13
Notes to Condensed Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 2018 | ||||||||||||
Pipelines and Transportation | Wholesale Marketing and Terminalling | Consolidated | ||||||||||
Service Revenue - Third Party | $ | $ | $ | |||||||||
Service Revenue - Affiliate (1) | ||||||||||||
Product Revenue - Third Party | ||||||||||||
Product Revenue - Affiliate | ||||||||||||
Lease Revenue - Affiliate | ||||||||||||
Total Revenue | $ | $ | $ | |||||||||
Our unfulfilled performance obligations as of September 30, 2018 were as follows (in thousands):
Remainder of 2018 | $ | |||||
2019 | ||||||
2020 | ||||||
2021 | ||||||
2022 and thereafter | ||||||
Total expected revenue on remaining performance obligations | $ | |||||
Note 5 - Inventory
Note 6 - Long-Term Obligations
DKL Credit Facility
At December 31, 2017, the Partnership had a $700.0 million senior secured revolving credit agreement with Fifth Third Bank ("Fifth Third"), as administrative agent, and a syndicate of lenders (the "2014 Facility") with a $100.0 million accordion feature, bearing interest at (i) either a U.S. prime dollar rate or a LIBOR Rate for borrowings denominated in U.S. Dollars, or (ii) either a Canadian dollar prime rate, or a Canadian Dealer Offered Rate, for borrowings denominated in Canadian dollars (in each case plus applicable margins, at the election of the borrowers and as a function of draw down currency). The 2014 Facility had a maturity date of December 30, 2019, and outstanding borrowings at December 31, 2017 were $179.9 million. The obligations under the 2014 Facility were secured by a first priority lien on substantially all of the Partnership's tangible and intangible assets. Additionally, a subsidiary of Delek provided a limited guaranty of the Partnership's obligations under the 2014 Facility.
On September 28, 2018, the Partnership entered into a third amended and restated senior secured revolving credit agreement, which amended and restated the 2014 Facility (hereafter, the "DKL Credit Facility") with Fifth Third, as administrative agent, and a syndicate of lenders. The DKL Credit Facility contains a dual currency borrowing tranche that permits draw downs in U.S. or Canadian dollars. Under the terms of the DKL Credit Facility, among other things, the lender commitments were increased from $700.0 million to $850.0 million. The DKL Credit Facility also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of $1.0 billion, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent.
14
Notes to Condensed Consolidated Financial Statements (Unaudited)
The obligations under the DKL Credit Facility remain secured by first priority liens on substantially all of the Partnership's and its subsidiaries' tangible and intangible assets. Additionally, Delek Marketing & Supply, LLC ("Delek Marketing"), a wholly-owned subsidiary of Delek, continues to provide a limited guaranty of the Partnership's obligations under the DKL Credit Facility. Delek Marketing's guaranty is (i) limited to an amount equal to the principal amount, plus unpaid and accrued interest, of a promissory note made by Delek in favor of Delek Marketing (the "Holdings Note") and (ii) secured by Delek Marketing's pledge of the Holdings Note to the lenders under the DKL Credit Facility. As of both September 30, 2018 and December 31, 2017, the principal amount of the Holdings Note was $102.0 million.
The DKL Credit Facility has a maturity date of September 28, 2023. Borrowings denominated in U.S. dollars bear interest at either a U.S. dollar prime rate , plus an applicable margin, or the London Interbank Offered Rate ("LIBOR "), plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars bear interest at either a Canadian dollar prime rate , plus an applicable margin, or the Canadian Dealer Offered Rate , plus an applicable margin, at the election of the borrowers. The applicable margin in each case and the fee payable for the unused revolving commitments vary based upon the Partnership's most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the DKL Credit Facility. At September 30, 2018, the weighted average interest rate for our borrowings under the facility was approximately 4.9 %. 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, 2018, this fee was 0.4 % per year.
As of September 30, 2018, we had $533.2 million of outstanding borrowings under the DKL Credit Facility, with no letters of credit in place. Unused credit commitments under the DKL Credit Facility as of September 30, 2018, were $316.8 million.
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. Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.
At any time prior to May 15, 2020, the Issuers may redeem up to 35 % of the aggregate principal amount of the 2025 Notes with the net cash proceeds of one or more equity offerings by the Partnership at a redemption price of 106.750 % of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to May 15, 2020, the Issuers may redeem all or part of the 2025 Notes at a redemption price of the principal amount, plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on May 15, 2020, the Issuers may, subject to certain conditions and limitations, redeem all or part of the 2025 Notes at a redemption price of 105.063 % of the redeemed principal for the twelve-month period beginning on May 15, 2020, 103.375 % for the twelve-month period beginning on May 15, 2021, 101.688 % for the twelve-month period beginning on May 15, 2022 and 100.00 % beginning on May 15, 2023 and thereafter, plus accrued and unpaid interest, if any.
In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations, the Issuers will be obligated to make an offer for the purchase of the 2025 Notes from holders at a price equal to 101 % of the principal amount thereof, plus accrued and unpaid interest.
In connection with the issuance of the 2025 Notes, the Issuers and the Guarantors entered into a registration rights agreement, whereby the Issuers and the Guarantors were required to exchange the 2025 Notes for new notes with terms substantially identical in all material respects with the 2025 Notes (except the new notes do not contain terms with respect to transfer restrictions). 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 (the "Exchange Offer"). The Exchange Offer expired on May 23, 2018 (the "Expiration Date"). The terms of the exchange notes that were issued as a result of the Exchange Offer (also referred to as the "2025 Notes") are substantially identical to the terms of the original 2025 Notes.
Note 7 - Income Taxes
15
Note 8 - Net Income Per Unit
Earnings in excess of distributions are allocated to our general partner and limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. At present, the only potentially dilutive units outstanding consist of unvested phantom units.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income attributable to partners | $ | $ | $ | $ | ||||||||||||
Less: General partner's distribution (including IDRs) (1) | ||||||||||||||||
Less: Limited partners' distribution | ||||||||||||||||
Distributions in excess of earnings | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
General partner's earnings: | ||||||||||||||||
Distributions (including IDRs) (1) | $ | $ | $ | $ | ||||||||||||
Allocation of distributions in excess of earnings | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total general partner's earnings | $ | $ | $ | $ | ||||||||||||
Limited partners' earnings on common units: | ||||||||||||||||
Distributions | $ | $ | $ | $ | ||||||||||||
Allocation of distributions in excess of earnings | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total limited partners' earnings on common units | $ | $ | $ | $ | ||||||||||||
Weighted average limited partner units outstanding (2): | ||||||||||||||||
Common units - (basic) | ||||||||||||||||
Common units - (diluted) | ||||||||||||||||
Net income per limited partner unit (2): | ||||||||||||||||
Common units - (basic) | $ | $ | $ | $ | ||||||||||||
Common units - (diluted) (3) | $ | $ | $ | $ | ||||||||||||
(1) General partner distributions (including IDRs) consist of the 2 % general partner interest and IDRs, which represent the right of the general partner to receive increasing percentages of quarterly distributions of available cash from operating surplus in excess of $0.43125 per unit per quarter. See Note 9 for further discussion related to IDRs.
(2) We base our calculation of net income per unit on the weighted-average number of common limited partner units outstanding during the period.
16
Note 9 - Equity
We had 9,101,137 common limited partner units held by the public outstanding as of September 30, 2018. Additionally, as of September 30, 2018, Delek owned a 61.4 % limited partner interest in us, consisting of 15,294,046 common limited partner units and a 94.6 % interest in our general partner, which owns the entire 2.0 % general partner interest consisting of 497,861 general partner units. Affiliates, who are also members of our general partner's management and board of directors, own the remaining 5.4 % interest in our general partner.
Equity Activity
Common - Public | Common - Delek | General Partner | Total | |||||||||
Balance at December 31, 2017 | ||||||||||||
General partner units issued to maintain 2% interest | ||||||||||||
Unit-based compensation awards (1) | ||||||||||||
Balance at September 30, 2018 | ||||||||||||
Common - Public | Common - Delek | General Partner | Total | |||||||||||||
Balance at December 31, 2017 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Distributions to unitholders and general partner related to Big Spring Logistic Assets Acquisition | ( | ) | ( | ) | ( | ) | ||||||||||
Cash distributions (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income attributable to partners | ||||||||||||||||
Unit-based compensation | ||||||||||||||||
Other | ||||||||||||||||
Balance at September 30, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Allocations of Net Income
Our Partnership Agreement contains provisions for the allocation of net income and loss to the unitholders and our general partner. For purposes of maintaining partner capital accounts, the Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our general partner.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income attributable to partners | $ | $ | $ | $ | ||||||||||||
Less: General partner's IDRs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net income available to partners | $ | $ | $ | $ | ||||||||||||
General partner's ownership interest | % | |||||||||||||||