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 | ||||||||||||||
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
(Exact name of registrant as specified in its charter)
 | |||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
(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 | ||||||||||||
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 | ☐ | ☑ | 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 | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| 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 | |||||||||||
| Customer relationship intangible, net | |||||||||||
| Marketing contract intangible, net | |||||||||||
| Rights-of-way | |||||||||||
| Goodwill | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND DEFICIT | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accounts payable to related parties | |||||||||||
| Interest payable | |||||||||||
| Excise and other taxes payable | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
| Long-term debt | |||||||||||
| Asset retirement obligations | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Other non-current liabilities | |||||||||||
| Total non-current liabilities | |||||||||||
| Equity (Deficit): | |||||||||||
Common unitholders - public; | |||||||||||
Common unitholders - Delek Holdings; | ( | ( | |||||||||
| 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
Affiliates (1) | $ | $ | $ | $ | |||||||||||||||||||
| 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 | |||||||||||||||||||||||
| Other operating (income) expense, net | ( | ( | |||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Income from equity method investments | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Total non-operating expenses, net | |||||||||||||||||||||||
| Income before income tax expense (benefit) | |||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Net income attributable to partners | $ | $ | $ | $ | |||||||||||||||||||
| Comprehensive income attributable to partners | $ | $ | $ | $ | |||||||||||||||||||
| Net income per limited partner unit: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average limited partner units outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Cash distributions per common limited partner unit | $ | $ | $ | $ | |||||||||||||||||||
(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 | $ | $ | ( | $ | ( | ||||||||||||
Cash distributions (1) | ( | ( | ( | ||||||||||||||
Net income attributable to partners | |||||||||||||||||
Other | |||||||||||||||||
| Balance at September 30, 2022 | $ | $ | ( | $ | ( | ||||||||||||
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | $ | ( | ||||||||||||
| Cash distributions | ( | ( | ( | ||||||||||||||
Net income attributable to partners | |||||||||||||||||
Other | |||||||||||||||||
| Balance at September 30, 2021 | $ | $ | ( | $ | ( | ||||||||||||
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | $ | ( | ||||||||||||
Cash distributions (1) | ( | ( | ( | ||||||||||||||
| Net income attributable to partners | |||||||||||||||||
| Delek Holdings unit sale to public | ( | — | |||||||||||||||
| Other | ( | ||||||||||||||||
| Balance at September 30, 2022 | $ | $ | ( | $ | ( | ||||||||||||
| Common - Public | Common - Delek Holdings | Total | |||||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | $ | ( | ||||||||||||
| Cash distributions | ( | ( | ( | ||||||||||||||
| Net income attributable to partners | |||||||||||||||||
| Other | |||||||||||||||||
| Balance at September 30, 2021 | $ | $ | ( | $ | ( | ||||||||||||
(1) Cash distributions include $0.2
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 | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash lease expense | |||||||||||
| Amortization of customer contract intangible assets | |||||||||||
| Amortization of deferred revenue | ( | ( | |||||||||
| Amortization of deferred financing costs and debt discount | |||||||||||
| Income from equity method investments | ( | ( | |||||||||
| Dividends from equity method investments | |||||||||||
| Other non-cash adjustments | |||||||||||
| 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: | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Business Combination, net of cash acquired | ( | ||||||||||
| 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: | |||||||||||
| Distributions to common unitholders - public | ( | ( | |||||||||
| Distributions to common unitholders - Delek Holdings | ( | ( | |||||||||
| Proceeds from revolving credit facility | |||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Proceeds from issuance of senior notes | |||||||||||
| Deferred financing costs paid | ( | ( | |||||||||
| Payments on financing lease liabilities | ( | ( | |||||||||
| 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) increase in accrued capital expenditures and other | $ | ( | $ | ||||||||
| Non-cash financing activities: | |||||||||||
| Non-cash lease liability arising from obtaining right of use assets during the period | $ | $ | |||||||||
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.
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: | $ | ||||
Add: closing net working capital (as defined in the 3 Bear Purchase Agreement) | |||||
Less: closing indebtedness (as defined in the 3 Bear Purchase Agreement) | ( | ||||
| Cash paid for the adjusted purchase price | |||||
| Cash paid to payoff 3 Bear credit agreement (as defined in the 3 Bear Purchase Agreement) | |||||
| Purchase price | $ | ||||
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 | $ | |||||||
| Accounts receivables, net | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Property, plant and equipment | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
Customer relationship intangible, net (1) | ||||||||
Rights-of-way (1) | ||||||||
| Other non-current assets | ||||||||
| Total assets acquired | ||||||||
| Liabilities assumed: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Asset retirement obligations | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total liabilities assumed | ||||||||
| Fair value of net assets acquired | $ | |||||||
(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
•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 0.6
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 | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income attributable to partners | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per limited partner unit: | ||||||||||||||||||||||||||
| Basic income per unit | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted income per unit | $ | $ | $ | $ | ||||||||||||||||||||||
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 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
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 1.2
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 | $ | $ | $ | $ | |||||||||||||||||||
| Purchases from Affiliates | $ | $ | $ | $ | |||||||||||||||||||
Operating and maintenance expenses | $ | $ | $ | $ | |||||||||||||||||||
General and administrative expenses | $ | $ | $ | $ | |||||||||||||||||||
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 | $ | $ | $ | $ | |||||||||||||||||||
Service Revenue - Affiliate (1) | |||||||||||||||||||||||
| Product Revenue - Third Party | |||||||||||||||||||||||
| Product Revenue - Affiliate | |||||||||||||||||||||||
| Lease Revenue - Affiliate | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
(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.
12 | | ||
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 | $ | $ | $ | ||||||||||||||
Service Revenue - Affiliate (1) | |||||||||||||||||
| Product Revenue - Third Party | |||||||||||||||||
| Product Revenue - Affiliate | |||||||||||||||||
| Lease Revenue - Affiliate | |||||||||||||||||
| Total Revenue | $ | $ | $ | ||||||||||||||
(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 | $ | $ | $ | $ | |||||||||||||||||||
Service Revenue - Affiliate (1) | |||||||||||||||||||||||
| Product Revenue - Third Party | |||||||||||||||||||||||
| Product Revenue - Affiliate | |||||||||||||||||||||||
| Lease Revenue - Affiliate | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
(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 | $ | $ | $ | ||||||||||||||
Service Revenue - Affiliate (1) | |||||||||||||||||
| Product Revenue - Third Party | |||||||||||||||||
| Product Revenue - Affiliate | |||||||||||||||||
| Lease Revenue - Affiliate | |||||||||||||||||
| Total Revenue | $ | $ | $ | ||||||||||||||
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 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 and thereafter | ||||||||
| Total expected revenue on remaining performance obligations | $ | |||||||
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 | $ | $ | $ | $ | |||||||||||||||||||
| Less: Limited partners' distribution | |||||||||||||||||||||||
| Earnings in excess (deficit) of distributions | $ | $ | $ | ( | $ | ||||||||||||||||||
| Limited partners' earnings on common units: | |||||||||||||||||||||||
| Distributions | $ | $ | $ | $ | |||||||||||||||||||
| Allocation of earnings in excess (deficit) of distributions | ( | ||||||||||||||||||||||
| Total limited partners' earnings on common units | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average limited partner units outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net income per limited partner unit: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
Diluted (1) | $ | $ | $ | $ | |||||||||||||||||||
(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
Note 6 - Inventory
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) | $ | $ | |||||||||
Delek Logistics Credit Facility (2) | |||||||||||
Delek Logistics 2025 Notes (3) | |||||||||||
| $ | $ | ||||||||||
(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.
14 | | ||
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 $