NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in thousands except as noted)
1
.
Organization and Basis of Presentation
As used in this report, the terms the “Partnership,” “we,” “our” and “us” or like terms refer to Alon USA Partners, LP, and its consolidated subsidiaries or to Alon USA Partners, LP or an individual subsidiary. References in this report to “Alon Energy” refer collectively to Alon USA Energy, Inc. and any of its consolidated subsidiaries, other than Alon USA Partners, LP, its subsidiaries and its general partner.
We are a Delaware limited partnership formed in August 2012 by Alon Energy and Alon USA Partners GP, LLC (the “General Partner”). The General Partner, a wholly-owned subsidiary of Alon Energy owns
100%
of our general partner interest, which is a non-economic interest.
In January 2017, it was announced that Delek US Holdings, Inc. (and various related entities) had entered into an Agreement and Plan of Merger with Alon Energy (previously traded under NYSE: ALJ), as subsequently amended on February 27 and April 21, 2017 (as so amended, the "Merger Agreement"). The related mergers (the “Merger” or the “Delek/Alon Merger”) were effective July 1, 2017 (the “Effective Time”), resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc. (“New Delek”) (NYSE: DK), with Alon Energy and the previous Delek US Holdings, Inc. (“Old Delek”) surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon Energy pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, as a result of the Delek/Alon Merger, the shares of common stock of Old Delek and Alon Energy were delisted from the New York Stock Exchange in July 2017, and their respective reporting obligations under the Exchange Act were terminated. Effective July 1, 2017, with the completion of the Delek/Alon Merger, references in this report to “Delek” refer to Old Delek and its consolidated subsidiaries for the periods prior to July 1, 2017, and New Delek and its consolidated subsidiaries for the periods on or after July 1, 2017, other than the Partnership and its subsidiaries.
Effective July 1, 2017, with the completion of the Delek/Alon Merger, Delek indirectly owns
100%
of our General Partner and
81.6%
of our limited partner interests. Our General Partner manages our operations and activities subject to the terms and conditions specified in our partnership agreement. The operations of our General Partner in its capacity as general partner are managed by its board of directors.
As a result of the Delek/Alon Merger, the Partnership became a consolidated subsidiary of Delek and elected to apply “push-down” accounting, which required its assets and liabilities to be adjusted to fair value on the effective date of the Merger. Due to the application of push-down accounting, the Partnership’s consolidated financial statements and certain footnote disclosures are presented in two distinct periods to indicate the application of two different bases of accounting between the periods presented. Our consolidated financial statements and related footnotes are presented with a black-line division, which delineates the lack of comparability between amounts presented on or after July 1, 2017, and dates prior. The periods prior to the Merger date, July 1, 2017, are identified as “Predecessor” and the period from July 1, 2017, forward is identified as “Successor”. Additionally, the Partnership’s accounting policies were conformed to those of Delek at the start of the Successor Period, in connection with the Delek/Alon Merger, effective July 1, 2017. Because of the application of push-down accounting and the conforming of accounting policies, our Successor consolidated balance sheet and consolidated statements of operations and comprehensive income (loss) subsequent to the Merger are not comparable to the Predecessor’s consolidated balance sheet and consolidated statements of operations and comprehensive income (loss) prior to the Merger, and differences could be material.
These consolidated financial statements and notes are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Exchange Act. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements.
In the opinion of the General Partner’s management, the information included in these consolidated financial statements reflects all adjustments, consisting of normal and recurring adjustments, which are necessary for a fair presentation of our consolidated financial position and results of operations for the interim periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances may have been aggregated or disaggregated in order to conform to the current year presentation. Our results of operations for the
three and nine
months ended
September 30, 2017
, are not necessarily indicative of the operating results that may be realized for the year ending
December 31, 2017
.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2016
. Our consolidated balance sheet as of
December 31, 2016
, has been derived from the audited financial statements as of that date.
Accounting Policies Update
The following condensed accounting policies represent updates in the Successor period to those policies disclosed in our annual report on Form 10-K, and primarily relate to changes resulting from the conforming of accounting policies in connection with the Merger.
Inventory
Crude oil, refined products and blendstocks (including crude oil consignment inventory) are stated at the lower of cost or net realizable value. Effective July 1, 2017, inventories were recorded at fair value in connection with the push-down of the acquisition method of accounting and subsequently, in the Successor period, cost is determined under the first-in, first-out (“FIFO”) inventory valuation method. Prior to July 1, 2017, cost was determined under the last-in, first-out (“LIFO”) valuation method. Under the LIFO valuation method, the most recently incurred costs are charged to cost of goods sold and inventories are valued at the earliest acquisition costs. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. An inventory write-down to market value results in a non-cash accounting adjustment, decreasing the value of our inventory and increasing our cost of goods sold. Such charges are subject to reversal in subsequent periods, not to exceed LIFO cost, if prices recover. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of goods sold in years when inventory volumes decline and result in charging cost of goods sold with LIFO inventory costs generated in prior periods.
Supply and Inventory Purchase Agreements
We have a Supply and Offtake Agreement (as defined in Note 6) with J. Aron & Company (“J. Aron”) whereby we agree to buy from J. Aron, at market prices, crude oil for processing at our refinery, and whereby we agree to sell to J. Aron certain refined products produced at our refinery. Such refined product will ultimately be marketed for sale to third parties, facilitated by the Partnership’s marketing function, as required by the Supply and Offtake Agreement. Following expiration or termination of the Supply and Offtake Agreement, we are obligated to purchase the crude oil and refined product inventories owned by J. Aron at then current market rates. (See further discussion in Note 6).
During the Successor period, such crude oil and refined product inventory is treated as financed inventory and reflected on the balance sheet, initially at fair value (in connection with the push-down of the acquisition method of accounting as of July 1, 2017) and then subsequently at the lower of FIFO cost or net realizable value, and the liability to repurchase the inventory (the “step-out liability”, further discussed in Note 6), is reflected on the balance sheet at fair value on a recurring basis. Effective July 1, 2017, such refined product inventory purchased by J. Aron is recognized in revenue when the inventory is sold to third parties.
During the Predecessor period, the crude oil inventory was treated as financed inventory and reflected on the balance sheet and the refined product inventory was relieved and excluded from the balance sheet when purchased by J. Aron at the inception of the Supply and Offtake Agreement. The repurchase requirement for the crude oil was considered to contain an embedded derivative, which was bifurcated and designated as a fair value hedge against changes to the fair value of the crude oil inventory. As such, the carrying value of inventory was adjusted for changes in fair value, with those changes recognized in earnings. The changes in fair value of the bifurcated derivative were also reflected in earnings. Additionally, sales of refined product inventory were recognized when purchased by J. Aron. See Note 6 for further discussion.
Property, Plant and Equipment
Depreciation for depreciable assets is computed using the straight-line method over management’s estimated useful lives of the related assets, which was
3
-
20
years during the Predecessor periods, and
7
-
40
years in the Successor period.
Renewable Identification Numbers
The U.S. Environmental Protection Agency (“EPA”) requires certain refiners to blend biofuels into the fuel products they produce pursuant to the EPA’s Renewable Fuel Standard - 2 ("RFS-2"). Alternatively, credits, called Renewable Identification Numbers ("RINs"), which may be generated and/or purchased, can be used to satisfy this obligation instead of physically blending biofuels ("RINs Obligation"). See Note 3 for further information.
From time to time, we enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs Obligation. These future RIN commitment contracts meet the definition of derivative instruments under ASC 815 and are recorded at estimated fair value in accordance with the provisions of ASC 815. During the Successor period, changes in the fair value of these future RIN commitment contracts are recorded in cost of goods sold on the consolidated statements of income. During the Predecessor period, we elected the normal purchase and sale exception and did not record these contracts at their fair values. See Note 4 for further information.
Income Taxes
Following the Delek/Alon Merger, operations of the Partnership are included in the consolidated Texas franchise tax return of Delek. Prior to the Delek/Alon Merger, Texas franchise tax was reported in the financial statements for the Partnership as if a separate return was filed.
Beginning July 1, 2017, Texas franchise tax is allocated to the Partnership based on its relative share of the consolidated gross margin of Delek.
Change in Classification
In connection with conforming the accounting policies to that of Delek in connection with the Merger, the presentation and classification of certain financial statement amounts has changed in the Successor period as compared to the Predecessor period. The most significant of these changes is the change in classification of catalysts and turnaround costs. During the Predecessor period, such costs were included in other non-current assets on the balance sheet. In the Successor period, such costs are included in property, plant and equipment. Other changes in classification have been made to the Successor period as compared to the Predecessor period, as appropriate, to conform to the presentation of the Delek consolidated financial statements.
New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (the “FASB”) issued guidance to refine and expand hedge accounting for both financial and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also makes certain targeted improvements to 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, and can be early adopted for any interim or annal financial statements that have not yet been issued. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The modification accounting guidance applies if the value, vesting conditions or classification of the award changes. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and can be early adopted for any interim or annual financial statements that have not yet been issued. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In January 2017, the FASB issued guidance that eliminates Step 2 of the goodwill impairment test, which required a comparison of the implied fair value of goodwill of 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. We expect to adopt this guidance on or before the effective date and we do not anticipate that the adoption will have a material impact on our business, financial condition or results of operations.
In January 2017, the FASB issued guidance clarifying the definition of a business in order to assist entities with evaluating when a set of transferred assets and activities is considered a business. In general, we expect that the revised definition will result in fewer acquisitions being accounted for as business combinations than under the current guidance. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted under certain circumstances. We early adopted this guidance as of July 1, 2017, with no material impact to our consolidated financial statements.
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment award transactions, including the accounting for excess tax benefits and deficiencies, classification of awards as either equity or liabilities and classification of excess tax benefits on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and can be early adopted for any interim or annual financial statements that have not yet been issued. We have adopted the updated guidance, effective January 1, 2017, with no material impact to our consolidated financial statements.
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 expect to adopt this guidance on or before the effective date and currently do not expect this new guidance to have a material impact on our business, financial condition or results of operations.
In July 2015, the FASB issued guidance requiring entities to measure FIFO or average cost inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not change the measurement of inventory measured using LIFO or the retail inventory method. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We adopted this guidance on July 1, 2017 in connection with the Merger, and the adoption did not have a material impact on our business, financial condition or results of operations.
In May 2014, the FASB issued guidance regarding “Revenue from Contracts with Customers,” to clarify the principles for recognizing revenue. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and can be adopted retrospectively. We will adopt this guidance on January 1, 2018.
As part of our efforts to prepare for adoption, in connection with the Delek/Alon Merger, we reviewed and gained an understanding of the new revenue recognition accounting guidance as applicable to the Partnership, performed scoping to identify and evaluate revenue streams under the new standard, and continue to review industry specific implementation guidance. We also developed internal controls over the implementation and transition process. We will perform testing to confirm our overall assessment during the fourth quarter of 2017 and determine any transition adjustments that may be required. We preliminarily expect to use the modified retrospective adoption method to apply this standard, under which the cumulative effect of initially applying the new guidance will be recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.
2
.
Delek/Alon Merger
The Delek/Alon Merger was accounted for using the acquisition method. The Partnership estimated the enterprise value of the Partnership on July 1, 2017 based on fair value as of the effective date. The estimated fair value of the partners’ capital balances as of July 1, 2017 was
$655,307
.
As a result of the Partnership’s election to apply push-down accounting in connection with the Delek/Alon Merger, our assets and liabilities were adjusted to fair value on July 1, 2017. The Partnership has recorded goodwill as the excess of the estimated enterprise value over the sum of the fair value amounts allocated to the Partnership’s assets and liabilities. The allocation was based upon a preliminary valuation. Our estimates and assumptions are subject to change during the purchase price allocation period. The preliminary purchase price allocation as of
September 30, 2017
is summarized as follows:
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
|
|
|
|
|
|
Cash
|
|
$
|
167,239
|
|
Receivables
|
|
119,495
|
|
Inventories
|
|
91,582
|
|
Prepaids and other current assets
|
|
5,895
|
|
Property, plant and equipment
(1)
|
|
402,273
|
|
Acquired intangibles
(1) (2)
|
|
43,924
|
|
Goodwill
|
|
568,541
|
|
Other non-current assets
|
|
11,882
|
|
Accounts payable
|
|
(179,815
|
)
|
Obligation under Supply and Offtake Agreement
|
|
(73,245
|
)
|
Other current liabilities
|
|
(184,155
|
)
|
Deferred income taxes
|
|
(2,365
|
)
|
Long term debt, net of current portion
|
|
(288,750
|
)
|
Other non-current liabilities
|
|
(27,194
|
)
|
|
|
$
|
655,307
|
|
_______________________
|
|
(1)
|
The primary areas of the purchase price allocation that are not yet finalized relate to property, plant and equipment valuation and allocation, evaluation of certain contracts and certain evaluations of legal and environmental matters.
|
(2)
The acquired intangibles amount includes the following identified intangibles:
|
|
•
|
third-party fuel supply agreement intangible that is subject to amortization with a preliminary fair value of
$43,000
, which will be amortized over a
10
-year useful life. We recognized amortization expense for the three months ended
September 30, 2017
of
$1,075
. The estimated amortization is
$1,075
for the fourth quarter of 2017 and
$4,300
for each of the five succeeding fiscal years.
|
|
|
•
|
Refinery permits preliminarily valued at
$924
, which have an indefinite life.
|
3
.
Fair Value Measurements
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of our assets and liabilities that fall under the scope of Accounting Standards Codification (“ASC”) 825,
Financial Instruments
("ASC 825").
We apply the provisions of ASC 820,
Fair Value Measurements
("ASC 820"), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to our commodity derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material to our financial statements at this time.
Our RINs Obligation surplus or deficit is based on the amount of RINs we must purchase, net of amounts internally generated and purchased and the price of those RINs as of the balance sheet date. The RINs Obligation surplus or deficit is categorized as Level 2 and is measured at fair value based on quoted prices from an independent pricing service.
Our RIN commitment contracts are future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs Obligation. In the Successor period, they are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service. Changes in the fair value of these future RIN commitment contracts are recorded in cost of goods sold on the consolidated statements of income. In the Predecessor period, we elected the normal purchase and sale exception and did not record these contracts at their fair values.
We determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We classify financial assets and financial liabilities into the following fair value hierarchy:
|
|
•
|
Level 1 - valued based on quoted prices in active markets for identical assets and liabilities;
|
|
|
•
|
Level 2 - valued based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability; and
|
|
|
•
|
Level 3 - valued based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Beginning July 1, 2017, we account for the liability to repurchase inventory previously sold to J. Aron under the Supply and Offtake Agreement, defined in Note 6 (the “step-out liability”), at fair value in accordance with ASC 825
,
as it pertains to the fair value option. This standard permits the election to carry financial instruments and certain other items similar to financial instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. By electing the fair value option, we can achieve an accounting result similar to a fair value hedge without having to follow the complex hedge accounting rules. Our J. Aron step-out liability is categorized as Level 2, and is measured at fair value using market prices for the consigned crude oil and refined products we are required to repurchase from J. Aron at the end of the term of the Supply and Offtake Agreement. The J. Aron step-out liability is presented in the Obligation under Supply and Offtake Agreement line item of our condensed consolidated balance sheet as of
September 30, 2017
. Such inventory was previously considered consigned, and we previously recorded an associated embedded derivative at fair value, and designated such as a fair value hedge on the change in fair value of the inventory in the Predecessor periods. See Note 6 for further discussion.
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at
September 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Successor
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Commodity contracts (futures)
|
$
|
—
|
|
|
$
|
311
|
|
|
$
|
—
|
|
|
$
|
311
|
|
Total assets
|
—
|
|
|
311
|
|
|
—
|
|
|
311
|
|
Liabilities
|
|
|
|
|
|
|
|
Commodity contracts (futures)
|
—
|
|
|
(199
|
)
|
|
—
|
|
|
(199
|
)
|
RINs obligation deficit
|
—
|
|
|
(29,593
|
)
|
|
—
|
|
|
(29,593
|
)
|
RIN commitment contracts
|
—
|
|
|
(6,614
|
)
|
|
—
|
|
|
(6,614
|
)
|
J. Aron step-out liability
|
—
|
|
|
(99,108
|
)
|
|
—
|
|
|
(99,108
|
)
|
Total liabilities
|
—
|
|
|
(135,514
|
)
|
|
—
|
|
|
(135,514
|
)
|
Net Liabilities
|
$
|
—
|
|
|
$
|
(135,203
|
)
|
|
$
|
—
|
|
|
$
|
(135,203
|
)
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Commodity contracts (futures and forwards)
|
$
|
1,930
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,930
|
|
Fair value hedge of consigned inventory
|
—
|
|
|
4,389
|
|
|
—
|
|
|
4,389
|
|
Total assets
|
1,930
|
|
|
4,389
|
|
|
—
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Commodity contracts (futures and forwards)
|
(2,619
|
)
|
|
—
|
|
|
—
|
|
|
(2,619
|
)
|
Total liabilities
|
(2,619
|
)
|
|
—
|
|
|
—
|
|
|
(2,619
|
)
|
Net (liabilities) assets
|
$
|
(689
|
)
|
|
$
|
4,389
|
|
|
$
|
—
|
|
|
$
|
3,700
|
|
4
.
Derivative Instruments
We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations as well as to reduce earnings volatility. We do not speculate using derivative instruments. Credit risk on our derivative instruments is mitigated by transacting with counterparties meeting established collateral and credit criteria.
Mark to Market
We have certain contracts that serve as economic hedges, which are derivatives used for risk management but not designated as hedges for financial accounting purposes. All economic hedge transactions are recorded at fair value and any changes in fair value between periods are recognized in earnings.
We have contracts that are used to fix prices on forecasted purchases of inventory, which we refer to as futures. Futures represent trades executed which have not been closed or settled at the end of the reporting period.
The following table presents the fair value of our derivative instruments as of September 30, 2017. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements, including cash collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below differ from the amounts presented in our condensed consolidated balance sheets. See Note
3
for further information regarding the fair value of derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
September 30, 2017
|
Derivative Type
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Commodity contracts (futures)
(1)
|
Other current assets
|
|
$
|
311
|
|
|
$
|
(199
|
)
|
RIN commitment contracts
(2)
|
Other current liabilities
|
|
—
|
|
|
(6,614
|
)
|
Total gross fair value of derivatives
|
|
|
311
|
|
|
(6,813
|
)
|
Less: Counterparty netting and cash collateral
(3)
|
|
(1,558
|
)
|
|
(199
|
)
|
Total net fair value of derivatives
|
|
$
|
1,869
|
|
|
$
|
(6,614
|
)
|
|
|
(1)
|
As of September 30, 2017, we had open derivative positions representing
432 thousand
barrels of crude oil and refined petroleum products.
|
|
|
(2)
|
As of September 30, 2017, we had open RIN contracts representing
320,217 thousand
RINs.
|
|
|
(3)
|
As of September 30, 2017,
$1,757
of cash collateral held by a counterparty has been netted with the derivatives with that counterparty.
|
Fair Value Hedge
Prior to July 1, 2017, we had forwards that represent physical trades for which pricing and quantities have been set, but the physical product delivery has not occurred by the end of the reporting period. These were designated as fair value hedges and were used to hedge price volatility of certain refining inventories and firm commitments to purchase inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, was recognized in earnings in the same period.
We had certain embedded commodity derivatives associated with the Supply and Offtake Agreement discussed in
Note 6
that were accounted for as a fair value hedge, which had purchase volumes of
126 thousand
barrels of crude oil as of
December 31, 2016
.
The following table presents the effect of derivative instruments on the consolidated balance sheets as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31, 2016
|
Derivative Type
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Commodity contracts (futures and forwards)
|
Accounts receivable
|
|
$
|
980
|
|
|
$
|
(950
|
)
|
Commodity contracts (futures and forwards)
|
Accrued liabilities
|
|
950
|
|
|
(1,669
|
)
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Fair value hedge of consigned inventory
|
Other assets
|
|
4,389
|
|
|
—
|
|
Total gross fair value of derivatives
|
|
|
6,319
|
|
|
(2,619
|
)
|
Less: Counterparty netting and cash collateral
(1)
|
|
1,900
|
|
|
(1,900
|
)
|
Total net fair value of derivatives
|
|
$
|
4,419
|
|
|
$
|
(719
|
)
|
|
|
(1)
|
As of December 31, 2016, there was
no
cash collateral held by a counterparty to net.
|
The following tables present the effect of derivative instruments on the consolidated statements of operations:
Derivatives in fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Location
|
|
Period from January 1, 2017 to June 30, 2017
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
Fair value hedge of consigned inventory
(1)
|
Interest expense
|
|
741
|
|
|
(1,772
|
)
|
|
(5,995
|
)
|
Total derivatives
|
|
|
$
|
741
|
|
|
$
|
(1,772
|
)
|
|
$
|
(5,995
|
)
|
_______________________
|
|
(1)
|
Changes in the fair value hedge are substantially offset in earnings by changes in the hedged item.
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Location
|
|
Period from July 1, 2017 to September 30, 2017
|
|
|
Period from January 1, 2017 to June 30, 2017
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
Commodity contracts (futures)
|
Cost of goods sold
|
|
(2,393
|
)
|
|
|
3,479
|
|
|
(1,199
|
)
|
|
4,998
|
|
Total derivatives
|
|
|
$
|
(2,393
|
)
|
|
|
$
|
3,479
|
|
|
$
|
(1,199
|
)
|
|
$
|
4,998
|
|
Compliance Program Market Risk
We are obligated by government regulations to blend a certain percentage of biofuels into the products that we produce and are consumed in the U.S. We purchase biofuels from third parties and blend those biofuels into our products, and each gallon of biofuel purchased includes a renewable identification number, or RIN. To the degree we are unable to blend biofuels at the required percentage, a RINs deficit is generated and we must acquire that number of RINs by the annual reporting deadline in order to remain in compliance with applicable regulations. Alternatively, if we have a RINs surplus, some of those RINs could be sold. Any such sales would be subject to our normal credit evaluation process.
We are exposed to market risk related to the volatility in the price of credits needed to comply with these governmental and regulatory programs. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. We may also sell the RINs with an agreement to repurchase in the future at a fixed price. Some of these contracts meet the definition of derivative instruments under ASC 815. In the Successor period
,
these contracts are recorded at estimated fair value in accordance with the provisions of ASC 815. Changes in the fair value of these future RIN commitment contracts are recorded in cost of goods sold on the consolidated statements of income. In the Predecessor period, we elected the normal purchase and sale exception and recorded purchases and sales as a component of cost of goods sold in the consolidated statements of income.
The cost of meeting our obligations under these compliance programs for the Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
was
$7,314
and
$3,712
, respectively, and
$6,438
and
$6,620
for the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended
September 30, 2016
, respectively. These amounts are reflected in cost of goods sold in the consolidated statements of operations.
5
.
Inventory
Carrying value of inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2017
|
|
|
December 31,
2016
|
Crude oil, refined products and blendstocks
|
$
|
99,802
|
|
|
|
$
|
38,109
|
|
Materials and supplies
|
—
|
|
|
|
11,573
|
|
Total inventories
|
$
|
99,802
|
|
|
|
$
|
49,682
|
|
Effective July 1, 2017, in connection with the Delek/Alon Merger, inventory was recorded at fair value under the acquisition method. Going forward, cost of inventory is accounted for using the FIFO method, pursuant to which inventories are valued at the lower of FIFO cost or net realizable value.
Prior to July 1, 2017, our Predecessor determined the cost of inventory using the LIFO valuation method and costs in excess of market value were charged to cost of goods sold. At
December 31, 2016
, the market value of our refined products and blendstock inventories was less than inventories valued on a LIFO cost basis, which resulted in a lower of cost or market reserve of
$6,213
. At
December 31, 2016
, the market value of our crude oil inventories exceeded LIFO costs, net of the fair value hedged item, by
$5,236
.
6
.
Crude Oil Supply and Inventory Purchase Agreements
We have entered into a Supply and Offtake Agreement and other associated agreements (together “Supply and Offtake Agreement”) with J. Aron. Pursuant to the Supply and Offtake Agreement, (i) J. Aron agreed to sell to us, and we agreed to buy from J. Aron, at market prices, crude oil for processing at our refinery and (ii) we agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at our refinery. The Supply and Offtake Agreement also provides for the sale, at market prices, of our crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage facilities, and the identification of prospective purchasers of refined products on J. Aron’s behalf. These daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a receivable related to this monthly settlement of
$7,052
as of
September 30, 2017
. The Supply and Offtake Agreement has an initial term that expires in May 2021. J. Aron may elect to terminate the Supply and Offtake Agreement prior to the expiration of the initial term beginning in May 2018 and upon each anniversary thereof, on
six
months’ prior notice. We may elect to terminate in May 2020 on
six
months’ prior notice.
Effective July 1, 2017, in connection with the Delek/Alon Merger, the Supply and Offtake Agreement is accounted for as a product financing arrangement. We incurred fees payable to J. Aron of
$1,455
during the three months ended
September 30, 2017
. These amounts are included as a component of interest expense in the condensed consolidated statements of income.
Upon any termination of the Supply and Offtake Agreement, including in connection with a force majeure event, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements. Upon the expiration or termination of the Supply and Offtake Agreement, we will be required to repurchase the consigned crude oil and refined products from J. Aron at then-prevailing market prices. At
September 30, 2017
, we had
1.6 million
barrels of inventory consigned from J. Aron, and we have recorded liabilities associated with this consigned inventory of
$99,108
in the condensed consolidated balance sheet.
Prior to July 1, 2017, associated with the Supply and Offtake Agreement, our Predecessor had a fair value hedge of our inventory purchase commitment with J. Aron and crude oil inventory consigned to J. Aron (“crude oil consignment inventory”). Additionally, financing charges related to the Supply and Offtake Agreement were recorded as interest expense in the consolidated statements of operations.
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
At
December 31, 2016
, we had net current receivables of
$10,569
with J. Aron for purchases and sales, and a consignment inventory receivable representing a deposit paid to J. Aron of
$6,290
. At
December 31, 2016
, we had non-current liabilities for the original financing of
$7,550
, net of the related fair value hedge. Additionally, we had net current payables of
$719
at
December 31, 2016
, for forward commitments related to month-end consignment inventory target levels differing from projected levels and the associated pricing with these inventory level differences.
7
.
Property, Plant and Equipment
Property, plant and equipment, net and depreciation expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2017
|
|
|
December 31,
2016
|
Refining facilities
|
$
|
424,154
|
|
|
|
$
|
732,697
|
|
Less: Accumulated depreciation
|
(6,048
|
)
|
|
|
(312,143
|
)
|
Property, plant and equipment, net
|
$
|
418,106
|
|
|
|
$
|
420,554
|
|
Depreciation expense for the Successor three-month period ended September 30, 2017 and the Predecessor three-month period ended September 30, 2016 was
$6,048
and
$9,316
, respectively. Depreciation expense for the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended September 30, 2016 was
$19,514
and
$27,558
, respectively.
8
.
Other Assets and Liabilities
The detail of other non-current assets is as follows:
Other Non-Current Assets, Net
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2017
|
|
|
December 31,
2016
|
Deferred turnaround and catalyst cost
|
$
|
—
|
|
|
|
$
|
34,252
|
|
Contract and other intangibles
|
42,849
|
|
|
|
—
|
|
Receivable from Supply and Offtake Agreement (Note 6)
|
6,290
|
|
|
|
6,290
|
|
Fair value hedge of consigned inventory (Note 4)
|
—
|
|
|
|
4,389
|
|
Other
|
4,892
|
|
|
|
8,280
|
|
Total other assets
|
$
|
54,031
|
|
|
|
$
|
53,211
|
|
Accounts Payable
Included in accounts payable were
$78,565
related to RINs financing transactions as of
December 31, 2016
that are accounted for as product financing arrangements. RINs financing transactions were included in accrued expenses and other current liabilities as of
September 30, 2017
.
The detail of accrued expenses and other non-current liabilities is as follows:
Accrued Liabilities and Other Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2017
|
|
|
December 31,
2016
|
Accrued Liabilities:
|
|
|
|
|
Taxes other than income taxes, primarily excise taxes
|
$
|
21,196
|
|
|
|
$
|
31,882
|
|
Accrued finance charges
|
493
|
|
|
|
372
|
|
Environmental accrual (Note 15)
|
4,214
|
|
|
|
796
|
|
Commodity contracts (Note 4)
|
6,614
|
|
|
|
719
|
|
RINs Obligation deficit (Note 3)
|
29,593
|
|
|
|
—
|
|
RINs financing transactions
|
109,276
|
|
|
|
—
|
|
Other
|
10,434
|
|
|
|
9,331
|
|
Total accrued liabilities
|
$
|
181,820
|
|
|
|
$
|
43,100
|
|
|
|
|
|
|
Other Non-Current Liabilities:
|
|
|
|
|
Obligation under Supply and Offtake Agreement (Note 6)
|
$
|
—
|
|
|
|
$
|
11,939
|
|
Environmental accrual (Note 15)
|
25,171
|
|
|
|
5,796
|
|
Asset retirement obligations
|
2,010
|
|
|
|
3,131
|
|
RINs financing transactions
|
—
|
|
|
|
39,478
|
|
Other
|
200
|
|
|
|
2,536
|
|
Total other non-current liabilities
|
$
|
27,381
|
|
|
|
$
|
62,880
|
|
9
.
Long-Term Obligations
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2017
|
|
|
December 31,
2016
|
Term loan credit facility
|
$
|
238,125
|
|
|
|
$
|
236,319
|
|
Revolving credit facility
|
100,000
|
|
|
|
—
|
|
Total debt
|
338,125
|
|
|
|
236,319
|
|
Less: Current portion
|
2,500
|
|
|
|
2,500
|
|
Total long-term debt
|
$
|
335,625
|
|
|
|
$
|
233,819
|
|
At July 1, 2017, all outstanding debt was adjusted to fair value pursuant to the push-down of the acquisition method of accounting.
Term Loan Credit Facility
In November 2012, we entered into a
$250,000
term loan with Credit Suisse (the “Term Loan”). The Term Loan requires principal payments of
$2,500
per annum paid in equal quarterly installments until maturity in November 2018. The Term Loan bears interest at a rate equal to the sum of (i) the Eurodollar rate (with a floor of
1.25%
per annum) plus (ii) a margin of
8.00%
per annum. At
September 30, 2017
, the weighted average interest rate was approximately
9.25%
per annum under the Term Loan.
The Term Loan is secured by a first priority lien on all of our fixed assets and other specified property, as well as on our general partner interest held by the General Partner, and a second priority lien on our cash, accounts receivables, inventories and related assets. The Term Loan contains restrictive covenants, such as restrictions on liens, mergers, consolidation, sales of assets, additional indebtedness, different businesses, certain lease obligations and certain restricted payments. The Term Loan does not contain any maintenance financial covenants.
At
September 30, 2017
, and December 31, 2016, the Term Loan had an outstanding principal balance of
$238,125
and $
240,000
, respectively. Outstanding borrowings are net of deferred financing costs and debt discount of $
2,307
and
$1,374
, respectively, at December 31, 2016.
Revolving Credit Facility
We have a
$240,000
revolving credit facility (the “Revolving Credit Facility”) that will mature on May 6, 2019 or an earlier date linked to our Term Loan maturity date, in accordance with the terms of the Revolving Credit Facility. The Revolving Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility amount or the borrowing base amount under the facility. Borrowings under the Revolving Credit Facility allow us to choose between base rate loans or LIBOR loans, plus respective margins.
The Revolving Credit Facility is secured by a first priority lien on our cash, accounts receivables, inventories and related assets and a second priority lien on our fixed assets and other specified property. The Revolving Credit Facility contains maintenance financial covenants. At
September 30, 2017
, we were in compliance with these covenants.
At
September 30, 2017
, the weighted average borrowing rate was approximately
5.3%
. Additionally, the Revolving Credit Facility requires the payment of a quarterly fee on the average unused revolving commitment. As of
September 30, 2017
, this fee was
0.65%
per year. As of
September 30, 2017
, we had
$100,000
of outstanding borrowings under the credit facility. There were
no
borrowings outstanding at December 31, 2016. At
September 30, 2017
and
December 31, 2016
, we had letters of credit outstanding of
$14,398
and
$100,613
, respectively. Unused credit commitments under the Revolving Credit Facility as of
September 30, 2017
were
$125,602
.
As of September 30, 2017, the Partnership has a letter of commitment from Delek to refinance the Revolving Credit Facility as long-term debt prior to its maturity.
As such, the borrowings outstanding under this facility as of September 30, 2017 have been classified as non-current.
10
.
Income Taxes
For tax purposes, each partner of the Partnership is required to take into account its share of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and fair market value of our assets, the acquisition price of such partner's units and the taxable income allocation requirements under our Partnership Agreement.
11
.
Net Income per Common Unit
The Partnership’s net income (loss) is allocated wholly to the common units as the general partner does not have an economic interest. Basic and diluted net income (loss) per common unit is calculated by dividing net income (loss) by the weighted-average number of common units outstanding during the period.
The following table illustrates the Partnership’s calculation of net income (loss) per common unit for the three and
nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period from July 1, 2017 to September 30, 2017
|
|
|
Period from January 1, 2017 to June 30, 2017
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
Net income (loss)
|
$
|
29,236
|
|
|
|
$
|
41,792
|
|
|
$
|
2,083
|
|
|
$
|
(5,288
|
)
|
Net income (loss) per common unit, basic and diluted
|
0.47
|
|
|
|
0.67
|
|
|
0.03
|
|
|
(0.08
|
)
|
Weighted-average common units outstanding, basic and diluted
|
62,529
|
|
|
|
62,523
|
|
|
62,520
|
|
|
62,515
|
|
12
.
Equity
We had
11,492,800
common limited partner units held by the public outstanding as of
September 30, 2017
. Additionally, as of
September 30, 2017
, Delek owned an
81.6%
limited partner interest in us, consisting of
51,036,528
common limited partner units. The Delek/Alon Merger had no impact on the number of units outstanding.
Equity Activity
The table below summarizes the changes to equity during the nine months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Unitholders
|
|
General Partner
|
|
Total Partners' Equity
|
Predecessor
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
103,503
|
|
|
$
|
—
|
|
|
$
|
103,503
|
|
Unit-based compensation
|
|
47
|
|
|
—
|
|
|
47
|
|
Distributions paid to unitholders
|
|
(30,638
|
)
|
|
—
|
|
|
(30,638
|
)
|
Net income
|
|
41,792
|
|
|
—
|
|
|
41,792
|
|
Balance at June 30, 2017
|
|
$
|
114,704
|
|
|
$
|
—
|
|
|
$
|
114,704
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
Balance at July 1, 2017
|
|
$
|
655,307
|
|
|
$
|
—
|
|
|
$
|
655,307
|
|
Unit-based compensation
|
|
25
|
|
|
—
|
|
|
25
|
|
Distributions paid to unitholders
|
|
(21,885
|
)
|
|
—
|
|
|
(21,885
|
)
|
Net income
|
|
29,236
|
|
|
—
|
|
|
29,236
|
|
Balance at September 30, 2017
|
|
$
|
662,683
|
|
|
$
|
—
|
|
|
$
|
662,683
|
|
Cash Distributions
We have adopted a policy pursuant to which we will distribute all of the available cash generated each quarter, as defined in the Partnership Agreement, subject to the approval of the board of directors of the General Partner in accordance with the terms and conditions of our Partnership Agreement. The per unit amount of available cash to be distributed each quarter, if any, will be distributed within
60
days following the end of such quarter.
The following table summarizes the Partnership’s cash distribution activity during the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Available for Distribution per Unit
(1)
|
|
Distribution Paid Per Unit
|
|
Total Distribution Paid
|
Predecessor
|
|
|
|
|
|
|
First Quarter 2017
|
|
$
|
0.38
|
|
|
$
|
0.11
|
|
|
$
|
6,877
|
|
Second Quarter 2017
|
|
$
|
0.35
|
|
|
$
|
0.38
|
|
|
$
|
23,761
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
Third Quarter 2017
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
$
|
21,885
|
|
|
|
(1)
|
Represents the aggregate cash available for distribution per unit attributable to the period indicated.
|
13
.
Equity Based Compensation
Restricted Units
We, through our General Partner, have adopted the Alon USA Partners, LP 2012 Long-Term Incentive Plan (the “LTIP”) for the employees, consultants and the directors of the Partnership, the General Partner and its affiliates who perform services for us. The LTIP provides grants of options, unit appreciation rights, restricted units, phantom units, unit awards, substitute awards, other unit-based awards, cash awards, performance awards and distribution equivalent rights. The maximum aggregate number of common units that may be issued under the LTIP shall not exceed
3,125,000
units.
Non-employee directors of the General Partner are awarded an annual grant of
$25
in restricted units, which vest over a period of
three
years, assuming continued service at vesting. In May 2017, we granted awards of
9,108
restricted common units at a grant date price of
$10.98
per unit.
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
14
.
Related Party Transactions
Acquisition of Alon Energy
The general and limited partner interests that were previously owned by Alon Energy were contributed to Delek in connection with the Delek/Alon Merger, as described in Note 1. As a result of the Delek/Alon Merger, both the Partnership and Alon Energy became subsidiaries of Delek, and Delek thereafter indirectly owns
100%
of our General Partner and
81.6%
of our limited partner interest. As the owner of the General Partner, Delek is responsible for appointing all members of the board of directors of our General Partner, including all of our General Partner’s independent directors. The Partnership has various operating and administrative agreements with Alon Energy (now Delek), including the agreements described below. Delek performs the administrative functions defined in such agreements on the Partnership’s behalf.
Sales and Receivables
Sales to related parties include feedstock, refined and blended product and asphalt sold to other Delek subsidiaries at prices substantially determined by reference to market commodity pricing information. These sales are included in net sales in the consolidated statements of operations. Accounts receivable from related parties includes sales of motor fuels and is shown separately on the consolidated balance sheets.
Purchases and Payables
We had purchases of crude oil, products and RINs from Delek of
$770
and
$175
for the Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
, respectively, and
$22,239
and
$960
for the Predecessor six months ended June 30, 2017 and and the Predecessor nine-month period ended
September 30, 2016
, respectively. Accounts payable includes a balance outstanding to Delek of
$84,631
at
September 30, 2017
.
Costs Allocated from Delek
The Partnership is a subsidiary of Delek and is operated as a component of the integrated operations of Delek. As such, the executive officers of Delek, who are employed by another subsidiary of Delek, also serve as executive officers of the General Partner and Delek’s other subsidiaries.
Corporate Overhead Allocations
Delek performs general corporate and administrative services and functions for us and Delek’s other subsidiaries, which include accounting, treasury, cash management, tax, information technology, insurance administration and claims processing, legal, environmental, risk management, audit, payroll and employee benefit processing and internal audit services. Delek allocates the expenses actually incurred in performing these services to the Partnership based primarily on the estimated amount of time the individuals performing such services devote to our business and affairs relative to the amount of time they devote to the business and affairs of Delek’s other subsidiaries. The management of Delek and the General Partner consider these allocations to be reasonable. We record the amount of such allocations as selling, general and administrative expenses. Our allocation for selling, general and administrative expenses was
$3,215
and
$3,301
, for the Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
, respectively, and
$5,766
and
$10,966
for the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended
September 30, 2016
, respectively.
Labor Costs
As we are operated as a component of Delek’s integrated operations, we have
no
employees. As a result, employee expense costs for Delek employees working in our operations have been allocated to us and recorded as payroll expense in direct operating expenses and selling, general and administrative expenses. The allocated portion of Delek’s employee expense costs included in direct operating expenses were
$6,400
and
$7,391
for the Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
, respectively, and
$14,474
and
$21,723
for the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended
September 30, 2016
, respectively. The allocated portion of Delek’s employee expense costs included in selling, general and administrative expenses were
$3,805
and
$1,178
for the Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
, respectively, and
$1,967
and
$3,413
for the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended
September 30, 2016
, respectively.
Insurance Costs
Insurance costs related to the Big Spring refinery and wholesale marketing operations are allocated to us by Delek based on estimated insurance premiums on a stand-alone basis relative to Delek’s total insurance premium. Our allocation for insurance costs included in direct operating expenses were
$971
and
$1,507
for the Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
, respectively, and
$2,246
and
$3,879
for the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended
September 30, 2016
, respectively.
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
Leasing Agreements
Included as a component of selling, general and administrative expenses are payments to a subsidiary of Alon Energy for use of certain equipment at the Big Spring refinery totaling
$1,230
for the both Successor three-month period ended
September 30, 2017
and the Predecessor three-month period ended
September 30, 2016
,
$2,460
for the Predecessor six-month period ended June 30, 2017 and
$3,690
for the the Predecessor nine-month period ended
September 30, 2016
.
Cash Distributions
Our common unitholders are entitled to receive distributions of available cash as it is determined by the board of directors of the General Partner in accordance with the terms and provisions of our Partnership Agreement. During the Successor three-month period ended
September 30, 2017
we paid cash distributions of
$21,885
, or
$0.35
per unit, of which
$17,850
was paid to Delek. During the Predecessor six-month period ended June 30, 2017 and the Predecessor nine-month period ended
September 30, 2016
, we paid cash distributions of
$30,638
or
$0.49
per unit, and
$13,754
, or
$0.22
per unit, of which
$24,990
and
$11,220
was paid to Alon Energy, respectively.
|
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15
.
|
Commitments and Contingencies
|
Commitments
In the normal course of business, we have long-term commitments to purchase, at market prices, utilities such as natural gas, electricity and water for use by our refinery, terminals and pipelines. We are also party to various refined product and crude oil supply and exchange agreements, which are typically short-term in nature or provide terms for cancellation.
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters.
Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations.
Environmental, Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the EPA, the United States Department of Transportation, the Occupational Safety and Health Administration, the Texas Commission on Environmental Quality, and the Railroad Commission of Texas, as well as other state and federal agencies.
These laws and regulations govern the discharge of materials into the environment, waste management practices, pollution prevention measures and the composition of the fuels we produce, as well as the safe operation of our plants and pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our refineries, terminals, pipelines and related operations, and may be subject to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured, handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.
We have been negotiating an agreement with EPA for over
10
years under EPA’s National Petroleum Refinery Initiative regarding alleged historical violations of the federal Clean Air Act. A Consent Decree resolving these alleged historical violations for our refinery was lodged with the United States District Court for the Northern District of Texas on June 6, 2017, and we expect that Consent Decree to become final later this year. If finalized, the Consent Decree will require payment of a
$456
civil penalty and capital expenditures for pollution control equipment that may be significant over the next
5
years.
As of
September 30, 2017
, we have recorded an environmental liability of approximately
$29,385
, primarily related to remediating or otherwise addressing certain environmental issues of a non-capital nature at the Big Spring Refinery. This liability includes estimated costs for ongoing investigation and remediation efforts, which were already being performed by the former operators of the refineries and terminals prior to our acquisition of those facilities, for known contamination of soil and groundwater, as well as estimated costs for additional issues which have been identified subsequent to the acquisitions.
Approximately
$4,214
of the total liability is expected to be expended over the next 12 months with most of the balance expended by 2046. In the future, we could be required to extend the expected remediation period or undertake additional investigations of our refineries, pipelines and terminal facilities, which could result in additional remediation liabilities.
16
.
Subsequent Event
Planned Acquisition of Non-controlling Interest in the Partnership
On November 8, 2017, Delek and the Partnership announced a definitive merger agreement under which Delek will acquire all of the outstanding limited partner units which Delek does not already own in an all-equity transaction. Delek currently owns approximately
51,000
limited partner units of the Partnership, or approximately
81.6%
of the outstanding units. Under terms of the merger agreement, the owners of the remaining outstanding units in the Partnership that Delek does not currently own will receive a fixed exchange ratio of
0.49
Delek shares for each limited partner unit of the Partnership. This transaction was approved by all voting members of the board of directors of the general partner of the Partnership upon the recommendation from its conflicts committee and by the board of directors of Delek. This transaction is expected to close in the first quarter of 2018.
Dividend Declaration
On
November 2, 2017
, our General Partner’s board of directors voted to declare a quarterly cash distribution of
$0.43
per share of our common units, payable on
November 22, 2017
to unitholders of record on
November 13, 2017
.