Environmental Liabilities

6 Months Ended

Jun. 30, 2013

Environmental Liabilities

Environmental Liabilities

10. Environmental Liabilities

The Partnership currently owns or leases properties where refined petroleum products are being, or have been handled.  These properties, and the refined petroleum products handled thereon, may be subject to federal and state environmental laws and regulations.  Under such laws and regulations, the Partnership could be required to remove or remediate containerized hazardous liquids or associated generated wastes (including wastes disposed of or abandoned by prior owners or operators), to remediate contaminated property arising from the release of liquids or wastes into the environment, including contaminated groundwater, or to implement best management practices to prevent future contamination.

The Partnership maintains insurance of various types with varying levels of coverage that is considered adequate under the circumstances to cover operations and properties.  The insurance policies are subject to deductibles that are considered reasonable and not excessive.  In addition, the Partnership has entered into indemnification and escrow agreements with various sellers in conjunction with several of their respective acquisitions, as further described below.  Financial responsibility for environmental remediation is an issue negotiated in connection with each acquisition transaction.  In each case, an assessment is made of potential environmental liability exposure based on available information.  Based on that assessment and relevant economic and risk factors, a determination is made whether to, and the extent to which the Partnership will, assume liability for existing environmental conditions.

The Partnership’s environmental liability was $1.3 million and $1.2 million at June 30, 2013 and December 31, 2012, respectively.  The liability relates to sites acquired or leased since the IPO.  The Partnership made payments of $0.1 million and recorded an additional accrual of $0.2 million in the three months ended June 30, 2013.

The Partnership is indemnified by third-party escrow funds of $0.2 million and state funds or insurance totaling $1.1 million, which are recorded as indemnification assets.  State funds represent probable state reimbursement amounts.  Reimbursement will depend upon the continued maintenance and solvency of the state.  Insurance coverage represents amounts deemed probable of reimbursement under insurance policies.

The estimates used in these reserves are based on all known facts at the time and an assessment of the ultimate remedial action outcomes.  The Partnership will adjust loss accruals as further information becomes available or circumstances change.  Among the many uncertainties that impact the estimates are the necessary regulatory approvals for, and potential modifications of remediation plans, the amount of data available upon initial assessment of the impact of soil or water contamination, changes in costs associated with environmental remediation services and equipment and the possibility of existing legal claims giving rise to additional claims.

Environmental liabilities related to the contributed sites have not been assigned to the Partnership, and are still the responsibility of certain of the Predecessor Entities.  The Omnibus Agreement (further described in Note 16) provides that certain of the Predecessor Entities must indemnify the Partnership for any costs or expenses that the Partnership incurs for environmental liabilities and third-party claims, regardless of when a claim is made, that are based on environmental conditions in existence prior to the closing of the Offering for contributed sites.  Certain of the Predecessor Entities are the beneficiary of escrow accounts created to cover the cost to remediate certain environmental liabilities.  In addition, certain of the Predecessor Entities maintain insurance policies to cover environmental liabilities and/or, where available, participate in state programs that may also assist in funding the costs of environmental liabilities.  Certain sites that were contributed to the Partnership, in accordance with the Contribution Agreement, were identified as having existing environmental liabilities that are not covered by escrow accounts, state funds or insurance policies.

The following table presents a summary roll forward of the Predecessor Entity’s environmental liabilities, on an undiscounted basis, for the six months ended June 30, 2013 (in thousands):

	Balance at December 31, 2012		Additions 2013		Payments in 2013		Balance at June 30, 2013
Environmental liabilities	$	21,208	$	301	$	1,766	$	19,743

A significant portion of the Predecessor Entities’ environmental reserves have corresponding indemnification assets.  The breakdown of the indemnification assets is as follows (in thousands):

	June 30, 2013		December 31, 2012
Third-party escrows	$	7,353	$	7,988
State funds	3,519		4,051
Insurance coverage	5,737		6,037
Total indemnification assets	$	16,609	$	18,076