Acquisitions

6 Months Ended

Jun. 30, 2022

Business Combination and Asset Acquisition [Abstract]

Acquisitions

Acquisitions

3 Bear Acquisition

We completed the 3 Bear Acquisition on June 1, 2022 (the "Acquisition Date"), 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 base purchase price for the 3 Bear Acquisition was $624.7 million, subject to adjustments for net working capital and closing indebtedness, as defined in the 3 Bear Purchase Agreement. The 3 Bear Acquisition was financed through a combination of cash on hand and borrowings under the DKL Credit Facility.

For the three and six months ended June 30, 2022, we incurred $6.2 million and $6.4 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 $20.6 million and $1.5 million, respectively, for the period from June 1, 2022 through June 30, 2022 related to these operations.

The 3 Bear Acquisition was accounted for using the acquisition method of accounting, whereby the preliminary 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 estimated purchase price (in thousands):

Base purchase price:	$	624,700
Less: closing net working capital (as defined in the 3 Bear Purchase Agreement) (1)	(250)
Less: closing indebtedness (as defined in the 3 Bear Purchase Agreement) (1)	(80,408)
Cash paid for the adjusted purchase price	544,042
Cash paid to payoff 3 Bear credit agreement (as defined in the 3 Bear Purchase Agreement)	80,408
Preliminary purchase price	$	624,450

(1) These amounts are based upon estimates at closing, but are subject to a subsequent review and revision period pursuant to the 3 Bear Purchase Agreement at which time final settlements for these components will be determined. Such subsequent adjustments may result in changes to the preliminary purchase price.

Purchase Price Allocation

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed in the 3 Bear Acquisition as of June 1, 2022 (in thousands):

Assets acquired:
Cash and cash equivalents	$	2,678
Accounts receivables, net	28,859
Inventories	1,831
Other current assets	986
Property, plant and equipment	382,800
Operating lease right-of-use assets	7,427
Goodwill	10,615
Customer relationship intangible, net (1)	210,000
Rights-of-way (1)	13,640
Other non-current assets	500
Total assets acquired	659,336
Liabilities assumed:
Accounts payable	8,020
Accrued expenses and other current liabilities	22,145
Current portion of operating lease liabilities	1,029
Asset retirement obligations	2,261
Operating lease liabilities, net of current portion	1,431
Total liabilities assumed	34,886
Fair value of net assets acquired	$	624,450

(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 six months ended June 30, 2022 of $1.5 million. The estimated amortization is $18.0 million for each of the five succeeding fiscal years.    

•Rights-of-way intangible valued at $13.6 million, which has an indefinite life.

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 June 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.

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 June 30,		Six Months Ended June 30,
(in thousands, except per unit data)	2022	2021	2022	2021
Net sales	314,909	199,199	571,849	383,026
Net income attributable to partners	38,396	37,290	72,613	55,305
Net income per limited partner unit:
Basic income per unit	0.88	0.86	1.67	1.27
Diluted income per unit	0.88	0.86	1.67	1.27