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Acquisitions
 9 Months Ended
Sep. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]  
Acquisitions Acquisitions
H2O Midstream Acquisition
We completed the H2O Midstream Acquisition on September 11, 2024, in which we acquired water disposal and recycling operations, in the Midland Basin in Texas (the "Midland Water Gathering System"), for total consideration of $229.5 million subject to customary adjustments for net working capital and indebtedness ("H2O Transaction"). The purchase price was comprised of approximately of $159.5 million in cash and $70.0 million of Preferred Units (as defined in Note 8). See Note 8 for further information on Preferred Units. The cash portion was financed through a combination of cash on hand and borrowings under the DKL Credit Facility (as defined in Note 6 ).
For the three and nine months ended September 30, 2024, we incurred $6.1 million 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 and comprehensive income for these periods.
Our consolidated financial and operating results reflect the H2O Midstream Acquisition operations beginning September 11, 2024. Our results of operations included revenue and net income of $3.6 million and $1.3 million, respectively, for the period from September 11, 2024 through September 30, 2024 related to these operations.
This 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.
Determination of Purchase Price (1)
The table below presents the estimated purchase price (in thousands):
Base purchase price:$230,000 
Less: closing net working capital (as defined in the H2O Midstream Purchase Agreement)
(2,508)
Plus: various closing adjustments
2,003 
Adjusted purchase price$229,495 
Cash paid $159,495 
Fair value of preferred units issued70,000 
Preliminary purchase price$229,495 
(1) These amounts are based upon estimates at closing, but are subject to a subsequent review and revision period pursuant to the H2O Midstream Acquisition 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 H2O Midstream Acquisition as of September 11, 2024 (in thousands):
Assets acquired:
Accounts receivables6,643 
Inventories2,448 
Other current assets879 
Property, plant and equipment174,548 
Operating lease right-of-use assets470 
Customer relationship intangible(1)
24,006 
Other intangibles(1)
34,841 
Other non-current assets21 
Total assets acquired$243,856 
Liabilities assumed:
Accounts payable$3,954 
Accrued expenses and other current liabilities5,059 
Current portion of operating lease liabilities278 
Asset retirement obligations4,851 
Operating lease liabilities, net of current portion219 
Total liabilities assumed14,361 
Fair value of net assets acquired$229,495 
(1)The acquired intangible assets include the following identified intangibles:
•Rights-of-way intangibles valued at $30.1 million, of which, the majority has an indefinite life.
•Favorable supply contract intangible that is subject to amortization with a preliminary fair value of $4.8 million which will be amortized over a 4.8 years useful life. The estimated amortization is $1.0 million for each of the next four fiscal years, and $0.4 million in the fifth succeeding fiscal year.
•The Customer relationship intangible that is subject to amortization with a preliminary fair value of $24.0 million, which will be amortized over an 12.6 years useful life. The estimated amortization is $1.9 million for each of the five succeeding fiscal years.    
The amortization expense related to the above intangible assets for the three and nine months ended September 30, 2024 was immaterial.
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, 2024. 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.
Customer relationships were valued using the income approach, with essential assumptions including projected revenues from these relationships, attrition rates, 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. For all other current assets and payables, their fair values were considered equivalent to their carrying amounts due to their short-term nature.
Unaudited Pro Forma Financial Information
The following table summarizes the unaudited pro forma financial information of the Partnership assuming the H2O Midstream Acquisition had occurred on January 1, 2023. The unaudited pro forma financial information has been adjusted to give effect to certain pro forma adjustments that are directly related to this 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 associated with revolving credit facility borrowings incurred in connection with this 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 intangible and, (iv) transaction costs. The unaudited pro forma financial information excludes any expected cost savings or other synergies as a result of this acquisition. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had this 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,
2024202320242023
(in thousands)
Net sales$226,303 $296,752 $775,369 $833,859 
Net income attributable to partners$40,045 $40,290 $119,183 $120,856 
Wink to Webster Pipeline Investment Acquisition
On August 5, 2024, the Partnership acquired Permian Pipeline Holdings, LLC, which holds 50% equity interests in W2W Holdings, from a wholly owned subsidiary of Delek Holdings. W2W Holdings includes a 15.6% indirect interest in Wink to Webster, and related joint venture indebtedness. Wink to Webster owns and operates a long-haul crude oil pipeline system with origin points at Wink and Midland in the Permian Basin and delivery points at multiple Houston area locations. Total consideration was comprised of $83.9 million in cash (including $2.7 million post-closing adjustment), forgiveness of a $60.0 million receivable from Delek Holdings and 2,300,000 of common units representing limited partnership interest in us.
This acquisition was considered a transaction between entities under common control. Accordingly, the equity interests acquired were recorded at amounts based on Delek Holdings' historical carrying value as of the acquisition date. The carrying value of the equity interests as of the acquisition date was $81.1 million. Pursuant to common control guidance, we recorded a reduction to equity of $62.8 million, included in contributions in the accompanying condensed consolidated statements of partners' equity, representing the net carrying amount of the equity interest acquired less the consideration paid. No value was assigned to the 2,300,000 common units issued. Prior periods have not been recast as these assets do not constitute a business in accordance with ASC 805, Business Combinations.