Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
A portion of our long-term debt is variable-rate debt. Changes in interest rates impact the interest payments of our variable-rate debt but generally do not impact the fair value of the liability. Conversely, changes in interest rates impact the fair value of our fixed-rate debt but do not impact its cash flows.
The ABL Facility is variable-rate debt with interest rates that are generally indexed to the prime rate or SOFR. At March 31, 2024, there were no borrowings under the ABL Facility.
The Term Loan B is variable-rate debt with interest rates that are generally indexed to the SOFR. At March 31, 2024, there was $700.0 million of outstanding borrowings under the Term Loan B at a weighted average interest rate of 5.33% plus a margin of 4.50%. A change in interest rates of 0.125% would result in an increase or decrease of our annual interest expense of $0.9 million, based on borrowings outstanding at March 31, 2024.
In March 2024, we entered into a $200.0 million interest rate swap to reduce the variability of cash outflows associated with our floating-rate, SOFR-based borrowings, including borrowings on the Term Loan B. An increase of 10% in the value of the underlying interest rate swap would result in a net change in the fair value of our interest rate swap of $0.1 million at March 31, 2024.
The current distribution rate for the Class B Preferred Units is a floating rate of the three-month London Interbank Offered Rate (“LIBOR”) interest rate (5.3314% for the quarter ended March 31, 2024) plus a spread of 7.213%. A change in interest rates of 0.125% would result in an increase or decrease of our Class B Preferred Unit distribution of $0.1 million, based on the Class B Preferred Units outstanding at March 31, 2024. Effective July 3, 2023, the reference to LIBOR in the formulation for the distribution rate in these securities was replaced with three-month CME Term SOFR, as calculated and published by CME Group Benchmark Administration, Ltd., plus a tenor spread adjustment of 0.26161% in accordance with the Adjustable Interest Rate (LIBOR) Act (“LIBOR Act”), and the rules implementing the LIBOR Act.
On April 15, 2024, the distributions for the Class C Preferred Units will accumulate at a percentage of the $25.00 liquidation preference equal to the applicable three-month LIBOR interest rate (or alternative rate as determined in accordance with our amended and restated limited partnership agreement (“Partnership Agreement”)) plus a spread of 7.384%. On or after July 1, 2024, the holders of our Class D Preferred Units can elect, from time to time, for the distributions to be calculated based on a floating rate equal to the applicable three-month LIBOR interest rate (or alternative rate as determined in accordance with our Partnership Agreement) plus a spread of 7.00% (“Class D Variable Rate”, as defined in our Partnership Agreement). Each Class D Variable Rate election shall be effective for at least four quarters following such election.
Commodity Price Risk
Our operations are subject to certain business risks, including commodity price risk. Commodity price risk is the risk that the market value of crude oil, natural gas liquids, or refined and renewables products will change, either favorably or unfavorably, in response to changing market conditions. Procedures and limits for managing commodity price risks are specified in our market risk policy. Open commodity positions and market price changes are monitored daily and are reported to senior management and to marketing operations personnel.
The crude oil, natural gas liquids, and refined and renewables products industries are “margin-based” and “cost-plus” businesses in which our realized margins depend on the differential of sales prices over our supply costs. We have no control over market conditions. As a result, our profitability may be impacted by sudden and significant changes in the price of crude oil, natural gas liquids, and refined and renewables products.
We engage in various types of forward contracts and financial derivative transactions to reduce the effect of price volatility on our product costs, to protect the value of our inventory positions, and to help ensure the availability of product during periods of short supply. We attempt to balance our contractual portfolio by purchasing volumes when we have a matching purchase commitment from our wholesale and retail customers. We may experience net unbalanced positions from time to time. In addition to our ongoing policy to maintain a balanced position, for accounting purposes we are required, on an ongoing basis, to track and report the market value of our derivative portfolio.
Although we use financial derivative instruments to reduce the market price risk associated with forecasted transactions, we do not account for financial derivative transactions as hedges. All changes in the fair value of our physical
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contracts that do not qualify as normal purchases and normal sales and settlements (whether cash transactions or non-cash mark-to-market adjustments) are reported either within revenue (for sales contracts) or cost of sales (for purchase contracts) in our consolidated statements of operations, regardless of whether the contract is physically or financially settled, and within cash flows from operations in our consolidated statements of cash flows. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Estimates” for a discussion of how we determine the fair value of our financial derivative instruments.
The following table summarizes the hypothetical impact on the March 31, 2024 fair value of our commodity derivatives of an increase of 10% in the value of the underlying commodity (in thousands):
Increase
(Decrease)
To Fair Value
Crude oil (Water Solutions segment) $ (1,504)
Crude oil (Crude Oil Logistics segment) $ (152)
Propane (Liquids Logistics segment) $ (1,432)
Butane (Liquids Logistics segment) $ (6,186)
Refined Products (Liquids Logistics segment) $ (2,867)
Other Products (Liquids Logistics segment) $ (912)
Canadian dollars (Liquids Logistics segment) $ 124
Changes in commodity prices may also impact the volumes that we are able to transport, dispose, store and market, which also impact our cash flows.
Credit Risk
Our operations are also subject to credit risk, which is the risk of loss from nonperformance by suppliers, customers or financial counterparties to a contract. Procedures and limits for managing credit risk are specified in our credit policy. Credit risk is monitored daily and we try to minimize exposure through the following:
• requiring certain customers to prepay or place deposits for our products and services;
• requiring certain customers to post letters of credit or other forms of surety;
• monitoring individual customer receivables relative to previously-approved credit limits;
• requiring certain customers to take delivery of their contracted volume ratably rather than allow them to take delivery at their discretion;
• entering into master netting agreements that allow for offsetting counterparty receivable and payable balances for certain transactions;
• reviewing the receivable aging regularly to identify issues or trends that may develop; and
• requiring marketing personnel to manage their customers’ receivable position and suspend sales to customers that have not timely paid outstanding invoices.
At March 31, 2024, our primary counterparties were retailers, resellers, energy marketers, producers, refiners, and dealers.
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