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EX-31.2 - CFO CERTIFICATION - Delek Logistics Partners, LPdklex312-cfocertificationx.htm
EX-32.1 - CEO CERTIFICATION - Delek Logistics Partners, LPdkl-ex321xceocertification.htm
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EX-32.2 - CFO CERTIFICATION - Delek Logistics Partners, LPdkl-ex322xcfocertification.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the quarterly period ended September 30, 2014
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                      to                     
Commission file number 001-35721

DELEK LOGISTICS PARTNERS, LP
(Exact name of registrant as specified in its charter)
Delaware
 
45-5379027
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
7102 Commerce Way
 
 
Brentwood, Tennessee
 
37027
(Address of principal executive offices)
 
(Zip Code)
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At October 31, 2014, there were 12,183,847 common units, 11,999,258 subordinated units, and 493,533 general partner units outstanding.



TABLE OF CONTENTS
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

2


Part I.
FINANCIAL INFORMATION

Item 1. Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
September 30, 2014
 
December 31, 2013 (1)
 
 
(In thousands)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
733

 
$
924

Accounts receivable
 
39,534

 
28,976

Inventory
 
9,825

 
17,512

Deferred tax assets
 
12

 
12

Other current assets
 
700

 
341

Total current assets
 
50,804

 
47,765

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
267,421

 
265,388

Less: accumulated depreciation
 
(49,318
)
 
(39,566
)
Property, plant and equipment, net
 
218,103

 
225,822

Goodwill
 
11,654

 
10,454

Intangible assets, net
 
11,587

 
12,258

Other non-current assets
 
4,024

 
5,045

Total assets
 
$
296,172

 
$
301,344

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
23,670

 
$
26,045

Accounts payable to related parties
 
9,486

 
1,513

Fuel and other taxes payable
 
5,562

 
5,700

Accrued expenses and other current liabilities
 
7,099

 
6,451

Total current liabilities
 
45,817

 
39,709

Non-current liabilities:
 
 
 
 
Revolving credit facility
 
230,000

 
164,800

Asset retirement obligations
 
3,260

 
3,087

Deferred tax liabilities
 
405

 
324

Other non-current liabilities
 
5,411

 
6,222

Total non-current liabilities
 
239,076

 
174,433

Equity:
 
 
 
 
Predecessor division equity
 

 
25,161

Common unitholders - public; 9,384,589 units issued and outstanding at September 30, 2014 (9,353,240 at December 31, 2013)
 
191,479

 
183,839

Common unitholders - Delek; 2,799,258 units issued and outstanding at September 30, 2014 (2,799,258 at December 31, 2013)
 
(242,788
)
 
(176,680
)
Subordinated unitholders - Delek; 11,999,258 units issued and outstanding at September 30, 2014 (11,999,258 at December 31, 2013)
 
69,243

 
59,386

General partner - Delek; 493,533 units issued and outstanding at September 30, 2014 (492,893 at December 31, 2013)
 
(6,655
)
 
(4,504
)
Total equity
 
11,279

 
87,202

Total liabilities and equity
 
$
296,172

 
$
301,344

 

(1) Includes the historical balances of the El Dorado Terminal and Tank Assets. See Notes 1 and 2 for further discussion.

See accompanying notes to condensed consolidated financial statements

3


Delek Logistics Partners, LP
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013 (2)
 
2014 (1)
 
2013 (2)
 
 
 
 

 
 
 
 
 
 
(In thousands)
Net sales
 
$
228,036

 
$
243,295

 
$
667,906

 
$
684,331

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
194,133

 
218,222

 
562,916

 
614,048

Operating expenses
 
10,213

 
8,973

 
29,076

 
27,982

General and administrative expenses
 
2,453

 
1,973

 
7,358

 
5,696

Depreciation and amortization
 
3,749

 
3,141

 
10,758

 
9,966

Loss on asset disposals
 

 

 
74

 

Total operating costs and expenses
 
210,548

 
232,309

 
610,182

 
657,692

Operating income
 
17,488

 
10,986

 
57,724

 
26,639

Interest expense, net
 
2,226

 
1,194

 
6,551

 
2,763

Net income before income tax expense
 
15,262

 
9,792

 
51,173

 
23,876

Income tax expense
 
177

 
307

 
605

 
547

Net income
 
15,085

 
9,485

 
50,568

 
23,329

Less: Loss attributable to Predecessors
 

 
(3,060
)
 
(943
)
 
(13,176
)
Net income attributable to partners
 
$
15,085

 
$
12,545

 
$
51,511

 
$
36,505

Comprehensive income attributable to partners
 
$
15,085

 
$
12,545

 
$
51,511

 
$
36,505

 
 
 
 
 
 
 
 
 
Less: General partner's interest in net income, including incentive distribution rights
 
(598
)
 
(250
)
 
(1,511
)
 
(729
)
Limited partners' interest in net income
 
$
14,487

 
$
12,295

 
$
50,000

 
$
35,776

 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.60

 
$
0.51

 
$
2.07

 
$
1.49

Common units - (diluted)
 
$
0.59

 
$
0.51

 
$
2.05

 
$
1.48

Subordinated units - Delek (basic and diluted)
 
$
0.60

 
$
0.51

 
$
2.07

 
$
1.49

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
  Common units - (basic)
 
12,183,847

 
12,036,821

 
12,165,474

 
12,014,445

  Common units - (diluted)
 
12,327,321

 
12,188,342

 
12,299,963

 
12,152,657

  Subordinated units - Delek (basic and diluted)
 
11,999,258

 
11,999,258

 
11,999,258

 
11,999,258

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.490

 
$
0.405

 
$
1.390

 
$
1.185

(1) The information presented includes the results of operations of the El Dorado Predecessor. Prior to the El Dorado Acquisition, the El Dorado Predecessor did not record revenues for intercompany terminalling and storage services.
(2) Adjusted to include the historical results of the El Dorado Terminal and Tank Assets. See Notes 1 and 2 for further discussion.
See accompanying notes to condensed consolidated financial statements

4


Delek Logistics Partners, LP
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended September 30,
 
 
2014 (1)
 
2013 (2)
 
 
(In thousands)
Cash flows from operating activities:
 
 
Net income
 
$
50,568

 
$
23,329

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
10,758

 
9,966

Amortization of unfavorable contract liability to revenue
 
(2,002
)
 
(1,956
)
Amortization of deferred financing costs
 
951

 
560

Accretion of asset retirement obligations
 
267

 
169

Deferred income taxes
 
81

 
42

Loss on asset disposals
 
74

 

Unit-based compensation expense
 
196

 
179

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
(10,558
)
 
(6,886
)
Inventories and other current assets
 
7,328

 
(7,311
)
Accounts payable and other current liabilities
 
137

 
9,722

Accounts payable - related parties
 
7,973

 
4,760

Non-current assets and liabilities, net
 
(844
)
 
(2,963
)
Net cash provided by operating activities
 
64,929

 
29,611

Cash flows from investing activities:
 
 
 
 
Business combinations
 

 
(5,722
)
Purchases of property, plant and equipment
 
(2,760
)
 
(9,840
)
Net cash used in investing activities
 
(2,760
)
 
(15,562
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of additional units to maintain 2% General Partner interest
 
22

 

Distributions to general partner
 
(837
)
 
(492
)
Distributions to common unitholders - Public
 
(12,391
)
 
(9,252
)
Distributions to common unitholders - Delek
 
(3,681
)
 
(2,810
)
Distributions to subordinated unitholders
 
(15,779
)
 
(12,047
)
Distributions to Delek for contribution of El Dorado Terminal and Tank Assets
 
(95,900
)
 
(94,800
)
Proceeds from revolving credit facility
 
395,900

 
138,000

Payments of revolving credit facility
 
(330,700
)
 
(67,000
)
Predecessor division equity contribution
 
1,006

 
17,149

Reimbursement of capital expenditures by Sponsor
 

 
463

Net cash used in financing activities
 
(62,360
)
 
(30,789
)
Net decrease in cash and cash equivalents
 
(191
)
 
(16,740
)
Cash and cash equivalents at the beginning of the period
 
924

 
23,452

Cash and cash equivalents at the end of the period
 
$
733

 
$
6,712

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
5,799

 
$
1,906

  Taxes
 
$
18

 
$
30

Non-cash financing activities:
 
 

 
 

Working capital retained by Sponsor
 
$

 
$
213

 Sponsor contribution of fixed assets
 
$
873

 
$
105


(1) Includes the historical cash flows of the El Dorado Terminal and Tank Assets. See Notes 1 and 2 for further discussion.

(2) Adjusted to include the historical cash flows of the El Dorado Terminal and Tank Assets. See Notes 1 and 2 for further discussion.

See accompanying notes to condensed consolidated financial statements

5


Delek Logistics Partners, LP
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Basis of Presentation
As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. References in this report to "Delek" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than Delek Logistics Partners, LP, its subsidiaries and its general partner (our "general partner").
The Partnership is a Delaware limited partnership formed in April 2012 by Delek Logistics GP, LLC, a subsidiary of Delek and our general partner.
On July 26, 2013, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Delek (i) the refined products terminal (the “Tyler Terminal”) located at Delek's Tyler, Texas refinery (the "Tyler Refinery") and (ii) 96 storage tanks and certain ancillary assets (the "Tyler Tank Assets" and together with the Tyler Terminal, the “Tyler Terminal and Tank Assets”) adjacent to the Tyler Refinery (such transaction, the “Tyler Acquisition”).
On February 10, 2014, the Partnership, through its wholly owned subsidiary Delek Logistics Operating, LLC ("OpCo"), acquired from Delek (i) the refined products terminal (the “El Dorado Terminal”) located at Delek's El Dorado, Arkansas refinery (the "El Dorado Refinery") and (ii) 158 storage tanks and certain ancillary assets (the "El Dorado Tank Assets" and together with the El Dorado Terminal, the “El Dorado Terminal and Tank Assets”) at and adjacent to the El Dorado Refinery (such transaction, the “El Dorado Acquisition”).
The El Dorado Acquisition and the Tyler Acquisition were accounted for as transfers between entities under common control. As entities under common control with Delek, we record the assets that Delek has contributed to us on our balance sheet at Delek's historical basis instead of fair value. Transfers between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes of the Partnership have been retrospectively adjusted to include (i) the historical results of the El Dorado Terminal and Tank Assets, as owned and operated by Delek, for all periods presented through February 10, 2014 (the "El Dorado Predecessor"), and (ii) the historical results of the Tyler Terminal and Tank Assets, as owned and operated by Delek, for all periods presented through July 26, 2013 (the "Tyler Predecessor"). We refer to the historical results of the El Dorado and Tyler Predecessors collectively as our "Predecessors." See Note 2 for further information regarding the El Dorado Acquisition and the Tyler Acquisition.
The accompanying unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2014 and 2013 include the consolidated financial position, results of operations, cash flows and division equity of our Predecessors. The financial statements of our Predecessors have been prepared from the separate records maintained by Delek and may not necessarily be indicative of the conditions that would have existed or the results of operations if our Predecessors had been operated as unaffiliated entities. For example, our Predecessors did not record revenues for intercompany terminalling or storage services.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 5, 2014. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2013 included in our Annual Report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been included. All significant intercompany transactions and account balances have been eliminated in the consolidation. Such intercompany transactions do not include those with Delek or our general partner. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

6


2. Acquisitions
El Dorado Acquisition
On February 10, 2014, the Partnership completed the El Dorado Acquisition and acquired the El Dorado Terminal and Tank Assets. The purchase price paid for the assets acquired was approximately $95.9 million in cash. The assets acquired consisted of the following:
The El Dorado Terminal. The refined products terminal located at the El Dorado Refinery, which consisted of a truck loading rack with three loading bays supplied by pipelines from storage tanks located at the El Dorado Refinery along with certain ancillary assets. Total throughput capacity for the El Dorado Terminal is approximately 26,700 barrels per day ("bpd").
 
The El Dorado Tank Assets. A total of 158 storage tanks and certain ancillary assets (such as pumps and piping) located at and adjacent to the El Dorado Refinery with an aggregate shell capacity of approximately 2.5 million barrels.
Delek retained any current assets and current liabilities related to the El Dorado Terminal and Tank Assets as of the date of the El Dorado Acquisition. The only historical balance sheet items that transferred to the Partnership in the El Dorado Acquisition were property, plant and equipment assets, tank inspection liabilities and asset retirement obligations, which were recorded by us at historical cost.
In connection with the El Dorado Acquisition, the Partnership and Delek entered into (i) an asset purchase agreement, (ii) the Second Omnibus Amendment (as defined in Note 13), (iii) a throughput and tankage agreement with respect to the El Dorado Terminal and Tank Assets, (iv) a lease and access agreement, and (v) a site services agreement. See Note 13 for additional information regarding these agreements.
Tyler Acquisition
On July 26, 2013, the Partnership completed the Tyler Acquisition and acquired the Tyler Terminal and Tank Assets. The purchase price paid for the assets acquired was $94.8 million in cash. The assets acquired consisted of the following:
The Tyler Terminal. The refined products terminal located at the Tyler Refinery, which consisted of a truck loading rack with nine loading bays supplied by pipelines from storage tanks located adjacent to the Tyler Refinery, along with certain ancillary assets. Total throughput capacity for the Tyler Terminal is approximately 72,000 bpd.
The Tyler Tank Assets. Ninety-six storage tanks and certain ancillary assets (such as pumps and piping) located adjacent to the Tyler Refinery with an aggregate shell capacity of approximately 2.0 million barrels.
Delek retained any current assets, current liabilities and environmental liabilities related to the Tyler Terminal and Tank Assets as of the date of the Tyler Acquisition. The only historical balance sheet items that transferred to the Partnership in the Acquisition were property, plant and equipment assets and asset retirement obligations, which were recorded by us at historical cost.
In connection with the Tyler Acquisition, the Partnership and Delek entered into (i) an asset purchase agreement, (ii) the First Omnibus Amendment (as defined in Note 13), (iii) a throughput and tankage agreement with respect to the Tyler Terminal and Tank Assets, (iv) a lease and access agreement, and (v) a site services agreement. See Note 13 for additional information regarding these agreements.
Financial Results of El Dorado Terminal and Tank Assets and Tyler Terminal and Tank Assets
The acquisitions of the El Dorado Terminal and Tank Assets and the Tyler Terminal and Tank Assets were considered transfers of businesses between entities under common control. Accordingly, the El Dorado Acquisition and the Tyler Acquisition were recorded at amounts based on Delek's historical carrying value as of each respective acquisition date, which were $25.2 million as of February 10, 2014 and $38.3 million as of July 26, 2013. Our historical financial statements have been retrospectively adjusted to reflect the results of operations, financial position, cash flows and equity attributable to the El Dorado Terminal and Tank Assets and the Tyler Terminal and Tank Assets as if we owned the assets for all periods presented. The results of the El Dorado Terminal and the Tyler Terminal are included in the wholesale marketing and terminalling segment, and the results of the El Dorado Tank Assets and the Tyler Tank Assets are included in the pipelines and transportation segment.

7


The following amounts associated with the El Dorado Terminal and Tanks Assets and the Tyler Terminal and Tank Assets, subsequent to each respective acquisition date, are included in the condensed consolidated statements of operations of the Partnership (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2014
Tyler Terminal and Tank Assets:
 
 
 
 
   Total operating revenues
 
$
4,486

 
$
13,488

   Net income attributable to the Partnership
 
$
2,341

 
$
7,625

El Dorado Terminal and Tank Assets:
 
 
 
 
   Total operating revenues
 
$
4,471

 
$
11,326

   Net income attributable to the Partnership
 
$
3,021

 
$
6,962

   Costs associated with the acquisition
 
$

 
$
186


The results of the El Dorado Terminal and Tank Assets' operations prior to the completion of the El Dorado Acquisition on February 10, 2014 have been included in the El Dorado Predecessor results in the tables below. The results of the Tyler Terminal and Tank Assets' operations prior to the completion of the Tyler Acquisition on July 26, 2013 have been included in the Tyler Predecessor results in the tables below. The results of the El Dorado Terminal and Tank Assets subsequent to February 10, 2014, and the results of the Tyler Terminal and Tank Assets subsequent to July 26, 2013 have been included in the Partnership's results.
The tables on the following page present our results of operations, the effect of including the results of the El Dorado Terminal and Tank Assets and the Tyler Terminal and Tank Assets and the adjusted total amounts included in our condensed consolidated financial statements.


8


Condensed Combined Balance Sheet as of December 31, 2013
 
 
Delek Logistics
 
El Dorado Terminal and Tank Assets
 
 
 
 
Partners, LP
 
(El Dorado Predecessor)
 
December 31, 2013
 
 
(In thousands)
ASSETS
Current Assets:
 
 
 
 
 
 
   Cash and cash equivalents
 
$
924

 
$

 
$
924

   Accounts receivable
 
28,976

 

 
28,976

   Inventory
 
17,512

 

 
17,512

   Deferred tax assets
 
12

 

 
12

   Other current assets
 
341

 

 
341

     Total current assets
 
47,765

 

 
47,765

Property, plant and equipment:
 
 
 
 
 
 
   Property, plant and equipment
 
235,588

 
29,800

 
265,388

   Less: accumulated depreciation
 
(36,306
)
 
(3,260
)
 
(39,566
)
Property, plant and equipment, net
 
199,282

 
26,540

 
225,822

Goodwill
 
10,454

 

 
10,454

Intangible assets, net
 
12,258

 

 
12,258

Other non-current assets
 
5,045

 

 
5,045

     Total assets
 
$
274,804

 
$
26,540

 
$
301,344

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
   Accounts payable
 
$
26,045

 
$

 
$
26,045

   Accounts payable to related parties
 
1,513

 

 
1,513

   Fuel and other taxes payable
 
5,700

 

 
5,700

   Accrued expenses and other current liabilities
 
5,776

 
675

 
6,451

     Total current liabilities
 
39,034

 
675


39,709

Non-current liabilities:
 
 
 
 
 
 
   Revolving credit facility
 
164,800

 

 
164,800

   Asset retirement obligations
 
2,993

 
94

 
3,087

   Deferred tax liabilities
 
324

 

 
324

   Other non-current liabilities
 
5,612

 
610

 
6,222

     Total non-current liabilities
 
173,729

 
704

 
174,433

Equity:
 
 
 
 
 
 
Predecessors division equity
 

 
25,161

 
25,161

Common unitholders - public (9,353,240 units issued and outstanding)
 
183,839

 

 
183,839

Common unitholders - Delek (2,799,258 units issued and outstanding)
 
(176,680
)
 

 
(176,680
)
Subordinated unitholders - Delek (11,999,258 units issued and outstanding)
 
59,386

 

 
59,386

General Partner unitholders - Delek (492,893 units issued and outstanding)
 
(4,504
)
 

 
(4,504
)
Total equity
 
62,041

 
25,161

 
87,202

Total liabilities and equity
 
$
274,804

 
$
26,540

 
$
301,344






9



Condensed Combined Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
El Dorado Terminal and Tank Assets
 
 
 
 
Delek Logistics Partners, LP
 
(El Dorado Predecessor)
 
Nine Months Ended September 30, 2014
 
 
(In thousands)
Net sales
 
$
667,906

 
$

 
$
667,906

Operating costs and expenses:
 
 
 
 
 
 
   Cost of goods sold
 
562,916

 

 
562,916

   Operating expenses
 
28,293

 
783

 
29,076

   General and administrative expenses
 
7,312

 
46

 
7,358

   Depreciation and amortization
 
10,644

 
114

 
10,758

   Loss on asset disposals
 
74

 

 
74

     Total operating costs and expenses
 
609,239

 
943

 
610,182

   Operating income (loss)
 
58,667

 
(943
)
 
57,724

Interest expense, net
 
6,551

 

 
6,551

Net income (loss) before income tax expense
 
52,116

 
(943
)
 
51,173

Income tax expense
 
605

 

 
605

Net income (loss)
 
51,511

 
(943
)
 
50,568

  Less: Loss attributable to Predecessors
 

 
(943
)
 
(943
)
Net income attributable to partners
 
$
51,511

 
$

 
$
51,511

 
 
 
 
 
 
 

 
 
 
 
Tyler Terminal and Tank Assets
 
El Dorado Terminal and Tank Assets
 
 
 
 
Delek Logistics Partners, LP
 
(Tyler Predecessor)
 
(El Dorado Predecessor)
 
Three Months Ended September 30, 2013
 
 
(In thousands)
Net Sales
 
$
243,295

 
$

 
$

 
$
243,295

Operating costs and expenses:
 
 
 
 
 
 
 
 
   Cost of goods sold
 
218,222

 

 

 
218,222

   Operating expenses
 
6,645

 
829

 
1,499

 
8,973

   General and administrative expenses
 
1,782

 
86

 
105

 
1,973

   Depreciation and amortization
 
2,600

 
244

 
297

 
3,141

     Total operating costs and expenses
 
229,249

 
1,159

 
1,901

 
232,309

   Operating income (loss)
 
14,046

 
(1,159
)
 
(1,901
)
 
10,986

Interest expense, net
 
1,194

 

 

 
1,194

Net income (loss) before income tax expense
 
12,852

 
(1,159
)
 
(1,901
)
 
9,792

Income tax expense
 
307

 

 

 
307

Net income (loss)
 
12,545

 
(1,159
)
 
(1,901
)
 
9,485

  Less: Loss attributable to Predecessors
 

 
(1,159
)
 
(1,901
)
 
(3,060
)
Net income attributable to partners
 
$
12,545

 
$

 
$

 
$
12,545


10



 
 
 
 
Tyler Terminal and Tank Assets
 
El Dorado Terminal and Tank Assets
 
 
 
 
Delek Logistics Partners, LP
 
(Tyler Predecessor)
 
(El Dorado Predecessor)
 
Nine Months Ended September 30, 2013
 
 
(In thousands)
Net Sales
 
$
684,331

 
$

 
$

 
$
684,331

Operating costs and expenses:
 
 
 
 
 
 
 
 
   Cost of goods sold
 
614,048

 

 

 
614,048

   Operating expenses
 
18,574

 
4,501

 
4,907

 
27,982

   General and administrative expenses
 
4,570

 
602

 
524

 
5,696

   Depreciation and amortization
 
7,324

 
1,750

 
892

 
9,966

     Total operating costs and expenses
 
644,516

 
6,853

 
6,323

 
657,692

   Operating income (loss)
 
39,815

 
(6,853
)
 
(6,323
)
 
26,639

Interest expense, net
 
2,763

 

 

 
2,763

Net income (loss) before income tax expense
 
37,052

 
(6,853
)
 
(6,323
)
 
23,876

Income tax expense
 
547

 

 

 
547

Net income (loss)
 
36,505

 
(6,853
)
 
(6,323
)
 
23,329

  Less: Loss attributable to Predecessors
 

 
(6,853
)
 
(6,323
)
 
(13,176
)
Net income attributable to partners
 
$
36,505

 
$

 
$

 
$
36,505

 
 
 
 
 
 
 
 
 

North Little Rock Acquisition

On October 24, 2013, we purchased a refined products terminal in North Little Rock, Arkansas from Enterprise Refined Products Company, LLC (the "North Little Rock Terminal"). The North Little Rock Terminal consists of a total of three products tanks with effective capacity of 140,000 barrels and a truck rack with throughput capacity of up to 10,000 bpd. We acquired the North Little Rock Terminal to extend our logistics presence in Arkansas.
During the second quarter of 2014, we finalized our purchase price allocation and adjusted certain of the acquisition-date fair values previously disclosed. The final allocation of the aggregate purchase price of the North Little Rock Terminal as of September 30, 2014 is summarized as follows (in thousands):
Property, plant and equipment
$
4,990

Intangible assets
10

     Total
$
5,000


11


North Little Rock Terminalling Agreement
In connection with the acquisition of the North Little Rock Terminal, on October 24, 2013, the Partnership and Delek entered into the North Little Rock Terminalling Agreement, which includes a minimum throughput commitment and a per barrel throughput fee that Delek will pay us for providing terminalling and other services to Delek at the North Little Rock Terminal, and for storing product at the terminal.
Pro Forma Financial Information - North Little Rock Acquisition
We began consolidating the results of operations of the North Little Rock Terminal on October 24, 2013. The North Little Rock Terminal contributed $0.4 million and $1.1 million to net sales for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.6 million to net income for the three and nine months ended September 30, 2014, respectively. Below are the unaudited pro forma consolidated results of operations of the Partnership for the three and nine months ended September 30, 2013, as if the acquisition had occurred on January 1, 2013 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2013
 
September 30, 2013
Net sales
 
$
243,673

 
$
685,432

Net income
 
$
9,687

 
$
23,953

Hopewell Acquisition
On July 19, 2013, the Partnership purchased a 13.5-mile pipeline and certain ancillary assets (the "Hopewell Pipeline"), including a related delivery station (the "Hopewell Station") and pumps. The Hopewell Pipeline originates at the Tyler Refinery and terminates at the Hopewell Station, where it effectively connects to the Partnership's 19-mile pipeline (the "Big Sandy Pipeline") that originates at the Hopewell Station and terminates at our light petroleum products terminal located in Big Sandy, Texas. The Hopewell Pipeline and the Big Sandy Pipeline form essentially one pipeline link between the Tyler Refinery and the Big Sandy Terminal (the "Tyler-Big Sandy Pipeline").
During the second quarter of 2014, we finalized our purchase price allocation and adjusted certain of the acquisition-date fair values previously disclosed. The final allocation of the aggregate purchase price of the Hopewell Pipeline as of September 30, 2014 is summarized as follows (in thousands):
Property, plant and equipment
$
3,538

Intangible assets
984

Goodwill
1,200

     Total
$
5,722

Amended and Restated Services Agreement (Big Sandy Terminal and Pipeline)
In connection with the acquisition of the Hopewell Pipeline, on July 25, 2013, the Partnership and Delek entered into the Amended and Restated Services Agreement (Big Sandy Terminal and Pipeline), which amended and restated the Terminalling Services Agreement dated November 7, 2012 for the Big Sandy Terminal to include, among other things, a minimum throughput commitment and a per-barrel throughput fee that Delek will pay us for throughput along the Tyler-Big Sandy Pipeline.

12


Pro Forma Financial Information - Hopewell Acquisition
We began consolidating the results of operations of the Hopewell Pipeline on July 19, 2013. Although the Tyler-Big Sandy Pipeline, of which the Hopewell Pipeline is an integral part, was not operational prior to November 2013 due to required maintenance to return it to service, Delek paid to us pipeline fees for the Tyler-Big Sandy Pipeline beginning in July 2013 and through the year ended December 31, 2013. The maintenance required to return the Hopewell Pipeline to service and thereby connect it to the Big Sandy Pipeline was completed in the fourth quarter of 2013. The Tyler-Big Sandy Pipeline contributed $0.4 million and $1.2 million to net sales for the three and nine months ended September 30, 2014, respectively, and $0.4 million and $0.9 million to net income for the three and nine months ended September 30, 2014, respectively.
Below are the unaudited pro forma consolidated results of operations of the Partnership for the three and nine months ended September 30, 2013, as if the acquisition had occurred on January 1, 2013 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2013
 
September 30, 2013
Net sales
 
$
243,295

 
$
684,334

Net income
 
$
9,459

 
$
23,047

3. Inventory
Inventories consisted of $9.8 million and $17.5 million of refined petroleum products as of September 30, 2014 and December 31, 2013, respectively. Cost of inventory is stated at the lower of cost or market, determined on a first-in, first-out basis.

4. Amended and Restated Credit Agreement

We entered into a $175.0 million senior secured revolving credit agreement on November 7, 2012, with Fifth Third Bank, as administrative agent, and a syndicate of lenders, which was subsequently amended and restated on July 9, 2013 (the “Amended and Restated Credit Agreement”). Under the terms of the Amended and Restated Credit Agreement, the lender commitments were increased from $175.0 million to $400.0 million and a dual currency borrowing tranche was added that permits draw downs in U.S. or Canadian dollars. The Amended and Restated Credit Agreement also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of $450.0 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent. The Amended and Restated Credit Agreement matures on November 7, 2017.

Borrowings denominated in U.S. dollars under the Amended and Restated Credit Agreement bear interest at either a U.S. dollar prime rate, plus an applicable margin, or the London Interbank Offered Rate ("LIBOR"), plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars under the Amended and Restated Credit Agreement bear interest at either a Canadian dollar prime rate, plus an applicable margin, or the Canadian Dealer Offered Rate, plus an applicable margin, at the election of the borrowers. The applicable margin in each case varies based upon the Partnership's most recently reported leverage ratio. At September 30, 2014, the weighted average interest rate was approximately 2.4%. Additionally, the Amended and Restated Credit Agreement requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of September 30, 2014, this fee was 0.4% per year.

The obligations under the Amended and Restated Credit Agreement remain secured by first priority liens on substantially all of the Partnership's and its subsidiaries' tangible and intangible assets. Additionally, Delek Marketing & Supply, LLC ("Delek Marketing") continues to provide a limited guaranty of the Partnership's obligations under the Amended and Restated Credit Agreement. Delek Marketing's guaranty is (i) limited to an amount equal to the principal amount, plus unpaid and accrued interest, of a promissory note made by Delek US in favor of Delek Marketing (the "Holdings Note"), and (ii) secured by Delek Marketing's pledge of the Holdings Note to our lenders under the Amended and Restated Credit Agreement. As of September 30, 2014, the principal amount of the Holdings Note was $102.0 million, plus unpaid interest accrued since the issuance date.
As of September 30, 2014, we had $230.0 million of outstanding borrowings under the Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling approximately $13.0 million, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at September 30, 2014. Amounts available under the Amended and Restated Credit Agreement as of September 30, 2014 were approximately $157.0 million.

13


5. 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.

6. Net Income Per Unit
We use the two-class method when calculating the net income per unit applicable to limited partners because we have more than one participating class of securities. Our participating securities consist of common units, subordinated units, general partner units and incentive distribution rights. The two-class method is based on the weighted-average number of common units outstanding during the period. Basic net income per unit applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’ interest in net income, after deducting our general partner’s 2% interest and incentive distribution rights by the weighted-average number of outstanding common and subordinated units. Our net income is allocated to our general partner and limited partners in accordance with their respective partnership percentages after giving effect to priority income allocations for incentive distribution rights to our general partner, which is the holder of the incentive distribution rights pursuant to our partnership agreement, which are declared and paid following the close of each quarter.
Earnings in excess of distributions are allocated to our general partner and limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. At present, the only potentially dilutive units outstanding consist of unvested phantom unit awards under the Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP"). Basic and diluted net income per unit applicable to subordinated limited partners are the same because there are no potentially dilutive subordinated units outstanding.

14


Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The calculation of net income per unit is as follows (dollars in thousands, except per unit amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income attributable to partners
 
$
15,085

 
$
12,545

 
$
51,511

 
$
36,505

Less: General partner's distribution (including IDRs) (1)
 
544

 
198

 
1,177

 
580

Less: Limited partners' distribution
 
5,970

 
4,875

 
16,922

 
14,249

Less: Subordinated partner's distribution
 
5,880

 
4,860

 
16,679

 
14,219

Earnings in excess of distributions
 
$
2,691

 
$
2,612

 
$
16,733

 
$
7,457

 
 
 
 
 
 
 
 
 
General partner's earnings:
 
 
 
 
 
 
 
 
Distributions (including IDRs) (1)
 
$
544

 
$
198

 
$
1,177

 
$
580

Allocation of earnings in excess of distributions
 
54

 
52

 
334

 
149

Total general partner's earnings
 
$
598

 
$
250

 
$
1,511

 
$
729

 
 
 
 
 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
 
 
 
 
Distributions
 
$
5,970

 
$
4,875

 
$
16,922

 
$
14,249

Allocation of earnings in excess of distributions
 
1,328

 
1,282

 
8,259

 
3,658

Total limited partners' earnings on common units
 
$
7,298

 
$
6,157

 
$
25,181

 
$
17,907

 
 
 
 
 
 
 
 
 
Limited partners' earnings on subordinated units:
 
 
 
 
 
 
 
 
Distributions
 
$
5,880

 
$
4,860

 
$
16,679

 
$
14,219

Allocation of earnings in excess of distributions
 
1,309

 
1,278

 
8,140

 
3,650

Total limited partner's earnings on subordinated units
 
$
7,189

 
$
6,138

 
$
24,819

 
$
17,869

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
Common units - (basic)
 
12,183,847

 
12,036,821

 
12,165,474

 
12,014,445

Common units - (diluted)
 
12,327,321

 
12,188,342

 
12,299,963

 
12,152,657

Subordinated units - Delek (basic and diluted)
 
11,999,258

 
11,999,258

 
11,999,258

 
11,999,258

 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common - (basic)
 
$
0.60

 
$
0.51

 
$
2.07

 
$
1.49

Common - (diluted)
 
$
0.59

 
$
0.51

 
$
2.05

 
$
1.48

Subordinated - (basic and diluted)
 
$
0.60

 
$
0.51

 
$
2.07

 
$
1.49

            

(1) General partner distributions (including IDRs) consist of the 2% general partner interest and IDRs, which represent the right of the general partner to receive increasing percentages of quarterly distributions of available cash from operating surplus in excess of $0.43125 per unit per quarter. See Note 7 for further discussion related to IDRs.


15



7. Equity
We had 9,384,589 common limited partner units held by the public outstanding as of September 30, 2014. Additionally, as of September 30, 2014, Delek owned a 60.0% limited partner interest in us, consisting of 2,799,258 common limited partner units and 11,999,258 subordinated limited partner units as well as a 96.1% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 493,533 general partner units. In accordance with our partnership agreement, Delek's subordinated units may convert to common units once specified distribution targets and other requirements have been met.
Equity Activity
The summarized changes in the carrying amount of our equity are as follows (in thousands):
 
 
Equity of Predecessors
 
Common - Public
 
Common - Delek
 
Subordinated
 
General Partner
 
Total
Balance at December 31, 2013
 
$
25,161

 
$
183,839

 
$
(176,680
)
 
$
59,386

 
$
(4,504
)
 
$
87,202

Sponsor contributions of equity to the El Dorado Predecessor
1,006

 

 

 

 

 
1,006

Loss attributable to the El Dorado Predecessor
(943
)
 

 

 

 

 
(943
)
Allocation of net assets acquired by the unitholders
(25,224
)
 

 
24,720

 

 
504

 

Cash distributions (1)

 
(12,391
)
 
(97,663
)
 
(15,779
)
 
(2,755
)
 
(128,588
)
Sponsorship contribution of fixed assets

 

 
855

 

 
18

 
873

Net income attributable to partners

 
19,579

 
5,845

 
25,057

 
1,030

 
51,511

Unit-based compensation

 
452

 
135

 
579

 
(970
)
 
196

Other

 

 

 

 
22

 
22

Balance at September 30, 2014
 
$

 
$
191,479

 
$
(242,788
)
 
$
69,243

 
$
(6,655
)
 
$
11,279

            

(1) Cash distributions include $95.9 million in cash payments for the El Dorado Acquisition. As an entity under common control with Delek, we record the assets that we acquire from Delek on our balance sheet at Delek's historical book basis instead of fair value. Additionally, any excess of cash paid over the historical book basis of the assets acquired from Delek is recorded within equity. As a result of the El Dorado Acquisition, our equity balance decreased $70.7 million during the nine months ended September 30, 2014. Distributions also include $0.1 million related to distribution equivalents on vested phantom units.

Allocations of Net Income
Our partnership agreement contains provisions for the allocation of net income and loss to our unitholders and our general partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect to priority income allocations, if any, in an amount equal to incentive cash distributions allocated 100% to our general partner.

16


The following table presents the allocation of the general partner's interest in net income (in thousands, except percentage of ownership interest):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income attributable to partners
 
$
15,085

 
$
12,545

 
$
51,511

 
$
36,505

Less: General partner's IDR's
 
(302
)
 

 
(491
)
 

Net income available to partners
 
$
14,783

 
$
12,545

 
$
51,020

 
$
36,505

General partner's ownership interest
 
2.0
%
 
2.0
%
 
2.0
%
 
2.0
%
General partner's allocated interest in net income
 
$
296

 
$
250

 
$
1,020

 
$
729

General partner's IDRs
 
302

 

 
491

 

Total general partner's interest in net income
 
$
598

 
$
250

 
$
1,511

 
$
729

Incentive Distribution Rights
The following table illustrates the percentage allocations of available cash from operating surplus between our unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and our unitholders in any available cash from operating surplus that we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that (i) our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest, (ii) our general partner has not transferred its incentive distribution rights, and (iii) there are no arrearages on common units.
 
 
 
Target Quarterly Distribution per Unit
 
Marginal Percentage Interest in Distributions
 
 
 
Target Amount
 
Unitholders
 
General Partner
Minimum Quarterly Distribution
 
 
$
0.37500

 
98.0
%
 
2.0
%
First Target Distribution
 
above
$
0.37500

 
98.0
%
 
2.0
%
 
 
up to
$
0.43125

 
 
 
 
Second Target Distribution
 
above
$
0.43125

 
85.0
%
 
15.0
%
 
 
up to
$
0.46875

 
 
 
 
Third Target Distribution
 
above
$
0.46875

 
75.0
%
 
25.0
%
 
 
up to
$
0.56250

 
 
 
 
Thereafter
 
thereafter
$
0.56250

 
50.0
%
 
50.0
%
Cash Distributions
Our partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that our common and subordinated unitholders and general partner will receive. Our distributions earned with respect to a given period are declared subsequent to quarter end. The table below summarizes the quarterly distributions related to our quarterly financial results:

17


Quarter Ended
 
Total Quarterly Distribution Per Limited Partner Unit
 
Total Quarterly Distribution Per Limited Partner Unit, Annualized
 
Total Cash Distribution, including general partner IDRs (in thousands)
 
Date of Distribution
 
Unitholders Record Date
December 31, 2013
 
$
0.415

 
$
1.66

 
$
10,228

 
February 13, 2014
 
February 4, 2014
March 31, 2014
 
$
0.425

 
$
1.70

 
$
10,474

 
May 14, 2014
 
May 6, 2014
June 30, 2014
 
$
0.475

 
$
1.90

 
$
11,910

 
August 14, 2014
 
August 7, 2014
September 30, 2014
 
$
0.490

 
$
1.96

 
$
12,394

 
November 14, 2014 (1)
 
November 6, 2014
            
(1) Expected date of distribution.
The allocation of total quarterly cash distributions expected to be made to general and limited partners for the three and nine months ended September 30, 2014 is set forth in the table below. Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below presents total cash distributions applicable to the period in which the distributions are earned (in thousands, except per unit amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
General partner's distributions:
 
 
 
 
 
 
 
 
     General partner's distributions
 
$
242

 
$
198

 
$
686

 
$
580

     General partner's incentive distribution rights
 
302

 

 
491

 

          Total general partner's distributions
 
544

 
198

 
1,177

 
580

 
 
 
 
 
 
 
 
 
Limited partners' distributions:
 
 
 
 
 
 
 
 
     Common
 
5,970

 
4,875

 
16,922

 
14,249

     Subordinated
 
5,880

 
4,860

 
16,679

 
14,219

          Total limited partners' distributions
 
11,850

 
9,735

 
33,601

 
28,468

               Total cash distributions
 
$
12,394

 
$
9,933

 
$
34,778

 
$
29,048

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.490

 
$
0.405

 
$
1.390

 
$
1.185

8. Equity Based Compensation
We incurred $0.1 million and $0.2 million of unit-based compensation expense related to the Partnership during the three and nine months ended September 30, 2014, respectively, and $0.1 million and $0.2 million during the three and nine months ended September 30, 2013, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income. The fair value of phantom unit awards under the LTIP is determined based on the closing price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized over the vesting period using the straight line method. Awards vest over a five -year service period. As of September 30, 2014, there was $1.0 million of total unrecognized compensation cost related to non-vested equity-based compensation arrangements, which is expected to be recognized over a weighted-average period of 3.1 years.
9. Segment Data
We report our assets and operating results in two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling:
The pipelines and transportation segment provides crude oil gathering, and crude oil, intermediate and finished products transportation and storage services to Delek's refining operations and independent third parties.

18


The wholesale marketing and terminalling segment provides marketing and terminalling services to Delek's refining operations and independent third parties.
Our operating segments adhere to the same accounting policies used for our consolidated financial statements. Our operating segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each reportable segment based on segment contribution margin. Segment contribution margin is defined as net sales less cost of sales and operating expenses, excluding depreciation and amortization.
On February 10, 2014, we acquired the El Dorado Terminal and Tank Assets from Delek. Our historical financial statements have been retrospectively adjusted to reflect the results of operations attributable to the El Dorado Terminal and Tank Assets as if we owned the assets for all periods presented. The results of the El Dorado Terminal and the El Dorado Tank Assets are included in the wholesale marketing and terminalling segment and the pipelines and transportation segment, respectively.

























19


The following is a summary of business segment operating performance as measured by contribution margin for the periods indicated (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013 (1) 
 
2014 (2)
 
2013 (1)
Pipelines and Transportation
 
 
 
 
 
 
 
 
     Net sales
 
$
23,767

 
$
15,743

 
$
65,957

 
$
43,008

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
1,011

 

 
3,267

 

     Operating expenses
 
7,676

 
7,012

 
22,420

 
22,490

     Segment contribution margin
 
$
15,080

 
$
8,731

 
$
40,270

 
$
20,518

 Capital spending (excluding business combinations)
 
$
504

 
$
2,184

 
$
1,654

 
$
8,242

 
 
 
 
 
 
 
 
 
Wholesale Marketing and Terminalling
 
 
 
 
 
 
 
 
     Net sales
 
$
204,269

 
$
227,552

 
$
601,949

 
$
641,323

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
193,122

 
218,222

 
559,649

 
614,048

     Operating expenses
 
2,537

 
1,961

 
6,656

 
5,492

     Segment contribution margin
 
$
8,610

 
$
7,369

 
$
35,644

 
$
21,783

 Capital spending (excluding business combinations)
 
$
323

 
$
517

 
$
1,106

 
$
1,598

 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
     Net sales
 
$
228,036

 
$
243,295

 
$
667,906

 
$
684,331

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
194,133

 
218,222

 
562,916

 
614,048

     Operating expenses
 
10,213

 
8,973

 
29,076

 
27,982

     Contribution margin
 
23,690

 
16,100

 
75,914

 
42,301

     General and administrative expenses
 
2,453

 
1,973

 
7,358

 
5,696

     Depreciation and amortization
 
3,749

 
3,141

 
10,758

 
9,966

     Loss on asset disposals
 

 


74

 

     Operating income
 
$
17,488

 
$
10,986

 
$
57,724

 
$
26,639

 Capital spending (excluding business combinations)
 
$
827

 
$
2,701

 
$
2,760

 
$
9,840

            

(1) Capital spending adjusted to include expenditures incurred in connection with the assets acquired in the El Dorado Acquisition.

(2) Capital spending includes expenditures incurred in connection with the assets acquired in the El Dorado Acquisition.

20


The following table summarizes the total assets for each segment as of September 30, 2014 and December 31, 2013 (in thousands).
 
 
September 30, 2014
 
December 31, 2013
Pipelines and Transportation
 
$
221,393

 
$
188,008

Wholesale Marketing and Terminalling
 
74,779

 
113,336

     Total Assets
 
$
296,172

 
$
301,344

Property, plant and equipment, accumulated depreciation and depreciation expense by reporting segment as of and for the three and nine months ended September 30, 2014 were as follows (in thousands):
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Property, plant and equipment
 
$
248,430

 
$
18,991

 
$
267,421

Less: accumulated depreciation
 
(41,005
)
 
(8,313
)
 
(49,318
)
Property, plant and equipment, net
 
$
207,425

 
$
10,678

 
$
218,103

Depreciation expense for the three months ended September 30, 2014
 
$
2,718

 
$
765

 
$
3,483

Depreciation expense for the nine months ended September 30, 2014
 
$
7,467

 
$
2,494

 
$
9,961

In accordance with ASC 360, Property, Plant & Equipment, we evaluate the realizability of property, plant and equipment as events occur that might indicate potential impairment.
10. 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 ASC 825, Financial Instruments.
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 interest rate and 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 at this time.
ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
Over the counter commodity swaps, interest rate swaps and caps are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, spot prices, interest rates, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines the classification as Level 2 or 3. Our contracts are valued using quotations provided by brokers based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.

21


The fair value hierarchy for our financial assets accounted for at fair value on a recurring basis at September 30, 2014 and December 31, 2013 was as follows (in thousands):
 
 
As of September 30, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$
45

 
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