Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Delek Logistics Partners, LPFinancial_Report.xls
EX-32.2 - CFO CERTIFICATION - Delek Logistics Partners, LPdkl-ex322xcfocertification.htm
EX-31.2 - CFO CERTIFICATION - Delek Logistics Partners, LPdklex312-cfocertificationx.htm
EX-10.6 - RANGELAND RIO PIPELINE LLC AGREEMENT - Delek Logistics Partners, LPexhibit106-rangelandriopip.htm
EX-31.1 - CEO CERTIFICATION - Delek Logistics Partners, LPdkl-ex311xceocertification.htm
EX-10.7 - DKL CADDO PIPELINE LLC AGREEMENT - Delek Logistics Partners, LPexhibit107-dklxcaddopipeli.htm
EX-32.1 - CEO CERTIFICATION - Delek Logistics Partners, LPdkl-ex321xceocertification.htm
EX-10.5 - AMENDED AND RESTATED SITE SERVICES AGREEMENT EL DORADO - Delek Logistics Partners, LPexhibit105-amendedandresta.htm
EX-10.4 - AMENDED AND RESTATED SITE SERVICES AGREEMENT TYLER - Delek Logistics Partners, LPexhibit104-amendedandresta.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 March 31, 2015
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 May 1, 2015, there were 12,216,447 common units, 11,999,258 subordinated units, and 494,197 general partner units outstanding.



TABLE OF CONTENTS
 
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and 2014 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014(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)
 
 
March 31, 2015
 
December 31, 2014 (1)
ASSETS
 
(In thousands)
Current assets:
 
 
 
 
Cash and cash equivalents
 
$

 
$
1,861

Accounts receivable
 
30,317

 
27,956

Accounts receivable from related parties
 
2,786

 

Inventory
 
4,476

 
10,316

Deferred tax assets
 
28

 
28

Other current assets
 
364

 
768

Total current assets
 
37,971

 
40,929

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
311,215

 
308,397

Less: accumulated depreciation
 
(57,547
)
 
(53,309
)
Property, plant and equipment, net
 
253,668

 
255,088

Equity method investments
 
6,018

 

Goodwill
 
11,654

 
11,654

Intangible assets, net
 
16,255

 
16,520

Other non-current assets
 
6,990

 
7,374

Total assets
 
$
332,556

 
$
331,565

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
14,218

 
$
18,208

Accounts payable to related parties
 

 
628

Excise and other taxes payable
 
5,542

 
5,443

Accrued expenses and other current liabilities
 
1,760

 
1,588

Tank inspection liabilities
 
2,907

 
2,829

Pipeline release liabilities
 
1,756

 
1,899

Total current liabilities
 
26,183

 
30,595

Non-current liabilities:
 
 
 
 
Revolving credit facility
 
316,364

 
251,750

Asset retirement obligations
 
3,381

 
3,319

Deferred tax liabilities
 
457

 
231

Other non-current liabilities
 
6,790

 
5,889

Total non-current liabilities
 
326,992

 
261,189

Equity (Deficit):
 
 
 
 
Predecessor division equity
 

 
19,726

Common unitholders - public; 9,417,189 units issued and outstanding at March 31, 2015 (9,417,189 at December 31, 2014)
 
195,077

 
194,737

Common unitholders - Delek; 2,799,258 units issued and outstanding at March 31, 2015 (2,799,258 at December 31, 2014)
 
(282,496
)
 
(241,112
)
Subordinated unitholders - Delek; 11,999,258 units issued and outstanding at March 31, 2015 (11,999,258 at December 31, 2014)
 
73,947

 
73,515

General partner - Delek; 494,197 units issued and outstanding at March 31, 2015 (494,197 at December 31, 2014)
 
(7,147
)
 
(7,085
)
Total equity (deficit)
 
(20,619
)
 
39,781

Total liabilities and equity (deficit)
 
$
332,556

 
$
331,565

 

(1) Adjusted to include the historical balances of the Logistics Assets Predecessor. 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
 
 
March 31,
 
 
2015 (1)
 
2014 (2)
 
 
(In thousands, except unit and per unit data)
Net sales:
 
 
 
 
   Affiliate
 
$
32,280

 
$
25,282

   Third-Party
 
111,232

 
178,245

     Net sales
 
143,512

 
203,527

Operating costs and expenses:
 
 
 
 
Cost of goods sold
 
108,407

 
172,209

Operating expenses
 
10,777

 
9,496

General and administrative expenses
 
3,409

 
2,663

Depreciation and amortization
 
4,500

 
3,477

Loss on asset disposals
 
5

 

Total operating costs and expenses
 
127,098

 
187,845

Operating income
 
16,414

 
15,682

Interest expense, net
 
2,157

 
1,983

Income before income tax expense
 
14,257

 
13,699

Income tax expense
 
254

 
147

Net income
 
14,003

 
13,552

Less: loss attributable to Predecessors
 
(637
)
 
(1,120
)
Net income attributable to partners
 
$
14,640

 
$
14,672

Comprehensive income attributable to partners
 
$
14,640

 
$
14,672

 
 
 
 
 
Less: General partner's interest in net income, including incentive distribution rights
 
(887
)
 
(293
)
Limited partners' interest in net income
 
$
13,753

 
$
14,379

 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
Common units - (basic)
 
$
0.57

 
$
0.60

Common units - (diluted)
 
$
0.56

 
$
0.59

Subordinated units - Delek (basic and diluted)
 
$
0.57

 
$
0.60

 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
  Common units - (basic)
 
12,216,447

 
12,152,498

  Common units - (diluted)
 
12,356,331

 
12,281,344

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

 
11,999,258

 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.530

 
$
0.425

(1) The information presented includes the results of operations of the Logistics Assets Predecessor. Prior to the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition, the Logistics Assets Predecessor did not record revenues for intercompany throughput and storage services. See Notes 1 and 2 for further discussion.
(2) Adjusted to include the historical results of the Logistics Assets Predecessor. 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)
 
 
Three Months Ended March 31,
 
 
2015 (1)
 
2014 (2)
Cash flows from operating activities:
 
(In thousands)
Net income
 
$
14,003

 
$
13,552

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
4,500

 
3,477

Amortization of unfavorable contract liability to revenue
 

 
(667
)
Amortization of deferred financing costs
 
365

 
317

Accretion of asset retirement obligations
 
62

 
120

Deferred income taxes
 
226

 
(5
)
Loss on asset disposals
 
5

 

Unit-based compensation expense
 
74

 
58

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
(2,361
)
 
(2,551
)
Inventories and other current assets
 
6,244

 
3,584

Accounts payable and other current liabilities
 
(3,784
)
 
(2,392
)
Accounts receivable from related parties
 
(3,299
)
 
(2,164
)
Non-current assets and liabilities, net
 
(266
)
 
83

Net cash provided by operating activities
 
15,769

 
13,412

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(7,573
)
 
(2,316
)
Proceeds from sales of property, plant and equipment
 
1,160

 

Equity method investments
 
(2,186
)
 

Net cash used in investing activities
 
(8,599
)
 
(2,316
)
Cash flows from financing activities:
 
 
 
 
Distributions to general partner
 
(706
)
 
(204
)
Distributions to common unitholders - public
 
(4,803
)
 
(3,882
)
Distributions to common unitholders - Delek
 
(1,428
)
 
(1,162
)
Distributions to subordinated unitholders
 
(6,119
)
 
(4,980
)
Distributions to Delek for acquisitions
 
(61,890
)
 
(95,900
)
Proceeds from revolving credit facility
 
137,864

 
185,200

Payments of revolving credit facility
 
(73,250
)
 
(89,500
)
Predecessor division equity contribution
 
115

 
2,534

Reimbursement of capital expenditures by Sponsor
 
1,186

 

Net cash used in financing activities
 
(9,031
)
 
(7,894
)
Net (decrease) increase in cash and cash equivalents
 
(1,861
)
 
3,202

Cash and cash equivalents at the beginning of the period
 
1,861

 
924

Cash and cash equivalents at the end of the period
 
$

 
$
4,126

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
1,674

 
$
1,525

  Taxes
 
$
5

 
$
15

Non-cash financing activities:
 
 

 
 

Equity method investments
 
$
3,832

 
$

 Sponsor contribution of fixed assets
 
$
354

 
$


(1) Includes the historical cash flows of the Logistics Assets Predecessor. See Notes 1 and 2 for further discussion.

(2) Adjusted to include the historical cash flows of the Logistics Assets Predecessor. 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 (a) Delek Logistics Partners, LP and its subsidiaries and (b) its general partner (as hereinafter defined).
The Partnership is a Delaware limited partnership formed in April 2012 by Delek Logistics GP, LLC, a subsidiary of Delek and our general partner (our "general partner").
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”).
On March 31, 2015, the Partnership, through OpCo, acquired from Delek, two crude oil rail offloading racks, which are designed to receive up to 25,000 barrels per day (“bpd”) of light crude oil or 12,000 bpd of heavy crude oil, or any combination of the two, delivered by rail to the El Dorado Refinery and related ancillary assets (the “El Dorado Assets”) (such transaction, the "El Dorado Offloading Racks Acquisition").
On March 31, 2015, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Delek, a crude oil storage tank located adjacent to the Tyler Refinery (the "Tyler Crude Tank") and certain ancillary assets (collectively with the Tyler Crude Tank, the "Tyler Assets") (such transaction, the "Tyler Crude Tank Acquisition"). The Tyler Crude Tank has approximately 350,000 barrels of shell capacity and is expected to primarily support Delek's Tyler, Texas refinery (the "Tyler Refinery"). The Tyler Assets, together with the El Dorado Assets, are hereinafter collectively referred to as the "Logistics Assets."
The El Dorado Acquisition, the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank 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"), (ii) the historical results of the El Dorado Assets, as owned and operated by Delek, for all periods presented through March 31, 2015 (the "El Dorado Assets Predecessor") and (iii) the historical results of the Tyler Assets, as owned and operated by Delek, for all periods through March 31, 2015 (the "Tyler Assets Predecessor"). The El Dorado Assets Predecessor, together with the Tyler Assets Predecessor, are hereinafter collectively referred to as the "Logistics Assets Predecessor." We refer to the historical results of the El Dorado Predecessor, the El Dorado Assets Predecessor and the Tyler Assets Predecessor collectively as our "Predecessors." See Note 2 for further information regarding the El Dorado Acquisition, the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition.
The accompanying unaudited condensed consolidated financial statements and related notes for the three months ended March 31, 2015 and 2014 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, throughput 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, 2014 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on February 26, 2015. 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, 2014 included in our Annual Report on Form 10-K.

6


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.
2. Acquisitions
Acquisitions from Delek
El Dorado Offloading Racks Acquisition
On March 31, 2015, the Partnership completed the El Dorado Offloading Racks Acquisition and acquired the El Dorado Assets. The purchase price paid for the El Dorado Assets acquired was $42.5 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility.

In connection with the El Dorado Offloading Racks Acquisition, the Partnership and Delek entered into (i) an asset purchase agreement, (ii) the Third Restated Omnibus Agreement (as defined in Note 14), (iii) a throughput agreement with respect to the El Dorado Assets, (iv) a lease and access agreement, and (v) an amended and restated site services agreement. See Note 14 for additional information regarding these agreements.

Tyler Crude Tank Acquisition

On March 31, 2015, the Partnership completed the Tyler Crude Tank Acquisition and acquired the Tyler Assets, including the Tyler Crude Tank. The purchase price paid for the Tyler Assets was $19.4 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility.
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.
In connection with the El Dorado Acquisition, the Partnership and Delek entered into (i) an asset purchase agreement, (ii) the Omnibus Agreement (as defined in Note 14), (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.
Financial Results of the El Dorado Assets, the Tyler Assets and the El Dorado Terminal and Tank Assets
The acquisitions of the El Dorado Assets, the Tyler Assets and the El Dorado Terminal and Tank Assets, were considered transfers of businesses between entities under common control. Accordingly, the El Dorado Offloading Racks Acquisition, the Tyler Crude Tank Acquisition and the El Dorado Acquisition, were recorded at amounts based on Delek's historical carrying values as of each respective acquisition date, which were $7.6 million as of March 31, 2015, $11.6 million as of March 31, 2015 and $25.2 million as of February 10, 2014, respectively. 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 Assets, the Tyler Assets and the El Dorado Terminal and Tank Assets, as if we owned the assets for all periods presented. The results of the El Dorado Terminal are included in the wholesale marketing and terminalling segment, and the results of the El Dorado Assets, the Tyler Assets and the El Dorado Tank Assets, are included in the pipelines and transportation segment.
The results of the El Dorado Assets' and the Tyler Assets' operations prior to the completion of the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition on March 31, 2015 have been included in the El Dorado Assets Predecessor results and the Tyler Assets Predecessor results in the tables below. 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 El Dorado Terminal and Tank Assets' operations subsequent to February 10, 2014, have been included in the Partnership's results.
The tables on the following pages present our results of operations, the effect of including the results of the Logistics Assets and the El Dorado Terminal and Tank Assets and the adjusted total amounts included in our condensed consolidated financial statements.


7


Condensed Combined Balance Sheet
 
 
Delek Logistics Partners, LP
 
El Dorado Assets (El Dorado Assets Predecessor)
 
Tyler Assets (Tyler Assets Predecessor)
 
December 31, 2014
 
 
(In thousands)
ASSETS
Current Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,861

 
$

 
$

 
$
1,861

Accounts receivable
 
27,956

 

 

 
27,956

Inventory
 
10,316

 

 

 
10,316

Deferred tax assets
 
28

 

 

 
28

Other current assets
 
768

 

 

 
768

Total current assets
 
40,929

 

 

 
40,929

Property, plant and equipment:
 
 
 
 
 
 
 
 
Property, plant and equipment
 
288,354

 
8,267

 
11,776

 
308,397

Less: accumulated depreciation
 
(52,992
)
 
(317
)
 

 
(53,309
)
Property, plant and equipment, net
 
235,362

 
7,950

 
11,776

 
255,088

Goodwill
 
11,654

 

 

 
11,654

Intangible assets, net
 
16,520

 

 

 
16,520

Other non-current assets
 
7,374

 

 

 
7,374

Total assets
 
$
311,839

 
$
7,950

 
$
11,776

 
$
331,565

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
   Accounts payable
 
$
18,208

 
$

 
$

 
$
18,208

   Accounts payable to related parties
 
628

 

 

 
628

   Excise and other taxes payable
 
5,443

 

 

 
5,443

   Accrued expenses and other current liabilities
 
1,588

 

 

 
1,588

   Tank inspection liabilities
 
2,829

 

 

 
2,829

   Pipeline release liabilities
 
1,899

 

 

 
1,899

     Total current liabilities
 
30,595

 

 

 
30,595

Non-current liabilities:
 
 
 
 
 
 
 
 
   Revolving credit facility
 
251,750

 

 

 
251,750

   Asset retirement obligations
 
3,319

 

 

 
3,319

   Deferred tax liabilities
 
231

 

 

 
231

   Other non-current liabilities
 
5,889

 

 

 
5,889

     Total non-current liabilities
 
261,189

 

 

 
261,189

Equity:
 
 
 
 
 
 
 
 
Predecessors division equity
 

 
7,950

 
11,776

 
19,726

Common unitholders - public (9,417,189 units issued and outstanding)
 
194,737

 

 

 
194,737

Common unitholders - Delek (2,799,258 units issued and outstanding)
 
(241,112
)
 

 

 
(241,112
)
Subordinated unitholders - Delek (11,999,258 units issued and outstanding)
 
73,515

 

 

 
73,515

General Partner unitholders - Delek (494,197 units issued and outstanding)
 
(7,085
)
 

 

 
(7,085
)
Total equity
 
20,055

 
7,950

 
11,776

 
39,781

Total liabilities and equity
 
$
311,839

 
$
7,950

 
$
11,776

 
$
331,565





8


Condensed Combined Statements of Operations
 
 
Delek Logistics Partners, LP
 
El Dorado Assets
(El Dorado Assets Predecessor)
 
Tyler Assets
(Tyler Assets Predecessor)
 
Three Months Ended March 31, 2015
 
 
(In thousands)
Net Sales
 
$
143,512

 
$

 
$

 
$
143,512

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
108,407

 

 

 
108,407

Operating expenses
 
10,610

 
167

 

 
10,777

General and administrative expenses
 
3,409

 

 

 
3,409

Depreciation and amortization
 
4,030

 
372

 
98

 
4,500

Loss on asset disposals
 
5

 

 

 
5

Total operating costs and expenses
 
126,461

 
539

 
98

 
127,098

Operating income (loss)
 
17,051

 
(539
)
 
(98
)
 
16,414

Interest expense, net
 
2,157

 

 

 
2,157

Net income (loss) before income tax expense
 
14,894

 
(539
)
 
(98
)
 
14,257

Income tax expense
 
254

 

 

 
254

Net income (loss)
 
14,640

 
(539
)
 
(98
)
 
14,003

Less: loss attributable to Predecessors
 

 
(539
)
 
(98
)
 
(637
)
Net income attributable to partners
 
$
14,640

 
$

 
$

 
$
14,640


 
 
Delek Logistics Partners, LP
 
El Dorado Assets
(El Dorado Assets Predecessor)
 
El Dorado Terminal and Tank Assets
(El Dorado Predecessor)
 
Three Months Ended March 31, 2014 (1)
 
 
(In thousands)
Net Sales
 
$
203,527

 
$

 
$

 
$
203,527

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
172,209

 

 

 
172,209

Operating expenses
 
8,536

 
177

 
783

 
9,496

General and administrative expenses
 
2,617

 

 
46

 
2,663

Depreciation and amortization
 
3,363

 

 
114

 
3,477

Total operating costs and expenses
 
186,725

 
177

 
943

 
187,845

Operating income (loss)
 
16,802

 
(177
)
 
(943
)
 
15,682

Interest expense, net
 
1,983

 

 

 
1,983

Net income (loss) before income tax expense
 
14,819

 
(177
)
 
(943
)
 
13,699

Income tax expense
 
147

 

 

 
147

Net income (loss)
 
14,672

 
(177
)
 
(943
)
 
13,552

Less: loss attributable to Predecessors
 

 
(177
)
 
(943
)
 
(1,120
)
Net income attributable to partners
 
$
14,672

 
$

 
$

 
$
14,672


(1) There were no revenues or expenses associated with the Tyler Assets Predecessor included in our condensed consolidated financial statements for the three months ended March 31, 2014 as the Tyler Assets were not fully constructed and were not placed into service until January 2015.


9


Acquisitions from Third Parties

Trucking Assets Acquisition

On December 17, 2014, through a new subsidiary, DKL Transportation, LLC, we completed the purchase of substantially all of the assets of Frank Thompson Transport, Inc. ("FTT"), a company that primarily hauled crude oil and asphalt products by transport truck, to complement our existing assets and increase our overall third party business. The assets purchased from FTT include approximately 120 trucks and 200 trailers (the "FTT Assets").

Terminal and Pipeline Acquisition
On October 1, 2014, we completed the purchase from an affiliate of Magellan Midstream Partners, LP of (i) a light products terminal in Mount Pleasant, Texas (the "Mount Pleasant Terminal"), (ii) a light products storage facility in Greenville, Texas (the "Greenville Storage Facility"), (iii) a 76-mile pipeline connecting the locations (the "Greenville-Mount Pleasant Pipeline") and (iv) finished product and other related inventory. The Mount Pleasant Terminal, the Greenville Storage Facility and the Greenville-Mount Pleasant Pipeline are hereinafter collectively referred to as the "Greenville-Mount Pleasant Assets." The Mount Pleasant Terminal consists of approximately 200,000 barrels of light product storage capacity, three truck loading lanes and ethanol blending capability. The Greenville Storage Facility has approximately 325,000 barrels of storage capacity and is connected to the Explorer Pipeline System, which is a common carrier pipeline owned by a third party. We acquired the Greenville-Mount Pleasant Assets to complement our existing assets and provide enhanced logistical capabilities.
Purchase Price Allocations - Acquisitions from Third Parties
The following table summarizes the allocation of the aggregate purchase price for each of the third party acquisitions described above (in thousands):
 
 
FTT Assets (1) 
 
Greenville-Mount Pleasant Assets (2) 
Property, plant and equipment
 
$
11,055

 
4,829

Intangible assets
 

 
5,171

Inventory
 

 
1,125

Accounts Receivable
 
1,871

 

Accounts Payable
 
(1,401
)
 

   Total
 
$
11,525

 
$
11,125

            
(1) 
Allocations are preliminary. The property, plant and equipment valuation is subject to change during the purchase price allocation period.
(2) 
During the first quarter of 2015, we adjusted our purchase price allocation and certain of the acquisition-date fair values previously disclosed. The property, plant and equipment and intangible assets valuation are subject to change during the purchase price allocation period.
Pro Forma Financial Information - Acquisitions from Third Parties
Below are the unaudited pro forma consolidated results of operations of the Partnership for the three months ended March 31, 2014, as if these acquisitions had occurred on January 1, 2014 (in thousands):

10


 
 
Three Months Ended
 
 
March 31, 2014
FTT Assets:
 
 
Net sales
 
$
206,761

Net income
 
$
13,719

Greenville-Mount Pleasant Assets:
 
 
Net sales
 
$
203,699

Net income
 
$
13,443

3. Inventory
Inventories consisted of $4.5 million and $10.3 million of refined petroleum products as of March 31, 2015 and December 31, 2014, respectively. Cost of inventory is stated at the lower of cost or market, determined on a first-in, first-out basis.

4. Second Amended and Restated Credit Agreement

We entered into a senior secured revolving credit agreement on November 7, 2012, with Fifth Third Bank, as administrative agent, and a syndicate of lenders. The agreement was amended and restated on July 9, 2013 (the "Amended and Restated Credit Agreement") and was most recently amended and restated on December 30, 2014 (the “Second Amended and Restated Credit Agreement”). Under the terms of the Second Amended and Restated Credit Agreement, the lender commitments were increased from $400.0 million to $700.0 million. The Second 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 $800.0 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent. The Second Amended and Restated Credit Agreement matures on December 30, 2019. While the majority of the terms of the Second Amended and Restated Credit Agreement are substantially unchanged from the predecessor facility, among other things, changes were made to certain negative covenants, the financial covenants and the interest rate pricing grid. The Second Amended and Restated Credit Agreement contains an option for Canadian dollar denominated borrowings.

Borrowings denominated in U.S. dollars 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 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 recent leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the credit facility. At March 31, 2015, the weighted average interest rate for our borrowings under the facility was approximately 2.6%. Additionally, the Second Amended and Restated Credit Agreement requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of March 31, 2015, this fee was 0.3% per year.

The obligations under the Second 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"), a direct, wholly owned subsidiary of Delek, continues to provide a limited guaranty of the Partnership's obligations under the Second 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 Second Amended and Restated Credit Agreement. As of March 31, 2015, the principal amount of the Holdings Note was $102.0 million, plus unpaid interest accrued since the issuance date.
As of March 31, 2015, we had approximately $316.4 million of outstanding borrowings under the Second Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling approximately $4.5 million, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at March 31, 2015. Amounts available under the Second Amended and Restated Credit Agreement as of March 31, 2015 were approximately $379.1 million.

11


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 ("IDRs"). 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.

12


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 expected date of distribution for the distributions earned during the period ended March 31, 2015 is May 14, 2015. The calculation of net income per unit is as follows (dollars in thousands, except per unit amounts):
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
Net income attributable to partners
 
$
14,640

 
$
14,672

Less: General partner's distribution (including IDRs) (1)
 
868

 
209

Less: Limited partners' distribution
 
6,475

 
5,165

Less: Subordinated partner's distribution
 
6,359

 
5,100

Earnings in excess of distributions
 
$
938

 
$
4,198

 
 
 
 
 
General partner's earnings:
 
 
 
 
Distributions (including IDRs) (1)
 
$
868

 
$
209

Allocation of earnings in excess of distributions
 
19

 
84

Total general partner's earnings
 
$
887

 
$
293

 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
Distributions
 
$
6,475

 
$
5,165

Allocation of earnings in excess of distributions
 
464

 
2,070

Total limited partners' earnings on common units
 
$
6,939

 
$
7,235

 
 
 
 
 
Limited partners' earnings on subordinated units:
 
 
 
 
Distributions
 
$
6,359

 
$
5,100

Allocation of earnings in excess of distributions
 
455

 
2,044

Total limited partner's earnings on subordinated units
 
$
6,814

 
$
7,144

 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
Common units - (basic)
 
12,216,447

 
12,152,498

Common units - (diluted)
 
12,356,331

 
12,281,344

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

 
11,999,258

 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
Common units - (basic)
 
$
0.57

 
$
0.60

Common units - (diluted)
 
$
0.56

 
$
0.59

Subordinated units - Delek (basic and diluted)
 
$
0.57

 
$
0.60

            

(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.


13



7. Equity
We had 9,417,189 common limited partner units held by the public outstanding as of March 31, 2015. Additionally, as of March 31, 2015, Delek owned a 59.9% 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 95.9% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 494,197 general partner units. Affiliates own the remaining 4.1% interest in our general partner. 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 (1)
 
Subordinated
 
General Partner (1)
 
Total
Balance at December 31, 2014
 
$
19,726

 
$
194,737

 
$
(241,112
)
 
$
73,515

 
$
(7,085
)
 
$
39,781

Sponsor contributions of equity to the Logistics Assets Predecessor
115

 

 

 

 

 
115

Loss attributable to the Logistics Assets Predecessor
(637
)
 

 

 

 

 
(637
)
Allocation of net assets acquired by the unitholders
(19,204
)
 

 
18,820

 

 
384

 

Cash distributions

 
(4,803
)
 
(62,080
)
 
(6,119
)
 
(1,944
)
 
(74,946
)
Sponsorship contribution of fixed assets

 

 
347

 

 
7

 
354

Net income attributable to partners

 
5,348

 
1,590

 
6,815

 
887

 
14,640

Unit-based compensation

 
154

 
46

 
196

 
(322
)
 
74

Other

 
(359
)
 
(107
)
 
(460
)
 
926

 

Balance at March 31, 2015
 
$

 
$
195,077

 
$
(282,496
)
 
$
73,947

 
$
(7,147
)
 
$
(20,619
)
            

(1) Cash distributions include $61.9 million in cash payments for the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank 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 Offloading Racks Acquisition and the Tyler Crude Tank Acquisition, our equity balance decreased $42.7 million during the three months ended March 31, 2015.

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 interests. 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.

14


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 March 31,
 
 
2015
 
2014
Net income attributable to partners
 
$
14,640

 
$
14,672

Less: General partner's IDRs
 
(606
)
 

Net income available to partners
 
$
14,034

 
$
14,672

General partner's ownership interest
 
2.0
%
 
2.0
%
General partner's allocated interest in net income
 
$
281

 
$
293

General partner's IDRs
 
606

 

Total general partner's interest in net income
 
$
887

 
$
293

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:

15


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
 
November 6, 2014
December 31, 2014
 
$
0.510

 
$
2.04

 
$
13,056

 
February 13, 2015
 
February 6, 2015
March 31, 2015
 
$
0.530

 
$
2.12

 
$
13,702

 
May 14, 2015 (1)
 
May 4, 2015
            
(1) Expected date of distribution.
The allocation of total quarterly cash distributions expected to be made on May 14, 2015 to general and limited partners for the three months ended March 31, 2015 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 March 31,
 
 
2015
 
2014
General partner's distributions:
 
 
 
 
     General partner's distributions
 
$
262

 
$
209

     General partner's IDRs
 
606

 

          Total general partner's distributions
 
868

 
209

 
 
 
 
 
Limited partners' distributions:
 
 
 
 
     Common
 
6,475

 
5,165

     Subordinated
 
6,359

 
5,100

          Total limited partners' distributions
 
12,834

 
10,265

               Total cash distributions
 
$
13,702

 
$
10,474

 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.530

 
$
0.425

8. Equity Based Compensation
We incurred $0.1 million of unit-based compensation expense related to the Partnership during both the three months ended March 31, 2015 and 2014. 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. All awards made through March 31, 2015 vest over a five-year service period unless such awards are amended in accordance with the LTIP. As of March 31, 2015, there was $0.8 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 2.8 years.
9. Equity Method Investments
In March 2015, the Partnership, through its indirect wholly owned subsidiary DKL Caddo, LLC ("DKL Caddo") became a member of Caddo Pipeline, LLC ("CP LLC") by entering into a limited liability company agreement (the “Caddo LLC Agreement”) with Plains Pipeline, L.P., an affiliate of Plains All American Pipeline, L.P. ("Plains"). CP LLC was formed to plan, develop, construct, own, operate and maintain a pipeline system and ancillary assets originating near Longview, Texas and extending to Shreveport, Louisiana (the "Caddo Pipeline System"). Pursuant to the terms of the Caddo LLC Agreement, DKL Caddo and Plains

16



each own a 50% membership interest in CP LLC. Pursuant to separate agreements, Plains will have primary responsibility for the construction of the Caddo Pipeline System, and, upon its completion, Plains will also have primary day-to-day responsibility for its operations.
In March 2015, the Partnership, through its indirect wholly owned subsidiary, DKL RIO, LLC ("DKL RIO"), became a member of Rangeland RIO Pipeline, LLC ("Rangeland RIO") by entering into a limited liability company agreement (the "Rangeland LLC Agreement") with Rangeland Energy II, LLC ("Rangeland"). Rangeland RIO was formed to develop, construct, operate and maintain a crude oil pipeline extending from Loving County, Texas, to Midland, Texas (the "RIO Pipeline"). Pursuant to the terms of the Rangeland LLC Agreement, DKL RIO owns 33% of Rangeland RIO, and Rangeland owns 67%. Rangeland will have primary day-to-day responsibility for the operations of the RIO Pipeline following completion of its construction.
The total projected investment in these two entities is approximately $91.0 million and will be financed through a combination of cash from operations and borrowings under the Second Amended and Restated Credit Agreement.  As of March 31, 2015, the investment in these joint ventures totaled $6.0 million and was accounted for using the equity method.
10. Segment Data
We report our assets and operating results in two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling:
The assets and investments reported in the pipelines and transportation segment provide crude oil gathering, and crude oil, intermediate and finished products transportation and storage services to Delek's refining operations and independent third parties.
The assets in the wholesale marketing and terminalling segment provide 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 and March 31, 2015, we acquired the El Dorado Terminal and Tank Assets and the Logistics Assets, respectively, 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 and the Logistics Assets as if we owned the assets for all periods presented. The results of the El Dorado Terminal are included in the wholesale marketing and terminalling segment. The results of the El Dorado Tank Assets and the Logistics Assets are included in the pipelines and transportation segment.
The following is a summary of business segment operating performance as measured by contribution margin for the periods indicated (in thousands):

17


 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
Pipelines and Transportation
 
 
 
 
Net Sales:
 
 
 
 
     Affiliate
 
$
23,985

 
$
17,501

     Third-Party
 
7,017

 
2,767

          Total Pipelines and Transportation
 
31,002

 
20,268

     Operating costs and expenses:
 
 
 
 
     Cost of goods sold
 
4,813

 
1,126

     Operating expenses (1) (2)
 
6,918

 
7,176

     Segment contribution margin
 
$
19,271

 
$
11,966

 Capital spending (excluding business combinations) (1) (2)
 
$
4,553

 
$
2,288

 
 
 
 
 
Wholesale Marketing and Terminalling
 
 
 
 
Net Sales:
 
 
 
 
     Affiliate
 
$
8,295

 
$
7,781

     Third-Party
 
104,215

 
175,478

          Total Wholesale Marketing and Terminalling
 
112,510

 
183,259

     Operating costs and expenses:
 
 
 
 
     Cost of goods sold
 
103,594

 
171,083

     Operating expenses
 
3,859

 
2,320

     Segment contribution margin
 
$
5,057

 
$
9,856

 Capital spending (excluding business combinations)
 
$
3,020

 
$
28

 
 
 
 
 
Consolidated
 
 
 
 
Net Sales:
 
 
 
 
     Affiliate
 
$
32,280

 
$
25,282

     Third-Party
 
111,232

 
178,245

     Net sales
 
143,512

 
203,527

     Operating costs and expenses:
 
 
 
 
     Cost of goods sold
 
108,407

 
172,209

     Operating expenses (1) (2)
 
10,777

 
9,496

     Contribution margin
 
24,328

 
21,822

     General and administrative expenses
 
3,409

 
2,663

     Depreciation and amortization
 
4,500

 
3,477

     Loss on asset disposals
 
5

 

     Operating income
 
$
16,414

 
$
15,682

 Capital spending (excluding business combinations) (1) (2)
 
$
7,573

 
$
2,316

            

(1) Includes operating expenses and capital spending expenditures incurred in connection with the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition for the three months ended March 31, 2015.

(2) Adjusted to include operating expenses and capital spending expenditures incurred in connection with the assets acquired in the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition for the three months ended March 31, 2014.


18



The following table summarizes the total assets for each segment as of March 31, 2015 and December 31, 2014 (in thousands).
 
 
March 31, 2015
 
December 31, 2014
Pipelines and Transportation
 
$
287,104

 
$
230,572

Wholesale Marketing and Terminalling
 
45,452

 
100,993

     Total Assets
 
$
332,556

 
$
331,565

Property, plant and equipment, accumulated depreciation and depreciation expense by reporting segment as of and for the three months ended March 31, 2015 were as follows (in thousands):
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Property, plant and equipment
 
$
291,225

 
$
19,990

 
$
311,215

Less: accumulated depreciation
 
(47,235
)
 
(10,312
)
 
(57,547
)
Property, plant and equipment, net
 
$
243,990

 
$
9,678

 
$
253,668

Depreciation expense for the three months ended March 31, 2015
 
$
3,476

 
$
759

 
$
4,235

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.
11. 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.

19


The fair value hierarchy for our financial assets accounted for at fair value on a recurring basis at March 31, 2015 and December 31, 2014 was as follows (in thousands):
 
 
As of March 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$
5

 
$

 
$
5

Liabilities
 
 
 
 
 
 
 


Commodity derivatives
 

 
(36
)
 

 
(36
)
Net liabilities
 
$

 
$
(31
)
 
$

 
$
(31
)
 
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$
24

 
$

 
$
24

Commodity derivatives
 

 
456

 

 
456

     Total assets
 

 
480

 

 
480

Liabilities
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
(61
)
 

 
(61
)
Net assets
 
$

 
$
419

 
$

 
$
419

The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy under the guidance of ASC 815-10-45, Derivatives and Hedging - Other Presentation Matters ("ASC 815-10-45"), wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty where the legal right of offset exists.
Our policy under the guidance of ASC 815-10-45 is to net the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and offset these values against the cash collateral arising from these derivative positions. As of March 31, 2015 and December 31, 2014, $0.2 million and no cash collateral, respectively, was held by counterparty brokerage firms.
12. Derivative Instruments
From time to time, we enter into forward fuel contracts to limit the exposure to price fluctuations for physical purchases of finished products in the normal course of business. We use derivatives to reduce normal operating and market risks with a primary objective in derivative instrument use being the reduction of the impact of market price volatility on our results of operations.
Typically, we enter into forward fuel contracts with major financial institutions in which we fix the purchase price of finished grade fuel for a predetermined number of units with fulfillment terms of less than 90 days.
From time to time, we may also enter into interest rate hedging agreements to limit floating interest rate exposure under the Second Amended and Restated Credit Agreement. Our initial credit facility required us to maintain interest rate hedging arrangements on at least 50% of the amount funded on November 7, 2012 under the credit facility, which was required to be in place for at least a three-year period beginning no later than March 7, 2013. Accordingly, effective February 25, 2013, we entered into interest rate hedges in the form of a LIBOR interest rate cap for a term of three years for a total notional amount of $45.0 million, thereby meeting the requirements in effect at that time. These requirements were eliminated in connection with the Amended and Restated Credit Agreement in July 2013, but the interest rate hedge remains in place in accordance with its terms.

20



The tables below present the fair value of our derivative instruments, as of March 31, 2015 and December 31, 2014. During the three months ended March 31, 2015 and March 31, 2014, we did not elect hedge treatment for these derivative positions. As a result, all changes in fair value are marked to market in the accompanying condensed consolidated statements of income.
(in thousands)
 
 
March 31, 2015
 
December 31, 2014
Derivative Type
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate derivatives
Other current assets
 
$
5

 
$

 
$

 
$

Interest rate derivatives
Other long term assets
 

 

 
24

 

Commodity derivatives (1)
Other current assets
 

 
(36
)
 
456

 
(61
)
Total gross value of derivatives
 
5

 
(36
)
 
480

 
(61
)
Less: Counterparty netting and cash collateral (2)
 
(156
)
 
(36
)
 
61

 
(61
)
Total net fair value of derivatives
 
$
161

 
$

 
$
419

 
$

            

(1) As of March 31, 2015, we had open derivative contracts representing 12,000 barrels of refined petroleum products.

(2) As of March 31, 2015, $0.2 million of cash collateral associated with our commodity derivatives has been netted with the derivative positions with each counterparty.
Recognized gains (losses) associated with derivatives not designated as hedging instruments for the three months ended March 31, 2015 and 2014 were as follows (in thousands):
 
 
 
Three Months Ended March 31,
Derivative Type
Income Statement Location
 
2015
 
2014
Interest rate derivatives
Interest expense
 
$
(19
)
 
$
(21
)
Commodity derivatives
Cost of goods sold
 
339

 

 
Total
 
$
320

 
$
(21
)

13. Commitments and Contingencies
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations.
Rate Regulation of Petroleum Pipelines
The rates and terms and conditions of service on certain of our pipelines are subject to regulation by the Federal Energy Regulatory Commission (“FERC”) under the Interstate Commerce Act (“ICA”) and by the state regulatory commissions in the states in which we transport crude oil and refined products, including the Railroad Commission of Texas, the Louisiana Public Service Commission, and the Arkansas Public Service Commission. Certain of our pipeline systems are subject to such regulation and have filed tariffs with the appropriate authorities. We also comply with the reporting requirements for these pipelines. Other of our pipelines have received a waiver from the application of FERC's tariff requirements but comply with other applicable regulatory requirements.
FERC regulates interstate transportation under the ICA, the Energy Policy Act of 1992 and the rules and regulations promulgated under those laws. The ICA and its implementing regulations require that tariff rates for interstate service on oil pipelines, including pipelines that transport crude oil and refined products in interstate commerce (collectively referred to as “petroleum pipelines”), be just and reasonable and non-discriminatory and that such rates and terms and conditions of service be filed with FERC. Under the ICA, shippers may challenge new or existing rates or services. FERC is authorized to suspend the

21


effectiveness of a challenged rate for up to seven months, though rates are typically not suspended for the maximum allowable period. Tariff rates are typically contractually subject to increase or decrease annually, by the amount of any change in various inflation-based indices, including the FERC oil pipeline index, the consumer price index and the producer price index; provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
While FERC regulates rates for shipments of crude oil or refined products in interstate commerce, state agencies may regulate rates and service for shipments in intrastate commerce. We own pipeline assets in Texas, Arkansas, and Louisiana, and accordingly, such assets may be subject to additional regulation by the applicable governmental authorities in those states.
Environmental Health and Safety
We are subject to various federal, state and local environmental and safety laws enforced by agencies including the United States Environmental Protection Agency, the United States Department of Transportation, the Occupational Safety and Health Administration, the Texas Commission on Environmental Quality, the Texas Railroad Commission, the Arkansas Department of Environmental Quality, the Louisiana Oil Spill Coordinating Office, the Louisiana Department of Environmental Quality, the Louisiana Department of Wildlife and Fisheries and the Tennessee Department of Environment and Conservation, as well as other state and federal agencies. Numerous permits or other authorizations are required under these laws for the operation of our terminals, pipelines, and related operations, and such permits and authorizations may be subject to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters, which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances we manufactured, stored, transported, handled, used, released or disposed of, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.
Crude Oil Releases
We have detected several crude oil releases involving our assets, including, without limitation, a release at our Magnolia Station in March 2013, a release near Macedonia, Arkansas in October 2013 and a release in Haynesville, Louisiana in April 2014. We do not believe the total costs associated with these events, whether alone or in the aggregate, including any fines or penalties and net of partial insurance reimbursement, will have a material adverse effect upon our business, financial condition or results of operations.

22


Contracts and Agreements
The majority of the petroleum products we sell in west Texas are purchased from Noble Petro, Inc. ("Noble Petro"). Under the terms of a supply contract (the "Abilene Contract") with Noble Petro, we have the right to purchase up to 20,350 bpd of petroleum products at the Abilene, Texas terminal, which we own, for sales at the Abilene and San Angelo terminals and to exchange barrels with third parties. We lease the Abilene and San Angelo, Texas terminals to Noble Petro, under a separate Terminal and Pipeline Lease and Operating Agreement, with a term that runs concurrent with that of the Abilene Contract. The Abilene Contract expires on December 31, 2017 and does not include any options for renewal. We also purchase spot barrels from various third parties and from Delek for sale to wholesale customers in west Texas.
Letters of Credit
As of March 31, 2015, we had in place letters of credit totaling approximately $4.5 million under the Second Amended and Restated Credit Agreement, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at March 31, 2015.
Operating Leases
We lease certain equipment and have surface leases under various operating lease arrangements, most of which provide the option to renew after the current lease term. None of these lease arrangements includes fixed rental rate increases. Lease expense for all operating leases totaled $0.2 million for both the three months ended March 31, 2015 and 2014.

14. Related Party Transactions
Commercial Agreements
The Partnership has various agreements with Delek, the majority of which are long-term, fee-based commercial agreements with Delek under which we provide crude oil gathering, crude oil and intermediate and refined products transportation and storage services, and marketing and terminalling services to Delek. Each of these agreements includes minimum quarterly volume or throughput commitments and has tariffs or fees indexed to inflation, provided that the tariffs or fees will not be decreased below the initial amount. Fees under each agreement are payable to us monthly by Delek or certain third parties to whom Delek has assigned certain of its rights. In most circumstances, if Delek or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek, and not any third party assignee, will be required to make a quarterly shortfall payment to us equal to the volume of the shortfall multiplied by the applicable fee.
The tariffs, throughput fees and the storage fees under our agreements with Delek are subject to increase or decrease annually, by the amount of any change in various inflation-based indices, including the FERC oil pipeline index, the consumer price index and the producer price index; provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
See our Annual Report on Form 10-K for a description of certain of our commercial agreements and other agreements with Delek. During the three months ended March 31, 2015, we entered into the following material commercial agreements with Delek:
Asset/Operation
 
Initiation Date
 
Initial/Maximum Term (years) (1)
Service
 
Minimum Throughput Commitment (bpd)
 
Fee (/bbl)
El Dorado Assets Throughput:
 
 
 
 
 
 
 
 
 
     Light Crude Throughput:
 
March 2015
 
9 / 15
Dedicated offloading services
 
N/A (3)
 
$1.00 (2)
     Heavy Crude Throughput:
 
March 2015
 
9 / 15
Dedicated offloading services
 
N/A (3)
 
$2.25 (2)
            
(1) 
Maximum term gives effect to the extension of the commercial agreement pursuant to the terms thereof.
(2) 
Fees payable to the Partnership by Delek.

23


(3) 
The El Dorado Assets Throughput Agreement provides for an obligated quarterly minimum throughput fee of $1.5 million for throughput of a combination of light and heavy crude.
El Dorado Assets Throughput Agreement. On March 31, 2015, in connection with the El Dorado Offloading Racks Acquisition, we and Delek entered into the Throughput Agreement (El Dorado Rail Offloading Facility) (the "Throughput Agreement") with respect to the El Dorado Assets. Under the Throughput Agreement, we will provide Delek with rail offloading services in return for throughput fees. The fees under the Throughput Agreement are indexed annually for inflation. The initial term of the Throughput Agreement is nine years and Delek, at its sole option, may extend the term for two renewal terms of three years each.
Omnibus Agreement. The Partnership entered into an omnibus agreement with Delek, our general partner, OpCo, Lion Oil Company and certain of the Partnership’s and Delek’s other subsidiaries on November 7, 2012, which was subsequently amended and restated on July 26, 2013 and February 26, 2014 in connection with our subsequent acquisitions from Delek (collectively, the "Omnibus Agreement"). The Omnibus Agreement was amended and restated again on March 31, 2015 in connection with the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition (the "Third Restated Omnibus Agreement"). The Third Restated Omnibus Agreement includes, among other things: (i) revisions of the schedules to include the El Dorado Assets and the Tyler Assets, (ii) revisions of certain provisions and schedules with respect to certain environmental matters, (iii) the addition of DKL Transportation, LLC as a party to the agreement, (iv) the elimination of certain provisions under the Omnibus Agreement that had expired, and (v) updating the annual administrative fee payable by us to Delek for general corporate and administrative services that Delek and its affiliates provide to us to reflect the inflationary increase provided under the Omnibus Agreement, from $3.3 million to $3.4 million, which is prorated and payable monthly.
Under the Third Restated Omnibus Agreement, Delek reimburses us for, among other things, (i) certain expenses that we incur for inspections, maintenance and repairs to certain assets we acquired from Delek to cause such assets to comply with applicable regulatory and/or industry standards, (ii) certain expenses that we incur for inspections, maintenance and repairs to most of the storage tanks contributed to us by Delek (subject to a deductible of $0.5 million per year) that are necessary to comply with the DOT pipeline integrity rules and certain American Petroleum Institute storage tank standards for a period of five years, and (iii) certain non-discretionary maintenance capital expenditures with respect to certain of our assets in excess of specified amounts, all as disclosed in the full agreement filed as Exhibit 10.3 to our Current Report on Form 8-K, filed with the SEC on April 6, 2015.
Predecessors' Transactions
Related-party transactions of the Predecessors were settled through division equity. Revenues from affiliates consist of revenues from gathering, pipeline transportation, storage, wholesale marketing and products terminalling services to Delek and its affiliates based on regulated tariff rates or contractually based fees.
Costs related specifically to us have been identified and included in the accompanying consolidated statements of income and comprehensive income. Prior to the formation of the Partnership, the El Dorado Acquisition, the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition, we were not allocating certain corporate costs. These costs were primarily allocated based on a percentage of salaries expense and property, plant and equipment costs. In the opinion of management, the methods for allocating these costs are reasonable. It is not practicable to estimate the costs that would have been incurred by us if we had been operated on a stand-alone basis.
Summary of Transactions
A summary of revenue and expense transactions with Delek, including expenses directly charged and allocated to our Predecessors, are as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
 
 
 
Revenues
 
$
32,280

 
$
25,282

Operating and maintenance expenses (1) 
 
$
7,552

 
$
5,569

General and administrative expenses (2)
 
$
1,256

 
$
1,282

            
(1) 
Operating and maintenance expenses include costs allocated to the El Dorado Predecessor for operating support provided to the El Dorado Predecessor and the Logistics Assets Predecessor by Delek, including certain labor related costs, property and liability insurance costs and certain other operating expenses. With respect to the El Dorado Predecessor and the Logistics Assets Predecessor, the costs that were allocated to us by Delek were $0.4 million and $0.2 million, respectively,

24


for the three months ended March 31, 2014. Costs that were allocated to us by Delek with respect to the Logistics Assets Predecessor were $0.2 million for the three months ended March 31, 2015.
(2) 
General and administrative expenses include costs allocated to the El Dorado Predecessor for general and administrative support provided to the El Dorado Predecessor by Delek, including services such as corporate management, risk management, accounting and human resources. With respect to the El Dorado Predecessor, the costs that were allocated to us by Delek were $0.1 million for the three months ended March 31, 2014. No costs were allocated to the Logistics Assets Predecessor to us by Delek for both the three months ended March 31, 2015 and 2014.
In accordance with our partnership agreement, our common, subordinated and general partner unitholders are entitled to receive quarterly distributions of available cash. We paid quarterly cash distributions, of which $7.8 million and $6.3 million were paid to Delek and our general partner during the three months ended March 31, 2015 and 2014, respectively. On April 21, 2015, our general partner's board of directors declared a quarterly cash distribution totaling $13.7 million, based on the available cash as of the date of determination for the end of the first quarter of 2015, payable on May 14, 2015, to unitholders of record on May 4, 2015. The distribution will include $8.7 million paid to both Delek and our general partner, including incentive distribution rights.
15. Subsequent Events

Distribution Declaration
On April 21, 2015, our general partner's board of directors declared a quarterly cash distribution of $0.53 per limited partner unit, payable on May 14, 2015, to unitholders of record on May 4, 2015.
Fouke Junction Spill
On April 28, 2015, a release of an estimated 100 barrels of crude oil occurred from a gathering line near Fouke, Arkansas. No significant environmental or public impacts have been identified. Cleanup operations were coordinated with state and federal officials and may continue for several weeks. Site maintenance, and remediation, if determined necessary, may continue for several months or longer. Based on current information available to us, we can not estimate the costs and liabilities, including any potential fines and penalties, associated with this event. However, we do not believe the total costs associated with this event, including any fines or penalties and net of any reimbursement and or indemnification by Delek pursuant to the Third Restated Omnibus Agreement and partial insurance reimbursement, will have a material adverse effect upon our business, financial condition or results of operations.

 


25


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references in this report to "Delek Logistics Partners, LP," the "Partnership," and "we," "our," "us," or like terms, refer to Delek Logistics Partners, LP and its general partner and subsidiaries. Unless the context otherwise requires, 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. Those statements in this section that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in such statements.
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”).
On March 31, 2015, the Partnership, through OpCo, acquired from Delek, two crude oil rail offloading racks, which racks are designed to receive up to 25,000 barrels per day ("bpd") of light crude oil or 12,000 bpd of heavy crude oil, or some combination of the two, delivered by rail to the El Dorado Refinery and related ancillary assets (the "El Dorado Assets") (such transaction, the "El Dorado Offloading Racks Acquisition").
On March 31, 2015, the Partnership, through its wholly owned subsidiary Delek Marketing & Supply, LP, acquired from Delek, a crude oil storage tank (the "Tyler Crude Tank") located adjacent to Delek's Tyler, Texas refinery (the "Tyler Refinery") and certain ancillary assets (collectively, with the Tyler Crude Tank, the "Tyler Assets") (such transaction, the "Tyler Crude Tank Acquisition"). The Tyler Crude Tank has approximately 350,000 barrels of shell capacity and is expected to primarily support the Tyler Refinery. The Tyler Assets, together with the El Dorado Assets, are hereinafter collectively referred to as the "Logistics Assets."
The El Dorado Acquisition, the El Dorado Offloading Racks Acquisition, and the Tyler Crude Tank Acquisition were accounted for as transfers between entities under common control. As an entity 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 comparable 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 for all periods presented through February 10, 2014 (the "El Dorado Predecessor"), and (ii) the historical results of the Logistics Assets for all periods presented through March 31, 2015 (the "Logistics Assets Predecessor"). We refer to the historical results of the El Dorado Predecessor and the Logistics Assets Predecessor collectively as our "Predecessors."
You should read the following discussion of our financial condition and results of operations in conjunction with our historical condensed consolidated financial statements and notes thereto.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to:

26


our substantial dependence on Delek or its assignees and their respective ability to pay us under our commercial agreements;
the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, spills, releases and tank failures;
the timing and extent of changes in commodity prices and demand for Delek’s refined products;
the suspension, reduction or termination of Delek's or its assignees' or any third party's obligations under our commercial agreements;
disruptions due to acts of God, equipment interruption or failure at our facilities, Delek’s facilities or third-party facilities on which our business is dependent;
our reliance on information technology systems in our day-to-day operations;
changes in general economic conditions;
the effects of existing and future laws and governmental regulations, including, but not limited to, the rules and regulations promulgated by the Federal Energy Regulatory Commission (the "FERC") and those relating to environmental protection, pipeline integrity and safety;
competitive conditions in our industry;
actions taken by our customers and competitors;
the demand for crude oil, refined products and transportation and storage services;
our ability to successfully implement our business plan;
our ability to complete internal growth projects on time and on budget;
Delek's inability to grow as expected;
natural disasters, weather-related delays, casualty losses and other matters beyond our control;
interest rates;
labor relations;
large customer defaults;
changes in the availability and cost of capital of debt and equity financing;
changes in tax status;
changes in insurance markets impacting costs and the level and types of coverage available;
the effects of future litigation; and
other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2104.
In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate future period results or trends. There can be no assurance that any of the events anticipated by the forward-looking statements will occur or, if any such events do occur, what impact they will have on our results of operations and financial condition.
Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements,

27


no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
Business Overview
The Partnership primarily owns and operates crude oil and intermediate and refined products logistics and marketing assets. We gather, transport and store crude oil and intermediate and refined products and market, distribute, transport and store refined products primarily in select regions of the southeastern United States and Texas for Delek and third parties, primarily in support of Delek’s Tyler and El Dorado Refineries. A substantial majority of our existing assets are both integral to and dependent on the success of Delek’s refining operations, as many of our assets are contracted exclusively to Delek in support of its Tyler and El Dorado Refineries.
The Partnership is not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. Instead, for purposes of these income taxes, each partner of the Partnership is required to take into account its share of items of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to the partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and the fair market value of our assets and financial reporting bases of assets and liabilities, the acquisition price of their units and the taxable income allocation requirements under our partnership agreement.
Our Reporting Segments and Assets

Our business consists of two operating segments: (i) our pipelines and transportation segment and (ii) our wholesale marketing and terminalling segment.

The assets and investments in our pipelines and transportation segment consist of and have been made in pipelines and trucks and ancillary assets, that provide crude oil gathering, crude oil and intermediate and refined products transportation and storage services primarily in support of Delek's refining operations in Tyler, Texas and El Dorado, Arkansas. Additionally, the assets in this segment provide crude oil transportation services to certain third parties, including a major integrated oil company. In providing these services, we do not take ownership of the products or crude oil that we transport or store; and, therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment.

The assets in our wholesale marketing and terminalling segment consist of refined products terminals and pipelines in Texas, Tennessee and Arkansas. We generate revenue in our wholesale marketing and terminalling segment by providing marketing services for the refined products output of the Tyler Refinery, engaging in wholesale activity at our terminals in west Texas, and at terminals owned by third parties, whereby we purchase light products for sale and exchange to third parties, and by providing terminalling services at our refined product terminals to independent third parties and Delek.
Recent Developments
Acquisitions
El Dorado Offloading Racks Acquisition. On March 31, 2015, the Partnership completed the El Dorado Offloading Racks Acquisition and acquired the El Dorado Assets.
In connection with the El Dorado Offloading Racks Acquisition, the Partnership and Delek entered into (i) an asset purchase agreement, (ii) the Third Restated Omnibus Agreement, (iii) a throughput agreement with respect to the El Dorado Assets, (iv) a lease and access agreement, and (v) an amended and restated site services agreement.
Tyler Crude Tank Acquisition. On March 31, 2015, the Partnership completed the Tyler Crude Tank Acquisition and acquired the Tyler Assets, including the Tyler Crude Tank.
Other Developments
Third Restated Omnibus Agreement. The Partnership entered into an omnibus agreement with Delek, our general partner, OpCo, Lion Oil Company and certain of the Partnership’s and Delek’s other subsidiaries on November 7, 2012, which was subsequently amended and restated on July 26, 2013 and February 26, 2014 in connection with our subsequent acquisitions from Delek (collectively, the "Omnibus Agreement"). The Omnibus Agreement was amended and restated again on March 31, 2015 in connection with the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition (the "Third Restated Omnibus Agreement"). The Third Restated Omnibus Agreement includes, among other things: (i) revisions of the schedules to include the El Dorado Assets and the Tyler Assets, (ii) revisions of certain provisions and schedules with respect to environmental matters in favor of the Partnership, (iii) the addition of DKL Transportation, LLC as a party to the agreement, (iv) the elimination of certain provisions under the Omnibus Agreement that had expired, and (v) updating the annual administrative fee payable by us to Delek

28


for general corporate and administrative services that Delek and its affiliates provide to us to reflect the inflationary increase provided under the Omnibus Agreement.
Joint Ventures. On March 20, 2015, we entered into two joint ventures that will construct logistics assets to serve third parties and subsidiaries of Delek. Our total projected investment for the two joint ventures is approximately $91.0 million and will be financed through a combination of cash from operations, borrowings under our revolving credit facility and asset contributions.
How We Generate Revenue     
The Partnership generates revenue by charging fees for gathering, transporting and storing crude oil and for marketing, distributing, transporting, throughputting and storing intermediate and refined products. A substantial majority of our contribution margin, which we define as net sales less cost of goods sold and operating expenses, is derived from commercial agreements with Delek with initial terms ranging from five to ten years, which we believe enhances the stability of our cash flows. As more fully described below, our commercial agreements with Delek include minimum volume commitments, which we believe will provide a stable revenue stream in the future.
Commercial Agreements
Commercial Agreements with Delek
The Partnership has various long-term, fee-based commercial agreements with Delek pursuant to which we provide crude oil gathering, crude oil and refined products transportation, and storage services and marketing and terminalling services to Delek, and Delek commits to provide us with minimum monthly throughput volumes of crude oil and refined products. See our Annual Report on Form 10-K for the year ended December 31, 2014 (our "Annual Report on Form 10-K") for a description of certain of our commercial and other agreements with Delek and our material agreements with third parties.
How We Evaluate Our Operations
We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) volumes (including pipeline throughput and terminal volumes); (ii) contribution margin and gross margin per barrel; (iii) operating and maintenance expenses; and (iv) EBITDA and di