Attached files

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EX-31.1 - EXHIBIT 31.1 - CEO CERTIFICATION - Delek Logistics Partners, LPdkl-ex311xceocertification.htm
EX-32.2 - EXHIBIT 32.2 - CFO CERTIFICATION - Delek Logistics Partners, LPdkl-ex322xcfocertification.htm
EX-32.1 - EXHIBIT 32.1 - CEO CERTIFICATION - Delek Logistics Partners, LPdkl-ex321xceocertification.htm
EX-31.2 - EXHIBIT 31.2 - CFO CERTIFICATION - Delek Logistics Partners, LPdkl-ex312xcfocertification.htm
EX-10.1 - EXHIBIT 10.1 FIRST AMENDMENT TO MARKETING AGREEMENT - Delek Logistics Partners, LPdkl-ex101revisedamendmentt.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the quarterly period ended September 30, 2016
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                      to                     
Commission file number 001-35721

DELEK LOGISTICS PARTNERS, LP
(Exact name of registrant as specified in its charter)
Delaware
 
45-5379027
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
7102 Commerce Way
 
 
Brentwood, Tennessee
 
37027
(Address of principal executive offices)
 
(Zip Code)
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At October 28, 2016, there were 24,304,987 common limited partner units and 496,020 general partner units outstanding.



TABLE OF CONTENTS
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2016 and 2015 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 10.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

2


Part I.
FINANCIAL INFORMATION

Item 1. Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Balance Sheets (Unaudited)
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
(In thousands)
Current assets:
 
 
 
 
Cash and cash equivalents
 
$

 
$

Accounts receivable
 
13,492

 
35,049

Inventory
 
7,264

 
10,451

Other current assets
 
919

 
1,540

Total current assets
 
21,675

 
47,040

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
331,131

 
325,647

Less: accumulated depreciation
 
(86,035
)
 
(71,799
)
Property, plant and equipment, net
 
245,096

 
253,848

Equity method investments
 
94,638

 
40,678

Goodwill
 
12,203

 
12,203

Intangible assets, net
 
14,686

 
15,482

Other non-current assets
 
4,872

 
6,037

Total assets
 
$
393,170

 
$
375,288

LIABILITIES AND DEFICIT
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
8,664

 
$
6,850

Accounts payable to related parties
 
39

 
3,992

Excise and other taxes payable
 
2,763

 
4,871

Tank inspection liabilities
 
1,095

 
1,890

Pipeline release liabilities
 
1,142

 
1,393

Accrued expenses and other current liabilities
 
3,185

 
1,694

Total current liabilities
 
16,888

 
20,690

Non-current liabilities:
 
 
 
 
Revolving credit facility
 
375,000

 
351,600

Asset retirement obligations
 
3,705

 
3,506

Other non-current liabilities
 
11,608

 
10,510

Total non-current liabilities
 
390,313

 
365,616

Deficit:
 
 
 
 
Common unitholders - public; 9,506,471 units issued and outstanding at September 30, 2016 (9,478,273 at December 31, 2015)
 
196,611

 
198,401

Common unitholders - Delek; 14,798,516 units issued and outstanding at September 30, 2016 (2,799,258 at December 31, 2015)
 
(204,073
)
 
(280,828
)
Subordinated unitholders - Delek; 0 units issued and outstanding at September 30, 2016 (11,999,258 at December 31, 2015)
 

 
78,601

General partner - 496,020 units issued and outstanding at September 30, 2016 (495,445 at December 31, 2015)
 
(6,569
)
 
(7,192
)
Total deficit
 
(14,031
)
 
(11,018
)
Total liabilities and deficit
 
$
393,170

 
$
375,288

 

See accompanying notes to condensed consolidated financial statements

3


Delek Logistics Partners, LP
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands, except unit and per unit data)
Net sales:
 
 
 
 
 
 
 
 
   Affiliate
 
$
36,360

 
$
41,824

 
$
111,814

 
$
113,975

   Third-Party
 
71,110

 
123,268

 
211,565

 
366,763

     Net sales
 
107,470

 
165,092

 
323,379

 
480,738

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
73,527

 
124,385

 
213,381

 
365,286

Operating expenses
 
9,251

 
11,616

 
28,445

 
33,191

General and administrative expenses
 
2,307

 
2,703

 
7,918

 
9,094

Depreciation and amortization
 
5,356

 
4,541

 
15,164

 
13,785

Loss (gain) on asset disposals
 
28

 

 
(16
)
 
(18
)
Total operating costs and expenses
 
90,469

 
143,245

 
264,892

 
421,338

Operating income
 
17,001

 
21,847

 
58,487

 
59,400

Interest expense, net
 
3,409

 
2,843

 
9,892

 
7,616

Loss on equity method investments
 
308

 
293

 
743

 
442

Total non-operating expenses
 
3,717

 
3,136

 
10,635

 
8,058

Income before income tax expense
 
13,284

 
18,711

 
47,852

 
51,342

Income tax expense
 
133

 
109

 
360

 
426

Net income
 
13,151

 
18,602

 
47,492

 
50,916

Less: loss attributable to the Logistics Assets Predecessor
 

 

 

 
(637
)
Net income attributable to partners
 
$
13,151

 
$
18,602

 
$
47,492

 
$
51,553

Comprehensive income attributable to partners
 
$
13,151

 
$
18,602

 
$
47,492

 
$
51,553

 
 
 
 
 
 
 
 
 
Less: General partner's interest in net income, including incentive distribution rights
 
3,259

 
1,383

 
8,303

 
3,379

Limited partners' interest in net income
 
$
9,892

 
$
17,219

 
$
39,189

 
$
48,174

 
 
 
 
 
 
 
 
 
Net income per limited partner unit (1):
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.41

 
$
0.71

 
$
1.61

 
$
1.99

Common units - (diluted)
 
$
0.41

 
$
0.70

 
$
1.60

 
$
1.97

Subordinated units - Delek (basic and diluted)
 
$

 
$
0.71

 
$
1.64

 
$
1.99

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding (1):
 
 
 
 
 
 
 
 
  Common units - (basic)
 
24,303,740

 
12,250,847

 
21,878,935

 
12,230,560

  Common units - (diluted)
 
24,380,334

 
12,369,777

 
21,962,733

 
12,362,340

  Subordinated units - Delek (basic and diluted)
 

 
11,999,258

 
2,408,610

 
11,999,258

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.655

 
$
0.570

 
$
1.895

 
$
1.650

            
(1) We base our calculation of net income per unit on the weighted-average number of common and subordinated limited partner units outstanding during the period. The weighted-average number of common and subordinated units reflects the conversion of the subordinated units to common units on February 25, 2016. See Notes 7 and 8 for further discussion.
See accompanying notes to condensed consolidated financial statements

4


Delek Logistics Partners, LP
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
(In thousands)
Net income
 
$
47,492

 
$
50,916

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
15,164

 
13,785

Amortization of deferred revenue
 
(843
)
 
(317
)
Amortization of deferred financing costs
 
1,095

 
1,095

Accretion of asset retirement obligations
 
199

 
187

Deferred income taxes
 

 
23

Loss on equity method investments
 
743

 
442

Gain on asset disposals
 
(16
)
 
(18
)
Unit-based compensation expense
 
414

 
298

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
21,557

 
(9,102
)
Inventories and other current assets
 
3,808

 
5,645

Accounts payable and other current liabilities
 
775

 
(5,050
)
Accounts receivable/payable to related parties
 
(4,110
)
 
9,046

Non-current assets and liabilities, net
 
483

 
(188
)
Net cash provided by operating activities
 
86,761

 
66,762

Cash flows from investing activities:
 
 
 
 
Business combinations
 

 
(400
)
Purchases of property, plant and equipment
 
(5,633
)
 
(17,598
)
Proceeds from sales of property, plant and equipment
 
175

 
1,189

Equity method investment contributions
 
(54,703
)
 
(27,069
)
Net cash used in investing activities
 
(60,161
)
 
(43,878
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of additional units to maintain 2% General Partner interest
 
15

 
31

Distributions to general partner
 
(6,861
)
 
(2,605
)
Distributions to common unitholders - public
 
(17,601
)
 
(15,193
)
Distributions to common unitholders - Delek
 
(15,578
)
 
(4,450
)
Distributions to subordinated unitholders - Delek
 
(11,503
)
 
(19,079
)
Distributions to Delek for acquisitions
 

 
(61,890
)
Proceeds from revolving credit facility
 
229,150

 
302,064

Payments of revolving credit facility
 
(205,750
)
 
(228,664
)
Predecessor division equity contribution
 

 
115

Reimbursement of capital expenditures by Delek
 
1,528

 
4,926

Net cash used in financing activities
 
(26,600
)
 
(24,745
)
Net decrease in cash and cash equivalents
 

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

 
1,861

Cash and cash equivalents at the end of the period
 
$

 
$

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
8,902

 
$
6,289

Income taxes
 
$

 
$
5

Non-cash investing activities:
 
 

 
 

Equity method investments
 
$

 
$
3,832

(Decreases) increases in accrued capital expenditures
 
$
(624
)
 
$
132

Non-cash financing activities:
 
 
 
 
Sponsor contribution of fixed assets
 
$
609

 
$
418



See accompanying notes to condensed consolidated financial statements

5


Delek Logistics Partners, LP

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Basis of Presentation

As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. References in this report to "Delek" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than Delek Logistics Partners, LP and its subsidiaries and its general partner (as hereinafter defined).

The Partnership is a Delaware limited partnership formed in April 2012 by Delek and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner").

On March 31, 2015, the Partnership, through its wholly owned subsidiary Delek Logistics Operating, LLC ("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 Delek's El Dorado, Arkansas refinery (the "El Dorado Refinery"), and related ancillary assets (the “El Dorado Assets”) (such transaction, the "El Dorado Rail 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 primarily supports the Tyler Refinery. The Tyler Assets, together with the El Dorado Assets, are hereinafter collectively referred to as the "Logistics Assets."

The El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition are hereinafter collectively referred to as the "Acquisitions from Delek." The Acquisitions from Delek 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 periods 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 Assets, as owned and operated by Delek through March 31, 2015 (the "El Dorado Assets Predecessor") and (ii) the historical results of the Tyler Assets, as owned and operated by Delek 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." See Note 2 for further information regarding the El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition.

The accompanying unaudited condensed consolidated financial statements and related notes for the three and nine month periods ended September 30, 2016 and 2015 include the consolidated financial position, results of operations, cash flows and equity of the Logistics Assets Predecessor as appropriate. The financial statements of the Logistics Assets Predecessor 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 the Logistics Assets Predecessor had been operated as unaffiliated entities. For example, the Logistics Assets Predecessor did not record revenues for intercompany terminalling, throughput, storage or other 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, 2015 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on February 29, 2016. 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, 2015 included in our Annual Report on Form 10-K.

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been included. All significant intercompany transactions and account balances have been eliminated in the consolidation. Such intercompany transactions do not include those with Delek or our general partner. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.


6


Certain prior period amounts have been reclassified in order to conform to the current year presentation. These reclassifications had no effect on net income or partners' equity as previously reported.

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.
New Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board ("FASB") issued guidance that clarifies eight cash flow classification issues pertaining to cash receipts and cash payments. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for any interim or annual financial statements that have not yet been issued. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In June 2016, the FASB issued guidance that requires organizations to use historical experience, current conditions, reasonable and supportable forecasts and forward-looking information in the measurement of all expected credit losses on financial instruments to more accurately estimate those losses. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted after December 15, 2018, and interim periods within those fiscal years. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment award transactions, including the accounting for excess tax benefits and deficiencies, classification of awards as either equity or liabilities and classification of excess tax benefits on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for any interim or annual financial statements that have not yet been issued. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In February 2016, the FASB issued guidance that requires the recognition of a lease liability and a right-of-use asset, initially measured at the present value of the lease payments, in the statement of financial position for all leases previously accounted for as operating leases. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In February 2015, the FASB issued guidance that amends and simplifies the requirements for consolidation and provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporations and securitization structures, should be consolidated. This guidance is effective for interim and annual periods beginning after December 15, 2015. We adopted this guidance on the effective date and the adoption did not have a material impact on our business, financial condition or results of operations.
In May 2014, the FASB issued guidance regarding “Revenue from Contracts with Customers,” to clarify the principles for recognizing revenue. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and can be adopted either retrospectively to each prior reporting period presented using a practical expedient as allowed by the new guidance or retrospectively with a cumulative effect adjustment to retained earnings as of the date of initial application. Early adoption is not permitted. We are currently evaluating the impact that adopting this new standard will have on our business, financial condition and results of operations.

2. Acquisitions

Acquisitions from Delek

During the nine-month period ended September 30, 2015, the Partnership acquired the assets listed below from Delek:

the El Dorado Assets, effective March 31, 2015, for approximately $42.5 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility; and
the Tyler Assets, effective March 31, 2015, for approximately $19.4 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility.

Financial Results of the El Dorado Assets and the Tyler Assets

7



The acquisitions of the El Dorado Assets and the Tyler Assets were considered transfers of businesses between entities under common control. Accordingly, the El Dorado Rail Offloading Racks Acquisition and the Tyler Crude Tank Acquisition were recorded at amounts based on Delek's historical carrying values as of the acquisition date, which were $7.6 million and $11.6 million as of March 31, 2015, 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 and the Tyler Assets, as if we owned the assets for the three-month period ended March 31, 2015. The results of the El Dorado Assets and the Tyler Assets are included in our pipelines and transportation segment.

The table below presents our results of operations, the effect of including the results of the El Dorado Assets and the Tyler Assets, and the adjusted total amounts included in our consolidated financial statements for the nine months ended September 30, 2015.

Condensed Combined Statements of Operations

 
 
Delek Logistics Partners, LP
 
El Dorado Assets
(El Dorado Assets Predecessor)
 
Tyler Assets
(Tyler Assets Predecessor)
 
Nine Months Ended September 30, 2015
 
 
(In thousands)
Net sales
 
$
480,738

 
$

 
$

 
$
480,738

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
365,286

 

 

 
365,286

Operating expenses
 
33,024

 
167

 

 
33,191

General and administrative expenses
 
9,094

 

 

 
9,094

Depreciation and amortization
 
13,315

 
372

 
98

 
13,785

Gain on asset disposals
 
(18
)
 

 

 
(18
)
Total operating costs and expenses
 
420,701

 
539

 
98

 
421,338

Operating income (loss)
 
60,037

 
(539
)
 
(98
)
 
59,400

Interest expense, net
 
7,616

 

 

 
7,616

Loss on equity method investments
 
442

 

 

 
442

Total non-operating costs and expenses
 
8,058

 

 

 
8,058

Net income (loss) before income tax expense
 
51,979

 
(539
)
 
(98
)
 
51,342

Income tax expense
 
426

 

 

 
426

Net income (loss)
 
51,553

 
(539
)
 
(98
)
 
50,916

Less: loss attributable to the Logistics Assets Predecessor
 

 
(539
)
 
(98
)
 
(637
)
Net income attributable to partners
 
$
51,553

 
$

 
$

 
$
51,553

 
 
 
 
 
 
 
 
 

3. Related Party Transactions

Commercial Agreements

The Partnership has a number of commercial agreements with Delek under which we provide various services, including crude oil gathering and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services. Fees under each agreement are payable to us monthly by Delek or certain third parties to whom Delek has assigned certain of its rights and are generally subject to increase or decrease on July 1 of each year, by the amount of any change in various inflation-based indices, including the Federal Energy Regulatory Commission oil pipeline index or various iterations of 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 more complete description of certain of our commercial agreements and other agreements with Delek.

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,

8


2013, February 10, 2014 and March 31, 2015 in connection with our subsequent acquisitions from Delek (collectively, the "Omnibus Agreement"). The third amendment and restatement occurring on March 31, 2015 generally provided for the following: (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 for under the Omnibus Agreement, from $3.3 million to $3.4 million, which is prorated and payable monthly. The Partnership entered into an amendment to the third amended and restated omnibus agreement on August 3, 2015, with an effective date of April 1, 2015 (the third amended and restated omnibus agreement between the Partnership, Delek and our general partner, as amended, is referred to as the "Third Restated Omnibus Agreement"). This amendment eliminated a $1.0 million per event deductible that applied to certain asset failures before Delek was required to reimburse the Partnership.

Pursuant to the terms of the Omnibus Agreement, we were reimbursed for certain capital expenditures in the amount of $0.7 million and $1.5 million during the three and nine months ended September 30, 2016, respectively, and $2.3 million and $4.9 million during the three and nine months ended September 30, 2015, respectively. These amounts are recorded in other long term liabilities and are amortized to revenue over the life of the underlying revenue agreement corresponding to the asset. Additionally, we were reimbursed or indemnified, as the case may be, for costs incurred in excess of certain amounts related to certain asset failures pursuant to the terms of the Omnibus Agreement. We were reimbursed $0.1 million and $1.2 million for these matters during the three and nine months ended September 30, 2016, respectively. During the three and nine months ended September 30, 2015, we were reimbursed for the costs incurred in connection with an asset failure near Fouke, Arkansas and the subsequent repair of the asset pursuant to the terms of the Third Restated Omnibus Agreement.
   
Logistics Assets Predecessor Transactions
 
Related-party transactions of the Logistics Assets Predecessor were settled through division equity. Costs related specifically to us have been identified and included in the accompanying consolidated statements of income and comprehensive income. Prior to the Acquisitions from Delek, we were not allocated 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 the Logistics Assets Predecessor had been operated on a stand-alone basis.

Summary of Transactions

Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, wholesale marketing and products terminalling services provided primarily to Delek based on regulated tariff rates or contractually based fees, and product sales to Alon USA Energy, Inc., an equity method investee of Delek. The Logistics Assets Predecessor did not record revenues for intercompany terminalling, throughput, storage or other services. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek or our general partner, as the case may be, for the services provided to us under the First Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). These expenses could also include reimbursement and indemnification amounts from Delek, as provided under the Third Restated Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek for direct or allocated costs and expenses incurred by Delek on behalf of the Partnership and for charges Delek incurred for the management and operation of our logistics assets, including an annual fee for various centralized corporate services, which are included in general and administrative services. In addition to these transactions, we purchase finished products and bulk biofuels from Delek, the costs of which are included in cost of goods sold.

A summary of revenue and expense transactions with Delek and its affiliates, including expenses directly charged and allocated to our Logistics Assets Predecessor, are as follows (in thousands):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Revenues
 
$
36,360

 
$
41,824

 
$
111,814

 
$
113,975

Cost of goods sold
 
$
5,247

 
$
43,100

 
$
24,064

 
$
86,849

Operating and maintenance expenses (1) 
 
$
7,988

 
$
8,059

 
$
22,738

 
$
22,834

General and administrative expenses 
 
$
1,641

 
$
1,788

 
$
4,595

 
$
4,907

            


9


(1) 
Operating and maintenance expenses include costs allocated to the Logistics Assets Predecessor for operating support provided by Delek, including certain labor related costs, property and liability insurance costs and certain other operating expenses. The costs that were allocated to us by Delek were $0.2 million for the nine months ended September 30, 2015.

Quarterly Cash Distributions

Our common and general partner unitholders and the holders of incentive distribution rights ("IDRs") are entitled to receive quarterly distributions of available cash as it is determined by the board of directors of our general partner in accordance with the terms and provisions of our Partnership Agreement. In February, May and August 2016, we paid quarterly cash distributions, of which $10.5 million, $11.3 million and $12.1 million, respectively, were paid to Delek and our general partner. On October 25, 2016, our general partner's board of directors declared a quarterly cash distribution totaling $19.3 million, based on the available cash as of the date of determination for the end of the third quarter of 2016, payable on November 14, 2016, of which $13.1 million is expected to be paid to Delek and our general partner, including the payment for the IDRs.

4. Inventory

Inventories consisted of $7.3 million and $10.5 million of refined petroleum products as of September 30, 2016 and December 31, 2015, respectively. Cost of inventory is stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

5. 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. 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 September 30, 2016, the weighted average interest rate for our borrowings under the facility was approximately 2.9%. 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 September 30, 2016, this fee was 0.4% 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 September 30, 2016, the principal amount of the Holdings Note was $102.0 million, plus unpaid interest accrued since the issuance date. The Second Amended and Restated Credit Agreement matures on December 30, 2019.
As of September 30, 2016, we had $375.0 million in outstanding borrowings under the Second Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling $6.5 million, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at September 30, 2016. Unused credit commitments under the Second Amended and Restated Credit Agreement as of September 30, 2016 were $318.5 million.

6. 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.

7. 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 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 IDRs, 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 IDRs, which are held by our general partner pursuant to our Partnership Agreement, which are 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 units. Basic and diluted net income per unit applicable to subordinated limited partners are the same because there are no potentially dilutive subordinated units outstanding.

10



Following the February 12, 2016 payment of the cash distribution attributable to the fourth quarter of 2015 and confirmation by the board of directors of our general partner (based on the recommendation of the Conflicts Committee) on February 25, 2016 that the requirements under the Partnership Agreement for the conversion of all subordinated units into common units were satisfied, the subordination period for such subordinated units ended. As a result, in the first quarter of 2016, each of the Partnership's 11,999,258 outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. The conversion did not impact the amount of the cash distribution paid or the total number of the Partnership's outstanding units representing limited partner interests. The Partnership's net income was allocated to the general partner and the limited partners, including the holders of the subordinated units through February 24, 2016, in accordance with our Partnership Agreement.

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 September 30, 2016 is November 14, 2016. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income attributable to partners
 
$
13,151

 
$
18,602

 
$
47,492

 
$
51,553

Less: General partner's distribution (including IDRs) (1)
 
3,382

 
1,314

 
8,443

 
3,212

Less: Limited partners' distribution
 
15,920

 
6,983

 
41,615

 
20,196

Less: Subordinated partner's distribution
 

 
6,839

 
4,424

 
19,798

(Distributions) earnings excess
 
$
(6,151
)
 
$
3,466

 
$
(6,990
)
 
$
8,347

 
 
 
 
 
 
 
 
 
General partner's earnings:
 
 
 
 
 
 
 
 
Distributions (including IDRs) (1)
 
$
3,382

 
$
1,314

 
$
8,443

 
$
3,212

Allocation of (distributions) earnings excess
 
(123
)
 
69

 
(140
)
 
167

Total general partner's earnings
 
$
3,259

 
$
1,383

 
$
8,303

 
$
3,379

 
 
 
 
 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
 
 
 
 
Distributions
 
$
15,920

 
$
6,983

 
$
41,615

 
$
20,196

Allocation of (distributions) earnings excess
 
(6,028
)
 
1,716

 
(6,368
)
 
4,131

Total limited partners' earnings on common units
 
$
9,892

 
$
8,699

 
$
35,247

 
$
24,327

 
 
 
 
 
 
 
 
 
Limited partners' earnings on subordinated units:
 
 
 
 
 
 
 
 
Distributions
 
$

 
$
6,839

 
$
4,424

 
$
19,798

Allocation of (distributions) earnings excess
 

 
1,681

 
(482
)
 
4,049

Total limited partners' earnings on subordinated units
 
$

 
$
8,520

 
$
3,942

 
$
23,847

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding (3):
 
 
 
 
 
 
 
 
Common units - (basic)
 
24,303,740

 
12,250,847

 
21,878,935

 
12,230,560

Common units - (diluted)
 
24,380,334

 
12,369,777

 
21,962,733

 
12,362,340

Subordinated units - Delek (basic and diluted) (2)
 

 
11,999,258

 
2,408,610

 
11,999,258

 
 
 
 
 
 
 
 
 
Net income per limited partner unit (3):
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.41

 
$
0.71

 
$
1.61

 
$
1.99

Common units - (diluted)
 
$
0.41

 
$
0.70

 
$
1.60

 
$
1.97

Subordinated units - Delek (basic and diluted)
 
$

 
$
0.71

 
$
1.64

 
$
1.99

            


11


(1) General partner distributions (including IDRs) consist of the payment with respect to the 2% general partner interest and payment on the 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 8 for further discussion related to IDRs.
(2) On February 25, 2016, each of the Partnership's 11,999,258 outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. Distributions and the Partnership's net income were allocated to the subordinated units through February 24, 2016.
(3) We base our calculation of net income per unit on the weighted-average number of common and subordinated limited partner units outstanding during the period. The weighted-average number of common and subordinated units reflects the conversion of the subordinated units to common units on February 25, 2016.

8. Equity

We had 9,506,471 common limited partner units held by the public outstanding as of September 30, 2016. Additionally, as of September 30, 2016, Delek owned a 59.7% limited partner interest in us, consisting of 14,798,516 common limited partner units and a 95.1% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 496,020 general partner units. Affiliates who are also members of our general partner's management and board of directors own the remaining 4.9% interest in our general partner.

Equity Activity

On February 25, 2016, the requirements under the Partnership Agreement for the conversion of all subordinated units into common units were satisfied and the subordination period ended. As a result, in the first quarter of 2016, each of the Partnership's 11,999,258 outstanding subordinated units converted into common units and began participating pro rata with the other common units in distributions of available cash. The conversion did not impact the amount of the cash distribution paid or the total number of the Partnership's outstanding units representing limited partner interests.

The table below summarizes the changes in the number of units outstanding from December 31, 2015 through September 30, 2016.

 
 
Common - Public
 
Common - Delek
 
Subordinated
 
General Partner
 
Total
Balance at December 31, 2015
 
9,478,273

 
2,799,258

 
11,999,258

 
495,445

 
24,772,234

General partner units issued to maintain 2% interest
 

 

 

 
575

 
575

Unit-based compensation awards
 
28,198

 

 

 

 
28,198

Subordinated unit conversion
 

 
11,999,258

 
(11,999,258
)
 

 

Balance at September 30, 2016
 
9,506,471

 
14,798,516

 

 
496,020

 
24,801,007


The summarized changes in the carrying amount of our equity from December 31, 2015 through September 30, 2016 are as follows (in thousands):
 
 
 
Common - Public
 
Common - Delek
 
Subordinated - Delek
 
General Partner
 
Total
Balance at December 31, 2015
 
$
198,401

 
$
(280,828
)
 
$
78,601

 
$
(7,192
)
 
$
(11,018
)
Cash distributions
(17,601
)
 
(15,578
)
 
(11,503
)
 
(6,861
)
 
(51,543
)
Sponsor contribution of fixed assets

 
597

 

 
12

 
609

Net income attributable to partners
15,318

 
19,929

 
3,942

 
8,303

 
47,492

Unit-based compensation
493

 
767

 

 
(846
)
 
414

Subordinated unit conversion

 
71,040

 
(71,040
)
 

 

Other

 

 

 
15

 
15

Balance at September 30, 2016
 
$
196,611

 
$
(204,073
)
 
$

 
$
(6,569
)
 
$
(14,031
)

Allocations of Net Income

Our Partnership Agreement contains provisions for the allocation of net income and loss to the 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

12


the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our general partner.
The following table presents the allocation of the general partner's interest in net income (in thousands, except percentage of ownership interest):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income attributable to partners
 
$
13,151

 
$
18,602

 
$
47,492

 
$
51,553

Less: General partner's IDRs
 
(3,057
)
 
(1,032
)
 
(7,503
)
 
(2,396
)
Net income available to partners
 
$
10,094

 
$
17,570

 
$
39,989

 
$
49,157

General partner's ownership interest
 
2.0
%
 
2.0
%
 
2.0
%
 
2.0
%
General partner's allocated interest in net income
 
$
202

 
$
351

 
$
800

 
$
983

General partner's IDRs
 
3,057

 
1,032

 
7,503

 
2,396

Total general partner's interest in net income
 
$
3,259

 
$
1,383

 
$
8,303

 
$
3,379


Incentive Distribution Rights

The following table illustrates the percentage allocations of available cash from operating surplus between the 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 IDRs, 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
%


13


Cash Distributions

Our Partnership Agreement sets forth the calculation to be used to determine the amount and priority of available cash distributions that our limited partner 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:
Quarter Ended
 
Total Quarterly Distribution Per Limited Partner Unit
 
Total Quarterly Distribution Per Limited Partner Unit, Annualized
 
Total Cash Distribution, including IDRs (in thousands)
 
Date of Distribution
 
Unitholders Record Date
September 30, 2015
 
$
0.570

 
$
2.28

 
$
15,136

 
November 13, 2015
 
November 6, 2015
December 31, 2015
 
$
0.590

 
$
2.36

 
$
16,124

 
February 12, 2016
 
February 5, 2016
March 31, 2016
 
$
0.610

 
$
2.44

 
$
17,095

 
May 13, 2016
 
May 5, 2016
June 30, 2016
 
$
0.630

 
$
2.52

 
$
18,085

 
August 12, 2016 
 
August 5, 2016
September 30, 2016
 
$
0.655

 
$
2.62

 
$
19,302

 
November 14, 2016 (1)
 
November 7, 2016
            
(1) Expected date of distribution.

The allocation of total quarterly cash distributions expected to be made on November 14, 2016 to our general partner and limited partners for the three and nine months ended September 30, 2016 and the allocation of total quarterly cash distributions for the three and nine months ended September 30, 2015 are set forth in the table below. Distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below presents total cash distributions applicable to the period in which the distributions are earned (in thousands, except per unit amounts):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
General partner's distributions:
 
 
 
 
 
 
 
 
     General partner's distributions
 
$
325

 
$
282

 
$
940

 
$
816

     General partner's IDRs
 
3,057

 
1,032

 
7,503

 
2,396

          Total general partner's distributions
 
3,382

 
1,314

 
8,443

 
3,212

 
 
 
 
 
 
 
 
 
Limited partners' distributions:
 
 
 
 
 
 
 
 
     Common
 
15,920

 
6,983

 
41,615

 
20,196

     Subordinated
 

 
6,839

 
4,424

 
19,798

          Total limited partners' distributions
 
15,920

 
13,822

 
46,039

 
39,994

               Total cash distributions
 
$
19,302

 
$
15,136

 
$
54,482

 
$
43,206

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.655

 
$
0.570

 
$
1.895

 
$
1.650


9. Equity Based Compensation

We incurred approximately $0.2 million and $0.4 million of unit-based compensation expense related to the Partnership during the three and nine months ended September 30, 2016, respectively, and $0.1 million and $0.3 million during the three and nine months ended September 30, 2015, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income. The fair value of phantom unit awards under the Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") is determined based on the closing price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized over the vesting period using the straight line method. Awards vest over one- to five-year service periods, unless such awards are amended in accordance with the LTIP. As of September 30, 2016, there was $0.9 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 1.7 years.



14




10. 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 an amended and restated limited liability company agreement (the “Caddo LLC Agreement”) with Plains Pipeline, L.P. ("Plains"), an affiliate of Plains All American Pipeline, L.P. CP LLC was formed to plan, develop, construct, own, operate and maintain a pipeline system and certain 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 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 responsibility for its day-to-day 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 an amended and restated limited liability company agreement (the "Rangeland LLC Agreement") with Rangeland Energy II, LLC ("Rangeland"). Rangeland RIO was formed to plan, develop, construct, own, operate and maintain a pipeline system and certain ancillary assets 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%. Construction on the pipeline has been substantially completed and operations began in September 2016. Rangeland has primary responsibility for the pipeline's day-to-day operations.

The Partnership's investments in these two entities are being financed through a combination of cash from operations and borrowings under the Second Amended and Restated Credit Agreement.  As of September 30, 2016, the Partnership's investments in these joint ventures totaled $94.6 million and were accounted for using the equity method.

We do not consolidate any part of the assets or liabilities of our equity investees. Our share of net income or loss will increase or decrease, as applicable, the carrying value of our investments in unconsolidated affiliates. With respect to CP LLC and Rangeland RIO, we determined that these entities do not represent variable interest entities and consolidation was not required. We have the ability to exercise influence over each of these joint ventures through our participation in the management committees, which make all significant decisions. However, since all significant decisions require the consent of the other investor(s) without regard to economic interest, we have determined that we have joint control and have applied the equity method of accounting. Our investment in these joint ventures is reflected in our pipelines and transportation segment.

Summarized Financial Information

Combined summarized financial information for our equity investees is shown below (in thousands):

 
 
September 30, 2016
 
December 31, 2015
Current assets
 
$
18,721

 
$
11,705

Noncurrent assets
 
$
212,463

 
$
87,467

Current liabilities
 
$
3,392

 
$
4,797

Noncurrent liabilities
 
$

 
$

 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
$
226

 
$

 
$
229

 
$

Gross profit
 
$
226

 
$

 
$
229

 
$

Net loss
 
$
(1,538
)
 
$
(880
)
 
$
(2,857
)
 
$
(1,332
)
 
 
 
 
 
 
 
 
 
11. Segment Data

We aggregate our operating units into 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.


15


The wholesale marketing and terminalling segment provides wholesale marketing and terminalling services to Delek's refining operations and independent third parties.

Our operating segments adhere to the 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 of its reportable segments 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 March 31, 2015, we acquired the Logistics Assets from Delek. Our historical financial statements have been retrospectively adjusted as appropriate to reflect the results of operations attributable to the Logistics Assets as if we owned the assets for all periods presented. The results of the Logistics Assets are included in the pipelines and transportation segment.


16


The following is a summary of business segment operating performance as measured by contribution margin for the periods indicated (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Pipelines and Transportation
 
 
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
 
 
     Affiliate
 
$
25,238

 
$
26,358

 
$
77,680

 
$
76,436

     Third-Party
 
3,388

 
7,581

 
15,739

 
22,239

          Total Pipelines and Transportation
 
28,626

 
33,939

 
93,419

 
98,675

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
4,811

 
5,211

 
14,401

 
15,126

     Operating expenses
 
7,678

 
8,368

 
22,317

 
23,031

     Segment contribution margin
 
$
16,137

 
$
20,360

 
$
56,701

 
$
60,518

 Capital spending (excluding business combinations)
 
$
2,613

 
$
2,872

 
$
4,037

 
$
12,627

 
 
 
 
 
 
 
 
 
Wholesale Marketing and Terminalling
 
 
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
 
 
     Affiliate
 
$
11,122

 
$
15,466

 
$
34,134

 
$
37,539

     Third-Party
 
67,722

 
115,687

 
195,826

 
344,524

          Total Wholesale Marketing and Terminalling
 
78,844

 
131,153

 
229,960

 
382,063

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
68,716

 
119,174

 
198,980

 
350,160

     Operating expenses
 
1,573

 
3,248

 
6,128

 
10,160

     Segment contribution margin
 
$
8,555

 
$
8,731

 
$
24,852

 
$
21,743

 Capital spending (excluding business combinations)
 
$
464

 
$
1,323

 
$
972

 
$
5,103

 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
 
 
     Affiliate
 
$
36,360

 
$
41,824

 
$
111,814

 
$
113,975

     Third-Party
 
71,110

 
123,268

 
211,565

 
366,763

     Net sales
 
107,470

 
165,092

 
323,379

 
480,738

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
73,527

 
124,385

 
213,381

 
365,286

     Operating expenses
 
9,251

 
11,616

 
28,445

 
33,191

     Contribution margin
 
24,692

 
29,091

 
81,553

 
82,261

     General and administrative expenses
 
2,307

 
2,703

 
7,918

 
9,094

     Depreciation and amortization
 
5,356

 
4,541

 
15,164

 
13,785

     Loss (gain) on asset disposals
 
28

 


(16
)
 
(18
)
     Operating income
 
$
17,001

 
$
21,847

 
$
58,487

 
$
59,400

 Capital spending (excluding business combinations) 
 
$
3,077

 
$
4,195

 
$
5,009

 
$
17,730




17


The following table summarizes the total assets for each segment as of September 30, 2016 and December 31, 2015 (in thousands).

 
 
September 30, 2016
 
December 31, 2015
Pipelines and Transportation
 
$
327,757

 
$
283,553

Wholesale Marketing and Terminalling
 
65,413

 
91,735

     Total Assets
 
$
393,170

 
$
375,288


Property, plant and equipment and accumulated depreciation as of September 30, 2016 and depreciation expense by reporting segment for the three and nine months ended September 30, 2016 were as follows (in thousands):
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Property, plant and equipment
 
$
274,184

 
$
56,947

 
$
331,131

Less: accumulated depreciation
 
(62,803
)
 
(23,232
)
 
(86,035
)
Property, plant and equipment, net
 
$
211,381

 
$
33,715

 
$
245,096

Depreciation expense for the three months ended September 30, 2016
 
$
4,225

 
$
866

 
$
5,091

Depreciation expense for the nine months ended September 30, 2016
 
$
11,865

 
$
2,502

 
$
14,367


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.

12. 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, 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 as of September 30, 2016.

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 ("OTC") commodity swaps and 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 based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.

18


The fair value hierarchy for our financial assets accounted for at fair value on a recurring basis at September 30, 2016 and December 31, 2015 was as follows (in thousands):

 
 
As of September 30, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$

 
$

 
$

OTC commodity swaps
 

 
88

 

 
88

     Total assets
 

 
88

 

 
88

Liabilities
 
 
 
 
 
 
 


OTC commodity swaps
 

 
(279
)
 

 
(279
)
Net liabilities
 
$

 
$
(191
)
 
$

 
$
(191
)
 
 
As of December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$

 
$

 
$

OTC commodity swaps
 

 
171

 

 
171

     Total assets
 

 
171

 

 
171

Liabilities
 
 
 
 
 
 
 
 
OTC commodity swaps
 

 
(45
)
 

 
(45
)
Net assets
 
$

 
$
126

 
$

 
$
126


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, 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.

As of September 30, 2016, a nominal amount of cash collateral was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty. As of December 31, 2015, $0.8 million of cash collateral was held by counterparty brokerage firms.

13. 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 an interest rate hedge 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 remained in place in accordance with its terms through its maturity date in February 2016.

19



The following table presents the fair value of our derivative instruments as of September 30, 2016 and December 31, 2015. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements, including any cash collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below may differ from the amounts presented in our consolidated balance sheets. During the three and nine months ended September 30, 2016 and September 30, 2015, we did not elect hedge accounting 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 and comprehensive income.

(in thousands)
 
 
 
September 30, 2016
 
December 31, 2015
Derivative Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate derivatives
 
Other long term assets
 
$

 
$

 
$

 
$

OTC commodity swaps (1)
 
Other current assets
 
88

 
(279
)
 
171

 
(45
)
Total gross value of derivatives
 
88

 
(279
)
 
171

 
(45
)
Less: Counterparty netting and cash collateral (2)
 
88

 
(88
)
 
(706
)
 
(45
)
Total net fair value of derivatives
 
$

 
$
(191
)
 
$
877

 
$

            

(1) As of September 30, 2016