10-Q
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, 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 October 30, 2015, there were 12,250,847 common units, 11,999,258 subordinated units, and 494,900 general partner units outstanding.


TABLE OF CONTENTS
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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)
 
 
September 30, 2015
 
December 31, 2014 (1)
ASSETS
 
(In thousands)
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
1,861

Accounts receivable
 
37,088

 
27,986

Inventory
 
5,018

 
10,316

Deferred tax assets
 
28

 
28

Other current assets
 
421

 
768

Total current assets
 
42,555

 
40,959

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
321,394

 
308,088

Less: accumulated depreciation
 
(66,237
)
 
(53,309
)
Property, plant and equipment, net
 
255,157

 
254,779

Equity method investments
 
30,459

 
—

Goodwill
 
11,654

 
11,654

Intangible assets, net
 
15,723

 
16,520

Other non-current assets
 
6,255

 
7,374

Total assets
 
$
361,803

 
$
331,286

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
12,437

 
$
17,929

Accounts payable to related parties
 
9,559

 
628

Excise and other taxes payable
 
5,114

 
5,443

Tank inspection liabilities
 
2,541

 
2,829

Pipeline release liabilities
 
2,429

 
1,899

Accrued expenses and other current liabilities
 
2,249

 
1,588

Total current liabilities
 
34,329

 
30,316

Non-current liabilities:
 
 
 
 
Revolving credit facility
 
325,150

 
251,750

Asset retirement obligations
 
3,442

 
3,319

Deferred tax liabilities
 
254

 
231

Other non-current liabilities
 
10,286

 
5,889

Total non-current liabilities
 
339,132

 
261,189

Equity (Deficit):
 
 
 
 
Predecessor division equity
 
—

 
19,726

Common unitholders - public; 9,451,589 units issued and outstanding at September 30, 2015 (9,417,189 at December 31, 2014)
 
198,527

 
194,737

Common unitholders - Delek; 2,799,258 units issued and outstanding at September 30, 2015 (2,799,258 at December 31, 2014)
 
(281,357
)
 
(241,112
)
Subordinated unitholders - Delek; 11,999,258 units issued and outstanding at September 30, 2015 (11,999,258 at December 31, 2014)
 
78,558

 
73,515

General partner - Delek; 494,900 units issued and outstanding at September 30, 2015 (494,197 at December 31, 2014)
 
(7,386
)
 
(7,085
)
Total (deficit) equity
 
(11,658
)
 
39,781

Total liabilities and (deficit) equity
 
$
361,803

 
$
331,286

 

(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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014 (1)
 
2015 (2)
 
2014 (1)
 
 
(In thousands, except unit and per unit data)
Net sales:
 
 
 
 
 
 
 
 
   Affiliate
 
$
41,824

 
$
29,682

 
$
113,975

 
$
83,855

   Third-Party
 
123,268

 
198,354

 
366,763

 
584,051

     Net sales
 
165,092

 
228,036

 
480,738

 
667,906

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
124,385

 
194,133

 
365,286

 
562,916

Operating expenses
 
11,616

 
10,361

 
33,191

 
29,576

General and administrative expenses
 
2,703

 
2,453

 
9,094

 
7,358

Depreciation and amortization
 
4,541

 
3,847

 
13,785

 
10,947

(Gain) loss on asset disposals
 
—

 
—

 
(18
)
 
74

Total operating costs and expenses
 
143,245

 
210,794

 
421,338

 
610,871

Operating income
 
21,847

 
17,242

 
59,400

 
57,035

Interest expense, net
 
2,843

 
2,226

 
7,616

 
6,551

Loss on equity method investments
 
293

 
—

 
442

 
—

Total non-operating expenses
 
3,136

 
2,226

 
8,058

 
6,551

Income before income tax expense
 
18,711

 
15,016

 
51,342

 
50,484

Income tax expense
 
109

 
177

 
426

 
605

Net income
 
18,602

 
14,839

 
50,916

 
49,879

Less: loss attributable to Predecessors
 
—

 
(246
)
 
(637
)
 
(1,632
)
Net income attributable to partners
 
$
18,602

 
$
15,085

 
$
51,553

 
$
51,511

Comprehensive income attributable to partners
 
$
18,602

 
$
15,085

 
$
51,553

 
$
51,511

 
 
 
 
 
 
 
 
 
Less: General partner's interest in net income, including incentive distribution rights
 
1,383

 
598

 
3,379

 
1,511

Limited partners' interest in net income
 
$
17,219

 
$
14,487

 
$
48,174

 
$
50,000

 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.71

 
$
0.60

 
$
1.99

 
$
2.07

Common units - (diluted)
 
$
0.70

 
$
0.59

 
$
1.97

 
$
2.05

Subordinated units - Delek (basic and diluted)
 
$
0.71

 
$
0.60

 
$
1.99

 
$
2.07

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
  Common units - (basic)
 
12,250,847

 
12,183,847

 
12,230,560

 
12,165,474

  Common units - (diluted)
 
12,369,777

 
12,327,321

 
12,362,340

 
12,299,963

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

 
11,999,258

 
11,999,258

 
11,999,258

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.570

 
$
0.490

 
$
1.650

 
$
1.390

(1) Adjusted to include the historical results of the Logistics Assets Predecessor. See Notes 1 and 2 for further discussion.
(2) The information presented includes the results of operations 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)
 
 
Nine Months Ended September 30,
 
 
2015 (1)
 
2014 (2)
Cash flows from operating activities:
 
(In thousands)
Net income
 
$
50,916

 
$
49,879

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,785

 
10,947

Amortization of unfavorable contract liability to revenue
 
—

 
(2,002
)
Amortization of deferred financing costs
 
1,095

 
951

Accretion of asset retirement obligations
 
187

 
267

Deferred income taxes
 
23

 
81

Loss on equity method investments
 
442

 
—

(Gain) loss on asset disposals
 
(18
)
 
74

Unit-based compensation expense
 
298

 
196

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
(9,102
)
 
(10,558
)
Inventories and other current assets
 
5,645

 
7,328

Accounts payable and other current liabilities
 
(5,050
)
 
137

Accounts payable to related parties
 
9,046

 
7,973

Non-current assets and liabilities, net
 
(505
)
 
(844
)
Net cash provided by operating activities
 
66,762

 
64,429

Cash flows from investing activities:
 
 
 
 
Business combinations
 
(400
)
 
—

Purchases of property, plant and equipment
 
(17,598
)
 
(4,930
)
Proceeds from sales of property, plant and equipment
 
1,189

 
—

Equity method investments
 
(27,069
)
 
—

Net cash used in investing activities
 
(43,878
)
 
(4,930
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of additional units to maintain 2% General Partner interest
 
31

 
22

Distributions to general partner
 
(2,605
)
 
(837
)
Distributions to common unitholders - public
 
(15,193
)
 
(12,391
)
Distributions to common unitholders - Delek
 
(4,450
)
 
(3,681
)
Distributions to subordinated unitholders
 
(19,079
)
 
(15,779
)
Distributions to Delek for acquisitions
 
(61,890
)
 
(95,900
)
Proceeds from revolving credit facility
 
302,064

 
395,900

Payments of revolving credit facility
 
(228,664
)
 
(330,700
)
Predecessor division equity contribution
 
115

 
3,676

Reimbursement of capital expenditures by Sponsor
 
4,926

 
—

Net cash used in financing activities
 
(24,745
)
 
(59,690
)
Net decrease in cash and cash equivalents
 
(1,861
)
 
(191
)
Cash and cash equivalents at the beginning of the period
 
1,861

 
924

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

 
$
733

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
6,289

 
$
5,799

Income taxes
 
$
5

 
$
18

Non-cash investing activities:
 
 

 
 

Equity method investments
 
$
3,832

 
$
—

Increases in accrued capital expenditures
 
$
132

 
$
—

Non-cash financing activities:
 
 
 
 
Sponsor contribution of fixed assets
 
$
418

 
$
873


(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 and nine months ended September 30, 2015 and 2014 include the consolidated financial position, results of operations, cash flows and division equity of our Predecessors as appropriate. 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, 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, 2014 (our

6

"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.

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.

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 shareholders' 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 September 2015, the Financial Accounting Standards Board (the "FASB") issued guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and can be early adopted 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 we do not anticipate that the adoption of this guidance will have a material impact on our business, financial position or results of operations.
In July 2015, the FASB issued guidance requiring entities to measure first-in, first-out ("FIFO") or average cost inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not change the measurement of inventory measured using last-in, first-out or the retail inventory method. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and can be early adopted at the beginning of any interim or annual period for which financial statements have not yet been issued. We expect to adopt this guidance on or before the effective date, and we do not anticipate that the adoption will have a material impact on our business, financial position or results of operations.

In April 2015, the FASB issued guidance which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt.  Prior to the issuance of this guidance, debt issuance costs were required to be presented in the balance sheet as an asset.  In August 2015, the FASB issued further clarification regarding an SEC staff announcement related to this guidance which permits entities to defer and present debt issuance costs associated with line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  Upon adoption, the guidance requires prior period financial statements to be retrospectively adjusted. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted in certain circumstances. We expect to adopt this guidance on or before the effective date, and we do not anticipate that the adoption will have a material impact on our business, financial position or results of operations.

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 was $42.5 million in cash financed with borrowings under the Partnership's amended and restated senior secured revolving credit facility.

7

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 these assets was approximately $95.9 million in cash.

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 Assets' and Tyler Assets' operations subsequent to March 31, 2015, have been included in the Partnership's results. 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.


8

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
 
27,986

 
—

 
—

 
27,986

Inventory
 
10,316

 
—

 
—

 
10,316

Deferred tax assets
 
28

 
—

 
—

 
28

Other current assets
 
768

 
—

 
—

 
768

Total current assets
 
40,959

 
—

 
—

 
40,959

Property, plant and equipment:
 
 
 
 
 
 
 
 
Property, plant and equipment
 
288,045

 
8,267

 
11,776

 
308,088

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

 
(53,309
)
Property, plant and equipment, net
 
235,053

 
7,950

 
11,776

 
254,779

Goodwill
 
11,654

 
—

 
—

 
11,654

Intangible assets, net
 
16,520

 
—

 
—

 
16,520

Other non-current assets
 
7,374

 
—

 
—

 
7,374

Total assets
 
$
311,560

 
$
7,950

 
$
11,776

 
$
331,286

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
   Accounts payable
 
$
17,929

 
$
—

 
$
—

 
$
17,929

   Accounts payable to related parties
 
628

 
—

 
—

 
628

   Excise and other taxes payable
 
5,443

 
—

 
—

 
5,443

   Tank inspection liabilities
 
2,829

 
—

 
—

 
2,829

   Pipeline release liabilities
 
1,899

 
—

 
—

 
1,899

   Accrued expenses and other current liabilities
 
1,588

 
—

 
—

 
1,588

     Total current liabilities
 
30,316

 
—

 
—

 
30,316

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
 
$
311,560

 
$
7,950

 
$
11,776

 
$
331,286





9

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 Predecessors
 
—

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

 
$
—

 
$
—

 
$
51,553

 
 
Delek Logistics Partners, LP
 
El Dorado Assets
(El Dorado Assets Predecessor)
 
Three Months Ended September 30, 2014 (1)
 
 
(In thousands)
Net Sales
 
$
228,036

 
$
—

 
$
228,036

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

 
—

 
194,133

Operating expenses
 
10,213

 
148

 
10,361

General and administrative expenses
 
2,453

 
—

 
2,453

Depreciation and amortization
 
3,749

 
98

 
3,847

Total operating costs and expenses
 
210,548

 
246

 
210,794

Operating income (loss)
 
17,488

 
(246
)
 
17,242

Interest expense, net
 
2,226

 
—

 
2,226

Net income (loss) before income tax expense
 
15,262

 
(246
)
 
15,016

Income tax expense
 
177

 
—

 
177

Net income (loss)
 
15,085

 
(246
)
 
14,839

Less: loss attributable to Predecessors
 
—

 
(246
)
 
(246
)
Net income attributable to partners
 
$
15,085

 
$
—

 
$
15,085

 
 
 
 
 
 
 

10

 
 
Delek Logistics Partners, LP
 
El Dorado Assets
(El Dorado Assets Predecessor)
 
El Dorado Terminal and Tank Assets
(El Dorado Predecessor)
 
Nine Months Ended September 30, 2014 (1)
 
 
(In thousands)
Net Sales
 
$
667,906

 
$
—

 
$
—

 
$
667,906

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

 
—

 
—

 
562,916

   Operating expenses
 
28,293

 
500

 
783

 
29,576

   General and administrative expenses
 
7,312

 
—

 
46

 
7,358

   Depreciation and amortization
 
10,644

 
189

 
114

 
10,947

   Loss on asset disposals
 
74

 
—

 
—

 
74

     Total operating costs and expenses
 
609,239

 
689

 
943

 
610,871

   Operating income (loss)
 
58,667

 
(689
)
 
(943
)
 
57,035

Interest expense, net
 
6,551

 
—

 
—

 
6,551

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

 
(689
)
 
(943
)
 
50,484

Income tax expense
 
605

 
—

 
—

 
605

Net income (loss)
 
51,511

 
(689
)
 
(943
)
 
49,879

  Less: loss attributable to Predecessors
 
—

 
(689
)
 
(943
)
 
(1,632
)
Net income attributable to partners
 
$
51,511

 
$
—

 
$
—

 
$
51,511


(1) There were no expenses associated with the Tyler Assets Predecessor included in our condensed consolidated financial statements for the three and nine months ended September 30, 2014, as the Tyler Assets were not fully constructed and were not placed into service until January 2015.

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 131 trucks and 204 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 has 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.

11


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
 
$
11,145

 
$
4,829

Intangible assets
 
—

 
5,171

Inventory
 
—

 
1,125

Accounts receivable
 
1,901

 
—

Accounts payable
 
(1,121
)
 
—

   Total
 
$
11,925

 
$
11,125

            

(1) 
During the nine months ended September 30, 2015, we adjusted our previously disclosed purchase price allocation and certain of the acquisition date fair values in connection with working capital adjustments and an additional $0.4 million of consideration paid for additional assets. The property, plant and equipment, accounts receivable and accounts payable valuation are subject to change during the purchase price allocation period.

(2) 
During the nine months ended September 30, 2015, we finalized our purchase price allocation and adjusted certain of the acquisition date fair values previously disclosed.

Pro Forma Financial Information - Acquisitions from Third Parties

Below are the unaudited pro forma consolidated results of operations of the Partnership for the three and nine months ended September 30, 2014, as if these acquisitions had independently occurred on January 1, 2014 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2014
FTT Assets:
 
 
 
 
Net sales
 
$
231,699

 
$
678,331

Net income
 
$
15,070

 
$
50,488

Greenville-Mount Pleasant Assets:
 
 
 
 
Net sales
 
$
228,208

 
$
668,423

Net income
 
$
14,729

 
$
49,551



3. Related Party Transactions

Commercial Agreements

The Partnership has various agreements with Delek, the majority of which are long-term, fee-based commercial agreements under which we provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek. These agreements typically include minimum quarterly volume, revenue or throughput commitments. 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, throughput or other 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 or amount of the shortfall multiplied or increased by the applicable fee.


12

The tariffs and throughput and 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 Federal Energy Regulatory Commission (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 nine months ended September 30, 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 (2)
 
$1.00 (3)
     Heavy Crude Throughput:
 
March 2015
 
9 / 15
Dedicated offloading services
 
N/A (2)
 
$2.25 (3)
            
(1) 
Maximum term gives effect to the extension of the commercial agreement pursuant to the terms thereof.
(2) 
The Throughput Agreement provides for a minimum throughput fee of $1.5 million per quarter for throughput of a combination of light and heavy crude.
(3) 
Fees payable to the Partnership by Delek.

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 second amended and restated omnibus agreement between the Partnership, Delek and the general partner was amended and restated on March 31, 2015. This amendment and restatement 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 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 the 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.

Agreements Governing Certain Indebtedness of Delek

Although we are not contractually bound by and are not liable for Delek’s debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, under the terms of certain of Delek's credit arrangements, we expect that Delek will be in default if we incur any indebtedness for borrowed money in excess of $300.0 million at any time outstanding, which amount is subject to and has been increased for (i) certain acquisitions of additional or newly constructed assets and for growth capital expenditures, in each case, net of asset sales, and for (ii) certain types of debt, such as debt obligations owed under hedge agreements, intercompany debt of the Partnership and our subsidiaries and debt under certain types of contingent obligations. These arrangements also require that Delek meets certain minimum levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders’ equity to adjusted total assets. We cannot assure you that such covenants will not impact our ability to use the full capacity available under our revolving credit facility in the future. Delek, due

13

to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek to violate any covenant in its credit arrangements or otherwise be in default under any of its credit arrangements.

Predecessors' Transactions
 
Related-party transactions of the Predecessors 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 El Dorado Acquisition, the El Dorado Offloading Racks Acquisition and the Tyler Crude Tank Acquisition, 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 Predecessors had been operated on a stand-alone basis.

Summary of Transactions

Revenues from affiliates consist of revenues from gathering, pipeline transportation, storage, wholesale marketing and products terminalling services provided primarily to Delek and its affiliates based on regulated tariff rates or contractually based fees, as well as product sales to Alon USA Energy, Inc., an equity method investee of Delek. 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 our 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 Predecessors, are as follows (in thousands):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Revenues
 
$
41,824

 
$
29,682

 
$
113,975

 
$
83,855

Cost of goods sold
 
$
43,100

 
$
24,841

 
$
86,849

 
$
45,403

Operating and maintenance expenses (1) 
 
$
8,059

 
$
5,658

 
$
22,834

 
$
16,563

General and administrative expenses (2)
 
$
1,788

 
$
1,335

 
$
4,907

 
$
3,799

            
(1) 
Operating and maintenance expenses include costs allocated to the Predecessors for operating support provided to the Predecessors by Delek, including certain labor related costs, property and liability insurance costs and certain other operating expenses. With respect to the El Dorado Predecessor, the costs that were allocated to us by Delek were $0.4 million for the nine months ended September 30, 2014. With respect to the Logistics Assets Predecessor, the costs that were allocated to us by Delek were $0.2 million for the nine months ended September 30, 2015 and $0.1 million and $0.5 million for the three and nine months ended September 30, 2014, respectively.
 
(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 nine months ended September 30, 2014. No costs were allocated to the Logistics Assets Predecessor to us by Delek for the nine months ended September 30, 2015 or for the three and nine months ended September 30, 2014.

Our common, subordinated, general partner unitholders and the holders of incentive distribution rights ("IDRs") are entitled to receive quarterly distributions of available cash in accordance with the terms and provisions of our partnership agreement. In February, May and August 2015, we paid quarterly cash distributions, of which $7.8 million, $8.7 million and $9.2 million, respectively, were paid to Delek and our general partner. On October 27, 2015, our general partner's board of directors declared

14

a quarterly cash distribution totaling $15.1 million, based on the available cash as of the date of determination for the end of the third quarter of 2015, of which $9.7 million is expected to be paid to both Delek and our general partner, including IDRs.

4. Inventory

Inventories consisted of $5.0 million and $10.3 million of refined petroleum products as of September 30, 2015 and December 31, 2014, respectively. Cost of inventory is stated at the lower of cost or market, determined on a FIFO 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. 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 September 30, 2015, the weighted average interest rate for our borrowings under the facility was approximately 2.5%. 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, 2015, 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 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, 2015, the principal amount of the Holdings Note was $102.0 million, plus unpaid interest accrued since the issuance date.
As of September 30, 2015, we had approximately $325.2 million of outstanding borrowings under the Second Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling approximately $2.5 million, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were drawn under these letters of credit at September 30, 2015. Amounts available under the Second Amended and Restated Credit Agreement as of September 30, 2015 were approximately $372.3 million. For a discussion of a potential indirect limitation on our ability to use the full capacity available under our revolving credit facility in the future, see Note 3.

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 to our general partner, which is the holder of the IDRs pursuant to our partnership agreement, which are paid following the close of each quarter.
 

15

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.

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, 2015 is November 13, 2015. The calculation of net income per unit is as follows (in thousands, except units and per unit amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income attributable to partners
 
$
18,602

 
$
15,085

 
$
51,553

 
$
51,511

Less: General partner's distribution (including IDRs) (1)
 
1,314

 
544

 
3,212

 
1,177

Less: Limited partners' distribution
 
6,983

 
5,970

 
20,196

 
16,922

Less: Subordinated partner's distribution
 
6,839

 
5,880

 
19,798

 
16,679

Earnings in excess of distributions
 
$
3,466

 
$
2,691

 
$
8,347

 
$
16,733

 
 
 
 
 
 
 
 
 
General partner's earnings:
 
 
 
 
 
 
 
 
Distributions (including IDRs) (1)
 
$
1,314

 
$
544

 
$
3,212

 
$
1,177

Allocation of earnings in excess of distributions
 
69

 
54

 
167

 
334

Total general partner's earnings
 
$
1,383

 
$
598

 
$
3,379

 
$
1,511

 
 
 
 
 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
 
 
 
 
Distributions
 
$
6,983

 
$
5,970

 
$
20,196

 
$
16,922

Allocation of earnings in excess of distributions
 
1,716

 
1,328

 
4,131

 
8,259

Total limited partners' earnings on common units
 
$
8,699

 
$
7,298

 
$
24,327

 
$
25,181

 
 
 
 
 
 
 
 
 
Limited partners' earnings on subordinated units:
 
 
 
 
 
 
 
 
Distributions
 
$
6,839

 
$
5,880

 
$
19,798

 
$
16,679

Allocation of earnings in excess of distributions
 
1,681

 
1,309

 
4,049

 
8,140

Total limited partner's earnings on subordinated units
 
$
8,520

 
$
7,189

 
$
23,847

 
$
24,819

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
Common units - (basic)
 
12,250,847

 
12,183,847

 
12,230,560

 
12,165,474

Common units - (diluted)
 
12,360,519

 
12,327,321

 
12,350,621

 
12,299,963

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

 
11,999,258

 
11,999,258

 
11,999,258

 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.71

 
$
0.60

 
$
1.99

 
$
2.07

Common units - (diluted)
 
$
0.70

 
$
0.59

 
$
1.97

 
$
2.05

Subordinated units - Delek (basic and diluted)
 
$
0.71

 
$
0.60

 
$
1.99

 
$
2.07

            


16

(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 8 for further discussion related to IDRs.

8. Equity

We had 9,451,589 common limited partner units held by the public outstanding as of September 30, 2015. Additionally, as of September 30, 2015, Delek owned a 59.8% 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 95.6% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 494,900 general partner units. Affiliates own the remaining 4.4% 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 - Delek
 
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
—

 
(15,193
)
 
(65,102
)
 
(19,079
)
 
(3,843
)
 
(103,217
)
Sponsor contribution of fixed assets
—

 
—

 
410

 
—

 
8

 
418

Net income attributable to partners
—

 
18,764

 
5,563

 
23,847

 
3,379

 
51,553

Unit-based compensation
—

 
578

 
172

 
735

 
(1,187
)
 
298

Other
—

 
(359
)
 
(108
)
 
(460
)
 
958

 
31

Balance at September 30, 2015
 
$
—

 
$
198,527

 
$
(281,357
)
 
$
78,558

 
$
(7,386
)
 
$
(11,658
)
            

(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 nine months ended September 30, 2015. Distributions also include $0.2 million related to distribution equivalents on vested phantom units.

Allocations of Net Income

Our partnership agreement contains provisions for the allocation of net income and loss to our unitholders and our general partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage 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.
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,
 
 
2015
 
2014
 
2015
 
2014
Net income attributable to partners
 
$
18,602

 
$
15,085

 
$
51,553

 
$
51,511

Less: General partner's IDRs
 
(1,032
)
 
(302
)
 
(2,396
)
 
(491
)
Net income available to partners
 
$
17,570

 
$
14,783

 
$
49,157

 
$
51,020

General partner's ownership interest
 
2.0
%
 
2.0
%
 
2.0
%
 
2.0
%
General partner's allocated interest in net income
 
$
351

 
$
296

 
$
983

 
$
1,020

General partner's IDRs
 
1,032

 
302

 
2,396

 
491

Total general partner's interest in net income
 
$
1,383

 
$
598

 
$
3,379

 
$
1,511


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 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
%


17

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:
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
 
May 4, 2015
June 30, 2015
 
$
0.550

 
$
2.20

 
$
14,368

 
August 14, 2015
 
August 6, 2015
September 30, 2015
 
$
0.570

 
$
2.28

 
$
15,136

 
November 13, 2015 (1)
 
November 6, 2015
            
(1) Expected date of distribution.

The allocation of total quarterly cash distributions expected to be made on November 13, 2015 to general and limited partners for the three and nine months ended September 30, 2015 is 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,
 
 
2015
 
2014
 
2015
 
2014
General partner's distributions:
 
 
 
 
 
 
 
 
     General partner's distributions
 
$
282

 
$
242

 
$
816

 
$
686

     General partner's IDRs
 
1,032

 
302

 
2,396

 
491

          Total general partner's distributions
 
1,314

 
544

 
3,212

 
1,177

 
 
 
 
 
 
 
 
 
Limited partners' distributions:
 
 
 
 
 
 
 
 
     Common
 
6,983

 
5,970

 
20,196

 
16,922

     Subordinated
 
6,839

 
5,880

 
19,798

 
16,679

          Total limited partners' distributions
 
13,822

 
11,850

 
39,994

 
33,601

               Total cash distributions
 
$
15,136

 
$
12,394

 
$
43,206

 
$
34,778

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.570

 
$
0.490

 
$
1.650

 
$
1.390


9. Equity Based Compensation

We incurred $0.1 million and $0.3 million of unit-based compensation expense related to the Partnership during the three and nine months ended September 30, 2015, respectively, and $0.1 million and $0.2 million during the three and nine months ended September 30, 2014, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income. The fair value of phantom unit awards under the LTIP is determined based on the closing price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized

18


over the vesting period using the straight line method. All awards made through June 9, 2015 vest over a five-year service period unless such awards are amended in accordance with the LTIP. Beginning June 10, 2015, all awards made to only non-employee directors vest over a three-year service period unless such awards are amended in accordance with the LTIP. As of September 30, 2015, there was $1.0 million of total unrecognized compensation cost related to non-vested equity-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.2 years.

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., 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 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 an amended and restated 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 responsibility for the construction of the RIO Pipeline, and, upon its completion, Rangeland will also have primary day-to-day responsibility for its operations.
 
The total projected investment in these two entities is approximately $96.0 million and is expected be financed through a combination of cash from operations and borrowings under the Second Amended and Restated Credit Agreement.  As of September 30, 2015, we have invested $30.9 million in these joint ventures, which are accounted for using the equity method.

11. 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 refined 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.


19

The following is a summary of business segment operating performance as measured by contribution margin for the periods indicated (in thousands):

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Pipelines and Transportation
 
 
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
 
 
     Affiliate
 
$
26,358

 
$
21,008

 
$
76,436

 
$
58,753

     Third-Party
 
7,581

 
2,759

 
22,239

 
7,204

          Total Pipelines and Transportation
 
33,939

 
23,767

 
98,675

 
65,957

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
5,211

 
1,011

 
15,126

 
3,267

     Operating expenses (1) (2)
 
8,368

 
8,234

 
23,031

 
23,718

     Segment contribution margin
 
$
20,360

 
$
14,522

 
$
60,518

 
$
38,972

 Capital spending (excluding business combinations) (1) (2)
 
$
2,872

 
$
408

 
$
12,627

 
$
3,824

 
 
 
 
 
 
 
 
 
Wholesale Marketing and Terminalling
 
 
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
 
 
     Affiliate
 
$
15,466

 
$
8,674

 
$
37,539