Document
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 June 30, 2018
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 August 3, 2018, there were 24,395,183 common limited partner units and 497,861 general partner units outstanding.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Delek Logistics Partners, LP

Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except unit and per unit data)
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
5,177

 
$
4,675

Accounts receivable
 
21,881

 
23,013

Accounts receivable from related parties
 
9,651

 
1,124

Inventory
 
12,715

 
20,855

Other current assets
 
697

 
783

Total current assets
 
50,121

 
50,450

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
446,961

 
367,179

Less: accumulated depreciation
 
(127,628
)
 
(112,111
)
Property, plant and equipment, net
 
319,333

 
255,068

Equity method investments
 
106,432

 
106,465

Goodwill
 
12,203

 
12,203

Intangible assets, net
 
157,643

 
15,917

Other non-current assets
 
4,617

 
3,427

Total assets
 
$
650,349

 
$
443,530

LIABILITIES AND DEFICIT
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
9,319

 
$
19,147

Excise and other taxes payable
 
4,590

 
4,700

Tank inspection liabilities
 
902

 
902

Pipeline release liabilities
 
1,037

 
1,000

Accrued expenses and other current liabilities
 
5,282

 
6,033

Total current liabilities
 
21,130

 
31,782

Non-current liabilities:
 
 
 
 
Long-term debt
 
737,139

 
422,649

Asset retirement obligations
 
5,007

 
4,064

Other non-current liabilities
 
16,035

 
14,260

Total non-current liabilities
 
758,181

 
440,973

Deficit:
 
 
 
 
Common unitholders - public; 9,101,137 units issued and outstanding at June 30, 2018 (9,088,587 at December 31, 2017)
 
173,607

 
174,378

Common unitholders - Delek; 15,294,046 units issued and outstanding at June 30, 2018 (15,294,046 at December 31, 2017)
 
(295,247
)
 
(197,206
)
General partner - 497,861 units issued and outstanding at June 30, 2018 (497,604 at December 31, 2017)
 
(7,322
)
 
(6,397
)
Total deficit
 
(128,962
)
 
(29,225
)
Total liabilities and deficit
 
$
650,349

 
$
443,530

 

See accompanying notes to the condensed consolidated financial statements

3


Delek Logistics Partners, LP

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(in thousands, except unit and per unit data)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net revenues:
 
 
 
 
 
 
 
 
   Affiliates
 
$
53,080

 
$
39,824

 
$
114,724

 
$
76,443

   Third party
 
113,200

 
86,945

 
219,477

 
179,799

     Net revenues
 
166,280

 
126,769

 
334,201

 
256,242

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
106,016

 
85,039

 
225,048

 
177,629

Operating expenses
 
14,917

 
9,966

 
27,494

 
20,324

General and administrative expenses
 
3,747

 
2,656

 
6,722

 
5,504

Depreciation and amortization
 
7,019

 
5,742

 
13,019

 
10,935

(Gain) loss on asset disposals
 
(129
)
 
(5
)
 
(69
)
 
7

Total operating costs and expenses
 
131,570

 
103,398

 
272,214

 
214,399

Operating income
 
34,710

 
23,371

 
61,987

 
41,843

Interest expense, net
 
10,926

 
5,462

 
18,988

 
9,533

Income from equity method investments
 
(1,899
)
 
(1,176
)
 
(2,757
)
 
(1,421
)
Total non-operating expenses, net
 
9,027

 
4,286

 
16,231

 
8,112

Income before income tax expense
 
25,683

 
19,085

 
45,756

 
33,731

Income tax expense
 
101

 
108

 
179

 
159

Net income attributable to partners
 
$
25,582

 
$
18,977

 
$
45,577

 
$
33,572

Comprehensive income attributable to partners
 
$
25,582

 
$
18,977

 
$
45,577

 
$
33,572

 
 
 
 
 
 
 
 
 
Less: General partner's interest in net income, including incentive distribution rights
 
6,212

 
4,552

 
11,842

 
8,661

Limited partners' interest in net income
 
$
19,370

 
$
14,425

 
$
33,735

 
$
24,911

 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.79

 
$
0.59

 
$
1.38

 
$
1.02

Common units - (diluted)
 
$
0.79

 
$
0.59

 
$
1.38

 
$
1.02

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
  Common units - (basic)
 
24,386,031

 
24,335,338

 
24,384,341

 
24,331,991

  Common units - (diluted)
 
24,394,103

 
24,375,946

 
24,391,760

 
24,371,540

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.770

 
$
0.705

 
$
1.520

 
$
1.395

See accompanying notes to the condensed consolidated financial statements

4


Delek Logistics Partners, LP

Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
45,577

 
$
33,572

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,019

 
10,935

Amortization of customer contract intangible assets
 
2,404

 

Amortization of deferred revenue
 
(723
)
 
(601
)
Amortization of deferred financing costs and debt discount
 
1,334

 
830

Accretion of asset retirement obligations
 
175

 
146

Deferred income taxes
 

 
119

Income from equity method investments
 
(2,757
)
 
(1,421
)
Dividends from equity method investments
 
2,302

 
278

(Gain) loss on asset disposals
 
(69
)
 
7

Unit-based compensation expense
 
302

 
364

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
1,132

 
932

Inventories and other current assets
 
8,226

 
2,041

Accounts payable and other current liabilities
 
(9,123
)
 
1,479

Accounts receivable/payable to related parties
 
(8,446
)
 
(1,352
)
Non-current assets and liabilities, net
 
(1,710
)
 
(419
)
Net cash provided by operating activities
 
51,643

 
46,910

Cash flows from investing activities:
 
 
 
 
Purchase of Big Spring logistics assets, net of assumed ARO liabilities
 
(72,376
)
 

Purchases of property, plant and equipment
 
(5,949
)
 
(5,867
)
Proceeds from sales of property, plant and equipment
 
356

 

Purchases of intangible assets
 
(144,219
)
 

Distributions from equity method investments
 
660

 
501

Equity method investment contributions
 
(172
)
 
(2,937
)
Net cash used in investing activities
 
(221,700
)
 
(8,303
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of additional units to maintain 2% General Partner interest
 
13

 
21

Distributions to general partner
 
(10,810
)
 
(8,231
)
Distributions to common unitholders - public
 
(13,463
)
 
(12,816
)
Distributions to common unitholders - Delek
 
(22,558
)
 
(20,772
)
Distributions to Delek unitholders and general partner related to Big Spring Logistic Assets Acquisition
 
(98,798
)
 

Proceeds from revolving credit facility
 
517,000

 
139,400

Payments of revolving credit facility
 
(203,000
)
 
(377,500
)
Proceeds from issuance of senior notes
 

 
248,112

Deferred financing costs paid
 
(525
)
 
(5,816
)
Reimbursement of capital expenditures by Delek
 
2,700

 
3,835

Net cash provided by (used in) financing activities
 
170,559

 
(33,767
)
Net increase in cash and cash equivalents
 
502

 
4,840

Cash and cash equivalents at the beginning of the period
 
4,675

 
59

Cash and cash equivalents at the end of the period
 
$
5,177

 
$
4,899

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
17,890

 
$
6,940

Income taxes
 
$
2

 
$
29

Non-cash investing activities:
 
 

 
 

Decrease in accrued capital expenditures
 
$
(1,529
)
 
$
(957
)
Non-cash financing activities:
 
 
 
 
Sponsor contribution of fixed assets
 
$

 
$
67



See accompanying notes to the 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.

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

In January 2017, Delek US Holdings, Inc. ("Old Delek") (and various related entities) entered into an Agreement and Plan of Merger with Alon USA Energy, Inc. (NYSE: ALJ) ("Alon USA"), as subsequently amended on February 27 and April 21, 2017 (as so amended, the "Merger Agreement"). The related merger (the "Delek/Alon Merger") was effective July 1, 2017 (the “Effective Time”), resulting in a new post-combination consolidated registrant renamed Delek US Holdings, Inc. (“New Delek”), with Alon USA and Old Delek surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon USA pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Unless the context otherwise requires, references in this report to "Delek" refer collectively to Old Delek with respect to periods prior to July 1, 2017, or New Delek, with respect to periods on or after July 1, 2017, and any of Old Delek's or New Delek's, as applicable, subsidiaries, other than the Partnership and its subsidiaries and its general partner.

Effective March 1, 2018, the Partnership, through its wholly-owned subsidiary DKL Big Spring, LLC, acquired from Delek certain logistics assets primarily located at or adjacent to Delek's refinery near Big Spring, Texas (the "Big Spring Refinery") and Delek's light products distribution terminal located in Stephens County, Oklahoma (collectively, the "Big Spring Logistic Assets"), such transaction the "Big Spring Logistic Assets Acquisition." See Note 2 for further information regarding the Big Spring Logistic Assets Acquisition.

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, 2017 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 1, 2018. 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, 2017 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.
New Accounting Pronouncements
In August 2017, the FASB issued guidance to better align financial reporting for hedging activities with the economic objectives of those activities for both financial (e.g., interest rate) and commodity risks. The guidance was intended to create more transparency in the presentation of financial results, both on the face of the financial statements and in the footnotes, and simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Companies are required to apply the guidance on a modified retrospective transition method in which the cumulative effect of the change will be recognized within equity in the consolidated balance sheet as of the date of adoption. Early adoption is permitted, including in an interim period. If a company early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. 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 May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The modification accounting guidance applies if the value, vesting conditions or classification of the award changes. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance should be applied prospectively to an award modified on or after the adoption date. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations.

6


In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The amendments in this guidance should be applied using either i) a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption or ii) a retrospective basis to each period presented in the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.
In January 2017, the FASB issued guidance concerning the goodwill impairment test that eliminates Step 2, which required a comparison of the implied fair value of goodwill of the reporting unit with the carrying amount of that goodwill for that reporting unit. It also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative assessment, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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 condition or results of operations.
In August 2016, the 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. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations, except for reclassifications of certain distributions received from equity method investees using the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings (as adjusted for amortization of basis differences) recognized by the investor. When such an excess occurs, the current-period distributions up to this excess should be considered a return of investment and classified as cash inflows from investing activities. This resulted in a reclassification of $0.5 million of distributions received in the six months ended June 30, 2017 from the line item entitled dividends from equity method investments in net cash provided by operating activities to the line item entitled distributions from equity method investments in net cash used in investing activities in the condensed consolidated statements of cash flows.
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 condition for all leases with terms longer than one year. Lessor accounting will remain substantially similar to current guidance. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In January 2018, the FASB amended the guidance to provide an optional practical expedient to rights of way. The practical expedient permits an entity to not evaluate under the new lease accounting guidance existing or expired rights of way that were not previously accounted for as leases. However, any new or modified rights of way should be evaluated under the new lease accounting guidance. If not elected, an entity should evaluate all existing or expired rights of way in connection with the adoption of the new lease requirement to assess whether they meet the definition of a lease. In July 2018, the FASB amended the guidance to provide a practical expedient regarding the requirement to recast prior periods for the new lease guidance. If elected, comparative periods in transition are not required to be recast, and a cumulative effect of initially applying the guidance will be recognized to the opening balance of retained earnings in the period of adoption. If not elected, we are required to use the modified retrospective adoption method to apply this guidance, under which the cumulative effect of initially applying the guidance will be recognized as an adjustment to the opening balance of retained earnings in the earliest period presented as of the adoption period. We expect to adopt the new lease standard on January 1, 2019 and elect the practical expedient regarding transition. We are currently evaluating the impact adopting this new guidance will have on our business, financial condition and results of operations. As part of our efforts to prepare for adoption, beginning in 2018, we formed a project implementation team, as well as a project timeline, to evaluate this guidance. We have also reviewed and gained an understanding of the new lease accounting guidance and substantially completed lease classification analysis for existing leases. We continue to perform scoping to identify and evaluate arrangements that will qualify as leases under the new standard, as well as to review industry specific implementation guidance. We are continuing to evaluate the impact of the guidance on our business processes, accounting systems, controls and financial statement disclosures, and expect to implement any changes to accommodate the new accounting and disclosure requirements prior to adoption on January 1, 2019.
In January 2016, the FASB issued guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. It will require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and will eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.

7


In May 2014, the FASB issued guidance as codified in Accounting Standards Codification ("ASC") 606, “Revenue from Contracts with Customers ("ASC 606),” 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 retrospectively. We adopted this guidance on January 1, 2018, using the modified retrospective transition method applied to contracts which were not completed as of January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.

The Partnership has updated its policies as it relates to revenue recognition. Revenue is measured based on consideration specified in a contract with a customer. The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or by providing a service to a customer. The adoption of ASC 606 did not materially change our revenue recognition patterns. Revenues for products sold are generally recognized upon delivery of the product, which is when title and control of the product is transferred. Transaction prices for these products are typically at market rates for the product at the time of delivery. Service revenues are recognized as crude oil, intermediate and refined product are shipped through, delivered by or stored in our pipelines, trucks, terminals and storage facility assets, as applicable. We do not recognize product revenues for these services as the product does not represent a promised good in the context of ASC 606. All service revenues are based on regulated tariff rates or contractual rates. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
Certain agreements for gathering, transportation, storage, terminalling, and offloading with Delek are considered operating leases under ASC 840, Leases. We identified the separate lease and service components of our revenues under these leases and applied ASC 606 only to the service component, while the lease component continued to be accounted for under ASC 840. Refer to Note 4 for further information.

Up-front Payments to Customers. We record all up-front payments to customers in accordance with the provisions of ASC 606. We evaluate the nature of each payment, the rights and obligations under the related contract, and whether the payment meets the definition of an asset. When an asset is recognized for an up-front payment to a customer, the asset is amortized, as a reduction of revenue, in a manner that reflects the pattern and period over which the asset is expected to provide benefit.

Sales, Use and Excise Taxes. Upon the adoption of ASC 606, we made the accounting policy election to exclude from revenue all taxes assessed by a governmental authority, including sales, use and excise taxes, that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. Historically, we have excluded sales, use and excise taxes from revenue in accordance with the applicable guidance in ASC 605, Revenue Recognition.

2. Acquisitions

Big Spring Logistic Assets Acquisition

Effective March 1, 2018, the Partnership, through its wholly-owned subsidiary DKL Big Spring, LLC, acquired the Big Spring Logistic Assets from Delek, which are primarily located at or adjacent to the Big Spring Refinery. The total purchase price was $170.8 million, subject to certain post-closing adjustments, financed through borrowings under the Partnership’s revolving credit facility.

The Big Spring Logistic Assets include:

Approximately 75 storage tanks and certain ancillary assets (such as tank pumps and piping) primarily located adjacent to the Big Spring Refinery;
An asphalt terminal and a light products terminal;
Certain crude oil and refined product pipelines; and
Other logistics assets, such as four underground saltwells used for natural gas liquids storage.

In connection with the closing of the transaction, Delek, the Partnership and various of their respective subsidiaries entered into and amended certain existing contracts, including entering into new pipelines, storage and throughput facilities and asphalt services agreements. The transaction and related agreements were approved by the Conflicts Committee of the Partnership's general partner, which is comprised solely of independent directors. See Note 3 for more detailed descriptions of these agreements.

The Big Spring Logistic Assets Acquisition was considered a transaction between entities under common control. Accordingly, the Big Spring Logistic Assets were recorded at amounts based on Delek's historical carrying value as of the acquisition date. The excess of the cash paid over the historical book value of the assets acquired from Delek amounted to $98.8 million and was recorded in equity. The carrying value of the Big Spring Logistic Assets as of the acquisition date was $72.0 million, which is net of $0.8 million of assumed asset retirement obligations liabilities.

8


Prior periods have not been recast, as these assets do not constitute a business in accordance with Accounting Standard Update 2017-01, "Clarifying the Definition of a Business". We capitalized approximately $0.4 million of acquisition costs related to the Big Spring Logistic Assets Acquisition during the six months ended June 30, 2018. We did not capitalize any acquisition costs during the three months ended June 30, 2018.

Marketing Contract Intangible Acquisition

Additionally, concurrent with the Big Spring Logistic Assets Acquisition, Delek, the Partnership and various of their respective subsidiaries entered into a new marketing agreement, whereby the Partnership markets certain finished products produced at or sold from the Big Spring Refinery to various customers in return for a marketing fee (the "Marketing Contract Intangible Acquisition"). We recorded a related contract intangible asset in the amount of $144.2 million based on the amount paid to enter into the contract, which represents the fair value of the intangible asset. The contract intangible asset will be amortized over a twenty year period as a component of net revenues from affiliates. The total consideration paid was financed through borrowings under the Partnership's revolving credit facility. This transaction and related marketing agreement were approved by the Conflicts Committee of the Partnership's general partner, which is comprised solely of independent directors. See Note 3 for a more detailed description of this marketing agreement.

3. Related Party Transactions

Commercial Agreements

The Partnership has a number of long-term, fee based 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 to Delek. Most of these agreements have an initial term ranging from five to ten years, which may be extended for various renewal terms at the option of Delek. In November 2017, Delek opted to renew certain of these agreements for subsequent five-year terms expiring in November 2022. In the case of our marketing agreement with Delek in respect to the Tyler refinery, the initial term has been extended through 2026. The 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 ("FERC") oil pipeline index or various iterations of the consumer price index ("CPI") and the producer price index ("PPI"); provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement. In most circumstances, if Delek or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek, and not any third party assignee, will be required to make a quarterly shortfall payment to us equal to the volume of the shortfall multiplied by the applicable fee, subject to certain exceptions as specified in the applicable agreement. Carry-over of any volumes or revenue in excess of such commitment to any subsequent quarter is not permitted.

See our Annual Report on Form 10-K for a more complete description of certain of our commercial agreements and other agreements with Delek.


























9


During the six months ended June 30, 2018, we entered into the following material agreements with Delek:

Asset/Operation
 
Initiation Date
 
Initial/Maximum Term (years) (1)
 
Service
 
Minimum Throughput Commitment (bpd)
 
Fee (2)
 
 
 
 
 
 
 
 
 
 
 
Pipelines, Storage and Throughput Facilities Agreement (Big Spring):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Crude Oil and Refined Products Throughput

 
March 1, 2018
 
10/15
 
Pipeline Throughput
 
104,300
 
$0.05/bbl
 
 
 
 
 
 
 
 
 
 
 
Rail Offloading
 
March 1, 2018
 
10/15
 
Offloading Services
 
4,500
 
$0.40/bbl
 
 
 
 
 
 
 
 
 
 
 
Terminalling
 
March 1, 2018
 
10/15
 
Dedicated Terminalling Services
 
29,250
 
$0.66/bbl
 
 
 
 
 
 
 
 
 
 
 
Storage
 
March 1, 2018
 
10/15
 
Storage
 
N/A
 
$1,374,630/month
 
 
 
 
 
 
 
 
 
 
 
Asphalt Services Agreement (Big Spring):
 
 
 
 
 
 
 
 
 
 
Terminalling
 
March 1, 2018
 
10/15
 
Dedicated Asphalt Terminalling
 
1,020 to 2,380 based on seasonality
 
$8.30/bbl
 
 
 
 
 
 
 
 
 
 
 
Storage
 
March 1, 2018
 
10/15
 
Storage
 
N/A
 
$456,490/month
 
 
 
 
 
 
 
 
 
 
 
Marketing Agreement (Big Spring):
 
 
 
 
 
 
 
 
 
 
Marketing Services
 
March 1, 2018
 
10/15
 
Dedicated Marketing and Selling
 
65,000
 
$0.50 - $0.71/bbl
            
(1) Maximum term gives effect to the extension by (i) the Partnership of the Pipelines, Storage and Throughput Facilities Agreement and Asphalt Services Agreement pursuant to the terms thereof and (ii) Delek of the Marketing Agreement pursuant to the terms thereof. Maximum term excludes the impact of the automatic annual renewal of these agreements, unless terminated by either party, subsequent to the extension.
(2) Fees payable to the Partnership by Delek.

Big Spring Pipeline, Storage and Throughput Facilities Agreement. In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP, a Texas limited partnership and an indirect, wholly-owned subsidiary of Delek (“Alon USA, LP”), and DKL Big Spring, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Partnership (the "Buyer"), entered into the Pipelines, Storage and Throughput Facilities Agreement (Big Spring Refinery Logistic Assets and Duncan Terminal) (the “Logistics Agreement”). Under the Logistics Agreement, the Buyer will provide storage and throughput services at certain of the Big Spring Logistic Assets for Alon USA, LP. The Buyer will act as bailee of crude oil and refined petroleum products owned by Alon USA, LP or its assignee held in such assets owned and operated by the Buyer. The Buyer will charge fees to Alon USA, LP based on throughput volumes received or delivered ranging from $0.05 to $0.66 per barrel and related storage fees depending on the type of service or product. The fees under the Logistics Agreement may be adjusted annually for inflation. The initial term of the Logistics Agreement is ten years; the Buyer has a one-time option to extend the Logistics Agreement for up to five additional years; and the Logistics Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.

Big Spring Asphalt Services Agreement. In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Buyer entered into the Big Spring Asphalt Services Agreement (the “Asphalt Services Agreement”). Under the Asphalt Services Agreement, the Buyer will provide asphalt storage and handling services at certain of the Big Spring Logistic Assets (such assets, the “Asphalt Facilities”). The Buyer will provide services to Alon USA, LP at the Asphalt Facilities and serve as bailee of all raw materials, and other hydrocarbons, used to make asphalt products owned by Alon USA, LP or its assignee held in the Asphalt Facilities. The Buyer will charge fees to Alon USA, LP based on throughput

10


volumes delivered of $8.30 per barrel and related storage fees. The fees under the Asphalt Services Agreement may be adjusted annually for inflation. The initial term of the Asphalt Services Agreement is ten years; the Buyer has a one-time option to extend the Asphalt Services Agreement for up to five additional years; and the Asphalt Services Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.

Big Spring Marketing Agreement. Concurrent with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Buyer entered into the Marketing Agreement (the “Marketing Agreement”). Under the Marketing Agreement, the Buyer will provide Alon USA, LP with services for the marketing and selling of certain refined petroleum products that are produced or sold from the refinery near Big Spring, Texas. The Buyer will charge Alon USA, LP fees for such marketing and selling services of $0.50 to $0.71 per barrel depending on the type of product. The fees under the Marketing Agreement may be adjusted annually for inflation. The initial term of the Marketing Agreement is ten years; Alon USA, LP has a one-time option to extend the Marketing Agreement for up to five additional years; and the Marketing Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.

Omnibus Agreement. The Partnership entered into an omnibus agreement with Delek, our general partner, Delek Logistics Operating, LLC, Lion Oil Company and certain of the Partnership's and Delek's other subsidiaries on November 7, 2012, which was subsequently amended and restated on July 26, 2013, February 10, 2014, March 31, 2015 and August 3, 2015 and was further amended effective March 1, 2018 in connection with the Big Spring Logistic Assets Acquisition (collectively, as amended, the "Omnibus Agreement"). In conjunction with the March 1, 2018 amendment, our obligation to pay an annual fee to Delek for its provision of centralized corporate services to the Partnership was increased to $3.9 million annually.

Pursuant to the terms of the Omnibus Agreement, we were reimbursed by Delek for certain capital expenditures in the amount of $0.4 million and $2.7 million during the three and six months ended June 30, 2018, respectively, and $0.8 million and $3.8 million during the three and six months ended June 30, 2017, 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. As of June 30, 2018, we have recorded an increase to accounts receivable from related parties of $7.8 million for these matters for which we were or expect to be reimbursed, which was recorded as a reduction to operating expense. We were reimbursed $0.1 million for these matters during each of the three and six months ended June 30, 2018. We were reimbursed $0.3 million and $0.4 million for these matters during the three and six months ended June 30, 2017.
   
Summary of Transactions

Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers, wholesale marketing and products terminalling services provided primarily to Delek based on regulated tariff rates or contractually based fees and product sales. 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 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, purchases from affiliates and expense transactions with Delek and its affiliates is as follows (in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
53,080

 
$
39,824

 
$
114,724

 
$
76,443

Purchases from affiliates
 
$
99,515

 
$
8,252

 
$
181,715

 
$
17,180

Operating and maintenance expenses 
 
$
11,422

 
$
6,385

 
$
18,911

 
$
13,481

General and administrative expenses 
 
$
2,505

 
$
1,561

 
$
3,462

 
$
3,254


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 and May 2018, we paid quarterly cash distributions of $22.8 million and $24.0 million, respectively, of which $16.2 million and $17.2 million, respectively, were paid to Delek and our general partner. In February and May 2017, we paid quarterly

11


cash distributions of $20.5 million and $21.0 million, of which $14.2 million and $14.7 million, respectively, were paid to Delek and our general partner. On July 24, 2018, our general partner's board of directors declared a quarterly cash distribution totaling $25.0 million, based on the available cash as of the date of determination for the end of the second quarter of 2018, payable on August 13, 2018, of which $18.0 million is expected to be paid to Delek and our general partner, including the payment for the IDRs.

4. Revenues

We generate revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate products and feed stocks; for distributing, transporting and storing refined products; for marketing refined products output of Delek's Tyler and Big Spring refineries; and for wholesale marketing in the west Texas area. A significant portion of our revenue is derived from long-term commercial agreements with Delek, which provide for annual fee adjustments for increases or decreases in the CPI, PPI or FERC index (refer to Note 3 for a more detailed description of these agreements). In addition to the services we provide to Delek, we also generate substantial revenue from crude oil, intermediate and refined products transportation services for, and terminalling and marketing services to, third parties primarily in Texas, Tennessee and Arkansas. Certain of these services are provided pursuant to contractual agreements with third parties. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.

The majority of our commercial agreements with Delek meet the definition of a lease since: (1) performance of the contracts is dependent on specified property, plant or equipment and (2) it is remote that one or more parties other than Delek will take more than a minor amount of the output associated with the specified property, plant or equipment. As part of our adoption of ASC 606, we applied the new revenue recognition standard only to the service component of these leases. The bifurcation of the lease and service components was based on an analysis of lease-related and service-related costs for each contract, adjusted for representative profit margins. The lease component continues to be accounted for under the applicable lease accounting guidance.

The following table represents a disaggregation of revenue for each reportable segment for the periods indicated (in thousands):

 
 
Three Months Ended June 30, 2018
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Service Revenue - Third Party
 
$
3,714

 
$
493

 
$
4,207

Service Revenue - Affiliate (1)
 
23,160

 
14,581

 
37,741

Product Revenue - Third Party
 

 
108,993

 
108,993

Product Revenue - Affiliate
 

 
794

 
794

Lease Revenue - Affiliate
 
10,870

 
3,675

 
14,545

Total Revenue
 
$
37,744

 
$
128,536

 
$
166,280


 
 
Six Months Ended June 30, 2018
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Service Revenue - Third Party
 
$
7,965

 
$
802

 
$
8,767

Service Revenue - Affiliate (1)
 
43,057

 
24,147

 
67,204

Product Revenue - Third Party
 

 
210,710

 
210,710

Product Revenue - Affiliate
 

 
21,028

 
21,028

Lease Revenue - Affiliate
 
20,435

 
6,057

 
26,492

Total Revenue
 
$
71,457

 
$
262,744

 
$
334,201

_____________________________
(1) Net of $1.8 million and $2.4 million of amortization expense for the three and six months ended, respectively, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.

As of June 30, 2018, we expect to recognize $1.2 billion in service and lease revenues related to our unfulfilled performance obligations pertaining to the minimum volume commitments and capacity utilization under the non-cancelable terms of our commercial agreements with Delek. We do not disclose information about remaining performance obligations that have original expected durations of one year or less.

12



Our unfulfilled performance obligations as of June 30, 2018 were as follows (in millions):
Remainder of 2018
 
 
 
$
87,828

2019
 
 
 
164,646

2020
 
 
 
164,295

2021
 
 
 
153,541

2022 and thereafter
 
 
 
635,164

Total expected revenue on remaining performance obligations
 
 
 
$
1,205,474



5. Inventory

Inventories consisted of $12.7 million and $20.9 million of refined petroleum products as of June 30, 2018 and December 31, 2017, respectively. Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We recognize lower of cost or net realizable value charges as a component of cost of goods sold in the consolidated statements of income and comprehensive income, which amounted to a nominal amount during both three and six month periods ended June 30, 2018 and 2017.

6. Long-Term Obligations

DKL Revolver

We have a $700.0 million senior secured revolving credit agreement with Fifth Third Bank, as administrative agent, and a syndicate of lenders (the "DKL Revolver"). The DKL Revolver contains a dual currency borrowing tranche that permits draw downs in U.S. or Canadian dollars and an accordion feature whereby the Partnership may 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 obligations under the DKL Revolver are 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 wholly-owned subsidiary of Delek, provides a limited guaranty of the Partnership's obligations under the DKL Revolver. 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 the DKL Revolver lenders. As of both June 30, 2018 and December 31, 2017, the principal amount of the Holdings Note was $102.0 million.

The DKL Revolver has a maturity date of December 30, 2019. 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 total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the credit facility. At June 30, 2018, the weighted average interest rate for our borrowings under the facility was approximately 4.9%. Additionally, the DKL Revolver requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of June 30, 2018, this fee was 0.5% per year.
As of June 30, 2018, we had $493.9 million of outstanding borrowings under the DKL Revolver, with no letters of credit in place. Unused credit commitments under the DKL Revolver as of June 30, 2018, were $206.1 million.

6.75% Senior Notes Due 2025

On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly-owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued $250.0 million in aggregate principal amount of 6.75% senior notes due 2025 (the “2025 Notes”) at a discount. The 2025 Notes are general unsecured senior obligations of the Issuers. The 2025 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Finance Corp., the "Guarantors") and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2025 Notes rank equal in right of payment with all existing and future senior indebtedness of the Issuers, and senior in right of payment to

13



any future subordinated indebtedness of the Issuers. Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.

At any time prior to May 15, 2020, the Issuers may redeem up to 35% of the aggregate principal amount of the 2025 Notes with the net cash proceeds of one or more equity offerings by the Partnership at a redemption price of 106.750% of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to May 15, 2020, the Issuers may redeem all or part of the 2025 Notes at a redemption price of the principal amount, plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on May 15, 2020, the Issuers may, subject to certain conditions and limitations, redeem all or part of the 2025 Notes at a redemption price of 105.063% of the redeemed principal for the twelve-month period beginning on May 15, 2020, 103.375% for the twelve-month period beginning on May 15, 2021, 101.688% for the twelve-month period beginning on May 15, 2022 and 100.00% beginning on May 15, 2023 and thereafter, plus accrued and unpaid interest, if any.

In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations, the Issuers will be obligated to make an offer for the purchase of the 2025 Notes from holders at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.

In connection with the issuance of the 2025 Notes, the Issuers and the Guarantors entered into a registration rights agreement, whereby the Issuers and the Guarantors were required to exchange the 2025 Notes for new notes with terms substantially identical in all material respects with the 2025 Notes (except the new notes do not contain terms with respect to transfer restrictions). On April 25, 2018, we made an offer to exchange the 2025 Notes and the related guarantees that were validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradeable, as required under the terms of the original indenture (the "Exchange Offer"). The Exchange Offer expired on May 23, 2018 (the "Expiration Date"). The terms of the exchange notes that were issued as a result of the Exchange Offer are substantially identical to the terms of the original 2025 Notes.
As of June 30, 2018, we had $250.0 million in outstanding principal amount of the 2025 Notes. Outstanding borrowings under the 2025 Notes are net of deferred financing costs and debt discount of $5.1 million and $1.6 million, respectively, as of June 30, 2018, and $5.5 million and $1.7 million, respectively, as of December 31, 2017.

7. 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.

8. 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, 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 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 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. The IDRs 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.


14


Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The expected date of distribution for the distributions earned during the period ended June 30, 2018 is August 13, 2018. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income attributable to partners
 
$
25,582

 
$
18,977

 
$
45,577

 
$
33,572

Less: General partner's distribution (including IDRs) (1)
 
6,200

 
4,608

 
11,910

 
8,845

Less: Limited partners' distribution
 
18,784

 
17,175

 
37,071

 
33,962

Earnings in excess (deficit) of distributions
 
$
598

 
$
(2,806
)
 
$
(3,404
)
 
$
(9,235
)
 
 
 
 
 
 
 
 
 
General partner's earnings:
 
 
 
 
 
 
 
 
Distributions (including IDRs) (1)
 
$
6,200

 
$
4,608

 
$
11,910

 
$
8,845

Allocation of earnings in excess (deficit) of distributions
 
12

 
(56
)
 
(68
)
 
(184
)
Total general partner's earnings
 
$
6,212

 
$
4,552

 
$
11,842

 
$
8,661

 
 
 
 
 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
 
 
 
 
Distributions
 
$
18,784

 
$
17,175

 
$
37,071

 
$
33,962

Allocation of earnings in excess (deficit) of distributions
 
586

 
(2,750
)
 
(3,336
)
 
(9,051
)
Total limited partners' earnings on common units
 
$
19,370

 
$
14,425

 
$
33,735

 
$
24,911

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding (2):
 
 
 
 
 
 
 
 
Common units - (basic)
 
24,386,031

 
24,335,338

 
24,384,341

 
24,331,991

Common units - (diluted)
 
24,394,103

 
24,375,946

 
24,391,760

 
24,371,540

 
 
 
 
 
 
 
 
 
Net income per limited partner unit (2):
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.79

 
$
0.59

 
$
1.38

 
$
1.02

Common units - (diluted)
 
$
0.79

 
$
0.59

 
$
1.38

 
$
1.02

            

(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 9 for further discussion related to IDRs.
(2) We base our calculation of net income per unit on the weighted-average number of common limited partner units outstanding during the period.

9. Equity

We had 9,101,137 common limited partner units held by the public outstanding as of June 30, 2018. Additionally, as of June 30, 2018, Delek owned a 61.4% limited partner interest in us, consisting of 15,294,046 common limited partner units and a 94.6% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 497,861 general partner units. Affiliates, who are also members of our general partner's management and board of directors, own the remaining 5.4% interest in our general partner.


15


Equity Activity

The table below summarizes the changes in the number of units outstanding from December 31, 2017 through June 30, 2018.
 
 
Common - Public
 
Common - Delek
 
General Partner
 
Total
Balance at December 31, 2017
 
9,088,587

 
15,294,046

 
497,604

 
24,880,237

General partner units issued to maintain 2% interest
 

 

 
257

 
257

Unit-based compensation awards (1)
 
12,550

 

 

 
12,550

Balance at June 30, 2018
 
9,101,137

 
15,294,046

 
497,861

 
24,893,044

(1) Unit-based compensation awards are presented net of 598 units withheld for taxes.

The summarized changes in the carrying amount of our equity from December 31, 2017 through June 30, 2018 are as follows (in thousands):
 
 
Common - Public
 
Common - Delek
 
General Partner
 
Total
Balance at December 31, 2017
 
$
174,378

 
$
(197,206
)
 
$
(6,397
)
 
$
(29,225
)
Distributions to unitholders and general partner related to Big Spring Logistic Assets Acquisition


 
(96,822
)
 
(1,976
)
 
(98,798
)
Cash distributions (1) 
(13,463
)
 
(22,558
)
 
(10,810
)
 
(46,831
)
Net income attributable to partners
12,581

 
21,154

 
11,842

 
45,577

Unit-based compensation
111

 
185

 
6

 
302

Other

 

 
13

 
13

Balance at June 30, 2018
 
$
173,607

 
$
(295,247
)
 
$
(7,322
)
 
$
(128,962
)
(1) Cash distributions include $0.1 million related to distribution equivalents on vested phantom units.

Allocations of Net Income

Our Partnership Agreement contains provisions for the allocation of net income and loss to 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 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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income attributable to partners
 
$
25,582

 
$
18,977

 
$
45,577

 
$
33,572

Less: General partner's IDRs
 
(5,817
)
 
(4,258
)
 
(11,154
)
 
(8,153
)
Net income available to partners
 
$
19,765

 
$
14,719

 
$
34,423

 
$
25,419

General partner's ownership interest
 
2.0
%
 
2.0
%
 
2.0
%
 
2.0
%
General partner's allocated interest in net income
 
$
395

 
$
294

 
$
688

 
$
508

General partner's IDRs
 
5,817

 
4,258

 
11,154

 
8,153

Total general partner's interest in net income
 
$
6,212

 
$
4,552

 
$
11,842

 
$
8,661



16


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 and (ii) our general partner has not transferred its IDRs.
 
 
 
Target Quarterly Distribution per Unit
 
Marginal Percentage Interest in Distributions
 
 
 
Target Amount
 
Unitholders
 
General Partner
Minimum Quarterly Distribution
 
 
$
0.37500

 
98.0
%
 
2.0
%
First Target Distribution
 
above
$
0.37500

 
98.0
%
 
2.0
%
 
 
up to
$
0.43125

 
 
 
 
Second Target Distribution
 
above
$
0.43125

 
85.0
%
 
15.0
%
 
 
up to
$
0.46875

 
 
 
 
Third Target Distribution
 
above
$
0.46875

 
75.0
%
 
25.0
%
 
 
up to
$
0.56250

 
 
 
 
Thereafter
 
thereafter
$
0.56250

 
50.0
%
 
50.0
%

Cash Distributions

Our Partnership Agreement sets forth the calculation to be used to determine the amount and priority of 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 general partner interest and IDRs (in thousands)
 
Date of Distribution
 
Unitholders Record Date
June 30, 2017
 
$
0.705

 
$
2.82

 
$
21,783

 
August 11, 2017
 
August 4, 2017
September 30, 2017
 
$
0.715

 
$
2.86

 
$
22,270

 
November 14, 2017
 
November 7, 2017
December 31, 2017
 
$
0.725

 
$
2.90

 
$
22,777

 
February 12, 2018
 
February 2, 2018
March 31, 2018
 
$
0.750

 
$
3.00

 
$
23,997

 
May 15, 2018
 
May 7, 2018
June 30, 2018
 
$
0.770

 
$
3.08

 
$
24,984

 
August 13, 2018 (1)
 
August 3, 2018
            
(1) Expected date of distribution.

17


The allocation of total quarterly cash distributions expected to be made on August 13, 2018 to general and limited partners for the three and six months ended June 30, 2018 and the allocation of total quarterly cash distributions for the three and six months ended June 30, 2017 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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
General partner's distributions:
 
 
 
 
 
 
 
 
     General partner's distributions
 
$
383

 
$
350

 
$
756

 
$
692

     General partner's IDRs
 
5,817

 
4,258

 
11,154

 
8,153

          Total general partner's distributions
 
6,200

 
4,608

 
11,910

 
8,845

 
 
 
 
 
 
 
 
 
Limited partners' distributions:
 
 
 
 
 
 
 
 
          Common limited partners' distributions
 
18,784

 
17,175

 
37,071

 
33,962

 
 
 
 
 
 
 
 
 
               Total cash distributions
 
$
24,984

 
$
21,783

 
$
48,981

 
$
42,807

 
 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
 
$
0.770

 
$
0.705

 
$
1.520

 
$
1.395


10. Equity Based Compensation

We incurred approximately $0.2 million and $0.3 million of unit-based compensation expense related to the Partnership during the three and six months ended June 30, 2018, respectively, and $0.2 million and $0.4 million of unit-based compensation expense related to the Partnership during the three and six months ended June 30, 2017, 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 of the awards. 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 June 30, 2018, there was $0.6 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 0.9 years.

11. Equity Method Investments

We have two joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek. We own a 50% membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC") to operate one of these pipeline systems and a 33% membership interest in the entity formed with Rangeland Energy II, LLC ("Rangeland RIO") to operate the other pipeline system.

The Partnership's investments in these two entities were financed through a combination of cash from operations and borrowings under the DKL Revolver.  As of June 30, 2018 and December 31, 2017, the Partnership's investment balance in these joint ventures was $106.4 million and $106.5 million, respectively.

In February 2018, the Partnership and an affiliate of Green Plains Partners LP ("Green Plains") entered into a joint venture engaging in the light products terminalling business. The companies formed DKGP Energy Terminals, LLC ("DKGP Energy"). The Partnership and Green Plains each own a 50% membership interest in DKGP Energy. DKGP Energy signed a membership interest purchase agreement (the "Membership Interest Purchase Agreement") to acquire two light products terminals located in Caddo Mills, Texas and North Little Rock, Arkansas from an affiliate of American Midstream Partners, L.P. ("American Midstream"), subject to certain closing conditions and regulatory approvals (the "DKGP Transaction"). The Membership Interest Purchase Agreement expired on August 1, 2018 pursuant to its terms (primarily due to delays in receiving federal regulatory approval for the acquisition), and the contemplated DKGP Transaction terminated (the "DKGP Termination"). As a result of the DKGP Termination, the contemplated contribution of certain of the Partnership's terminals to DKGP Energy, in connection with the DKGP Transaction, terminated. At this time the Partnership and Green Plains do not have any further transaction or development plans with respect to DKGP Energy.

We do not consolidate any part of the assets or liabilities or operating results of our equity method investees. Our share of net income or loss of the investees will increase or decrease, as applicable, the carrying value of our investments in unconsolidated affiliates. With respect

18



to CP LLC and Rangeland RIO, we determined that these entities do not represent variable interest entities and consolidation is not required. We have the ability to exercise significant 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 method investees is shown below (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Current assets
 
$
18,195

 
$
12,671

Non-current assets
 
$
241,564

 
$
244,329

Current liabilities
 
$
3,876

 
$
1,798

 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
9,886

 
$
7,022

 
$
17,876

 
$
12,693

Gross profit
 
$
9,886

 
$
7,022

 
$
17,876

 
$
12,693

Net income
 
$
4,800

 
$
3,379

 
$
7,512

 
$
4,392

 
 
 
 
 
 
 
 
 
12. Segment Data

We aggregate our operating segments 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.

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 revenues less cost of goods sold and operating expenses.




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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Pipelines and Transportation
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
     Affiliates
 
$
34,030

 
$
27,668

 
$
63,492

 
$
54,168

     Third party
 
3,714

 
2,555

 
7,965

 
4,732

          Total pipelines and transportation
 
37,744

 
30,223

 
71,457

 
58,900

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
5,195

 
4,403

 
9,636

 
8,808

     Operating expenses
 
9,933

 
7,933

 
19,555

 
16,088

     Segment contribution margin
 
$
22,616

 
$
17,887

 
$
42,266

 
$
34,004

 Capital spending  (1)
 
$
826

 
$
1,660

 
$
2,234

 
$
3,797

 
 
 
 
 
 
 
 
 
Wholesale Marketing and Terminalling
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
     Affiliates (2)
 
$
19,050

 
$
12,156

 
$
51,232

 
$
22,275

     Third party
 
109,486

 
84,390

 
211,512

 
175,067

          Total wholesale marketing and terminalling
 
128,536

 
96,546

 
262,744

 
197,342

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
100,821

 
80,636

 
215,412

 
168,821

     Operating expenses
 
4,984

 
2,033

 
7,939

 
4,236

     Segment contribution margin
 
$
22,731

 
$
13,877

 
$
39,393

 
$
24,285

 Capital spending (1)
 
$
1,426

 
$
459

 
$
2,215

 
$
1,113

 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
     Affiliates
 
$
53,080

 
$
39,824

 
$
114,724

 
$
76,443

     Third party
 
113,200

 
86,945

 
219,477

 
179,799

          Total consolidated
 
166,280

 
126,769

 
334,201

 
256,242

     Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cost of goods sold
 
106,016

 
85,039

 
225,048

 
177,629

     Operating expenses
 
14,917

 
9,966

 
27,494

 
20,324

     Contribution margin
 
45,347

 
31,764

 
81,659

 
58,289

     General and administrative expenses
 
3,747

 
2,656

 
6,722

 
5,504

     Depreciation and amortization
 
7,019

 
5,742

 
13,019

 
10,935

     Loss (gain) on asset disposals
 
(129
)
 
(5
)
 
(69
)
 
7

     Operating income
 
$
34,710

 
$
23,371

 
$
61,987

 
$
41,843

 Capital spending (1)
 
$
2,252

 
$
2,119

 
$
4,449

 
$
4,910


(1) Capital spending excludes transaction costs capitalized in the amount of $0.4 million that relate to the Big Spring Logistic Assets Acquisition for the six months ended June 30, 2018. No costs were capitalized during the three months ended June 30, 2018.

(2) Affiliate revenue for the wholesale marketing and terminalling segment is presented net of amortization expense pertaining to the Marketing Contract Intangible Acquisition. See Note 3 for additional information.


20


The following table summarizes the total assets for each segment as of June 30, 2018 and December 31, 2017 (in thousands):

 
 
June 30, 2018
 
December 31, 2017
Pipelines and transportation
 
$
439,311

 
$
349,351

Wholesale marketing and terminalling
 
211,038

 
94,179

     Total assets
 
$
650,349

 
$
443,530


Property, plant and equipment and accumulated depreciation as of June 30, 2018 and depreciation expense by reporting segment for the three and six months ended June 30, 2018 were as follows (in thousands):
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Property, plant and equipment
 
$
362,128

 
$
84,833

 
$
446,961

Less: accumulated depreciation
 
(96,915
)
 
(30,713
)
 
(127,628
)
Property, plant and equipment, net
 
$
265,213

 
$
54,120

 
$
319,333

Depreciation expense for the three months ended June 30, 2018
 
$
5,594

 
$
1,336

 
$
6,930

Depreciation expense for the six months ended June 30, 2018
 
$
10,524

 
$
2,406

 
$
12,930


In accordance with Accounting Standards Codification ("ASC") 360, Property, Plant & Equipment, we evaluate the realizability of property, plant and equipment as events occur that might indicate potential impairment. There were no indicators of impairment of our property, plant and equipment as of June 30, 2018.

13. Fair Value Measurements

The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of our assets and liabilities that fall under the scope of ASC 825, Financial Instruments.

We apply the provisions of ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to commodity and interest rate 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 to our financial statements at this time.

ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.

Commodity swaps, exchange-traded futures, physical commodity forward purchase and sale contracts and any interest rate swaps 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.

21


The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at June 30, 2018 and December 31, 2017 was as follows (in thousands):

 
 
As of June 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
2

 
$

 
$
2

     Total assets
 

 
2

 

 
2

Liabilities
 
 
 
 
 
 
 


Commodity derivatives
 

 
(380
)
 

 
(380
)
Net liabilities
 
$

 
$
(378
)
 
$

 
$
(378
)
 
 
As of December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
(1,087
)
 

 
(1,087
)
Net liabilities
 
$

 
$
(1,087
)
 
$

 
$
(1,087
)

The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. In the table above, 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, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and where the legal right of offset exists.

As of June 30, 2018 and December 31, 2017, we had cash collateral of $0.5 million and $0.3 million, respectively, netted with the net derivative position of our counterparty. See Note 14 for further information regarding derivative instruments.

14. 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 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 DKL Revolver.

22



The following table presents the fair value of our derivative instruments as of June 30, 2018 and December 31, 2017. 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 deficit or 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 differ from the amounts presented in our accompanying condensed consolidated balance sheets. During the three and six months ended June 30, 2018 and 2017, 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. See Note 13 for further information regarding the fair value of derivative instruments.

(in thousands)
 
 
 
June 30, 2018
 
December 31, 2017
Derivative Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives:
 
 
 
 
 
 
 
 
Commodity derivatives (1)
 
Accrued expenses and other current liabilities
 
$
2

 
$
(380
)
 
$

 
$
(1,087
)
Total gross fair value of derivatives
 
2

 
(380
)
 

 
(1,087
)
Less: Counterparty netting and cash collateral (deficit) (2)
 
(88
)
 
(380
)
 

 
(290
)
Total net fair value of derivatives
 
$
90

 
$

 
$

 
$
(797
)
            

(1) As of June 30, 2018 and December 31, 2017, we had open derivative contracts representing 117,000 barrels and 370,000 barrels, respectively, of refined petroleum products.

(2) As of June 30, 2018 and December 31, 2017, we had cash collateral of $0.5 million and $0.3 million, respectively, netted with the net derivative position of our counterparty.

Recognized gains (losses) associated with our derivatives for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivative Type
Income Statement Location
 
2018
 
2017
 
2018
 
2017
Commodity derivatives
Cost of goods sold
 
$
(843
)
 
$
606

 
$
740

 
$
1,116


15. Commitments and Contingencies

Litigation

In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations. See "Crude Oil Releases" below for further discussion.

Environmental, Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the Environmental Protection Agency (the "EPA"), the United States Department of Transportation, the Occupational Safety and Health Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices, pollution prevention measures, as well as the safe operation of our pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our terminals, pipelines, saltwells, trucks, and related operations, and may be subject to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and we

23


expect that there will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.

Releases of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, or is not a reimbursable event under the Omnibus Agreement, subject us to substantial expenses, including costs to respond to, contain and remediate a release, to comply with applicable laws and regulations and to resolve claims by third parties for personal injury, property damage or natural resources damages.

Crude Oil Releases

We have experienced several crude oil releases involving our assets, including, but not limited to, the following releases:

In February 2018, a release of approximately 203 barrels of crude oil, occurred from our SALA Gathering System near Urbana, Arkansas Station.
In March 2013, a release of approximately 5,900 barrels of crude oil, the majority of which was contained on-site, occurred from a pumping facility at our Magnolia Station located west of the El Dorado Refinery (the "Magnolia Release").

Cleanup operations and site maintenance and remediation efforts on these and other releases have been substantially completed, although regulatory authorities could require additional remediation based on the results of our remediation efforts. We may incur additional expenses as a result of further scrutiny by regulatory authorities and continued compliance with laws and regulations to which our assets are subject. Expenses incurred for the remediation of these crude oil releases are included in operating expenses in our condensed consolidated statements of income and comprehensive income and are subsequently reimbursed by Delek pursuant to the terms of the Omnibus Agreement. Reimbursements are recorded as a reduction to operating expense. We do not believe the total costs associated with these events, whether alone or in the aggregate, including any fines or penalties and net of available insurance reimbursement, will have a material adverse effect upon our business, financial condition or results of operations as we are reimbursed by Delek for such costs.

During each of the three and six months ended June 30, 2018, we recorded approximately $0.1 million of expense, which is net of total expected reimbursements from Delek pursuant to the terms of the Omnibus Agreement of $7.8 million, to cover the cost of certain asset failures that occurred in 2018.

The United States Department of Justice (the "DOJ"), on behalf of the EPA, and the State of Arkansas, on behalf of the Arkansas Department of Environmental Quality, are currently pursuing an enforcement action against the Partnership with regard to potential violations of the Clean Water Act and certain state laws arising from the Magnolia Release. Although we have been negotiating a resolution to this matter with the EPA and the State of Arkansas, which will include monetary penalties and other relief, on July 13, 2018, the DOJ and the State of Arkansas filed a civil action against two of the Partnership's wholly-owned subsidiaries, Delek Logistics Operations LLC and SALA Gathering Systems LLC, in the United States District Court for the Western District of Arkansas on July 13, 2018. As of June 30, 2018, we have accrued $1.0 million, which we recorded in pipeline release liabilities in our condensed consolidated balance sheet, for the Magnolia Release in connection with these proceedings. We believe this amount is adequate to cover our expected obligations related to these proceedings and that these proceedings will not have a material adverse effect upon the Partnership's business, financial condition or result of operations.

Contracts and Agreements

The majority of the petroleum products we sold in west Texas prior to December 31, 2017 were purchased from Noble Petro, Inc. ("Noble Petro"). Under the terms of a supply contract (the "Abilene Contract") with Noble Petro that expired on December 31, 2017, we purchased petroleum products at the Abilene, Texas terminal, which we own, for sales and exchange with third parties at the Abilene and San Angelo terminals. We leased the Abilene and San Angelo, Texas terminals to Noble Petro, under a separate Terminal and Pipeline Lease and Operating Agreement, that expired on December 31, 2017. In the first half of 2018, we purchased spot barrels from various third parties and from Delek for sale to wholesale customers in west Texas.

Letters of Credit

At June 30, 2018, we had no letters of credit in place under the DKL Revolver.

24



16. Subsequent Events

Distribution Declaration

On July 24, 2018, our general partner's board of directors declared a quarterly cash distribution of $0.77 per limited partner unit, payable on August 13, 2018, to unitholders of record on August 3, 2018.





25


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 1, 2018 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.

In January 2017, Delek US Holdings, Inc. ("Old Delek") (and various related entities) entered into an Agreement and Plan of Merger with Alon USA Energy, Inc. (NYSE: ALJ) ("Alon USA"), as subsequently amended on February 27 and April 21, 2017, (as so amended, the "Merger Agreement"). The related merger (the "Delek/Alon Merger") was effective July 1, 2017 (the “Effective Time”), resulting in a new post-combination consolidated registrant renamed Delek US Holdings, Inc. (“New Delek”), with Alon USA and Old Delek surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon USA pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

Unless the context otherwise requires, references in this report to "Delek Logistics Partners, LP," the "Partnership," "we," "us," "our," or like terms, may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless the context otherwise requires, references in this report to "Delek" refer collectively to Old Delek, with respect to periods prior to July 1, 2017, or New Delek, with respect to periods on or after July 1, 2017, and any of Old Delek's or New Delek's, as applicable, subsidiaries, other than the Partnership and its subsidiaries and its general partner.

Effective March 1, 2018, the Partnership acquired from Delek certain logistics assets primarily located at or adjacent to Delek's Big Spring, Texas refinery (the "Big Spring Refinery"). See 2018 Developments" for further details.

You should read the following discussion of our financial condition and results of operations in conjunction with our historical condensed consolidated financial statements and notes thereto.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to:

our substantial dependence on Delek or its assignees and their support of and respective ability to pay us under our commercial agreements;
our future coverage, leverage, financial flexibility and growth, and our ability to improve performance and achieve distribution growth at any level or at all;
Delek's future growth, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution;
positive industry dynamics, including Permian Basin growth, efficiencies and takeaway capacity;

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the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or legal actions and other effects related to spills, releases and tank failures;
changes in insurance markets impacting costs and the level and types of coverage available;
the timing and extent of changes in commodity prices and demand for refined products;
the wholesale marketing margins we are able to obtain and the number of barrels of product we are able to purchase and sell in our west Texas wholesale business;
the suspension, reduction or termination of Delek's or its assignees' or third-party's obligations under our commercial agreements, including the duration, fees or terms thereof;
the results of our investments in joint ventures;
the ability to secure commercial agreements with Delek or third parties upon expiration of existing agreements;
disruptions due to acts of God, equipment interruption or failure at our facilities, Delek’s facilities or third-party facilities on which our business is dependent;
changes in the availability and cost of capital of debt and equity financing;
our reliance on information technology systems in our day-to-day operations;
changes in general economic conditions;
the effects of existing and future laws and governmental regulations, including, but not limited to, the rules and regulations promulgated by the Federal Energy Regulatory Commission ("FERC") and those relating to environmental protection, pipeline integrity and safety;
competitive conditions in our industry;
actions taken by our customers and competitors;
the demand for crude oil, refined products and transportation and storage services;
our ability to successfully implement our business plan;