Logistics-9.30.2013-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the quarterly period ended September 30, 2013
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                      to                     
Commission file number 001-35721

DELEK LOGISTICS PARTNERS, LP
(Exact name of registrant as specified in its charter)
Delaware
 
45-5379027
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
7102 Commerce Way
 
 
Brentwood, Tennessee
 
37027
(Address of principal executive offices)
 
(Zip Code)
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At November 1, 2013, there were 12,036,821 common units, 11,999,258 subordinated units, and 490,532 general partner units outstanding.

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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

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Part I.
FINANCIAL INFORMATION

Item 1. Financial Statements
Delek Logistics Partners, LP
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
September 30,
2013
 
December 31, 2012 (1)
 
 
(In thousands)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
6,712

 
$
23,452

Accounts receivable
 
34,611

 
27,725

Inventory
 
21,239

 
14,351

Deferred tax assets
 
14

 
14

Other current assets
 
592

 
169

Total current assets
 
63,168

 
65,711

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
229,753

 
216,048

Less: accumulated depreciation
 
(33,264
)
 
(24,991
)
Property, plant and equipment, net
 
196,489

 
191,057

Goodwill
 
10,454

 
10,454

Intangible assets, net
 
11,647

 
12,430

Other non-current assets
 
5,620

 
3,664

Total assets
 
$
287,378

 
$
283,316

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
26,995

 
$
21,849

Accounts payable to related parties
 
14,908

 
10,148

Fuel and other taxes payable
 
6,683

 
4,650

Accrued expenses and other current liabilities
 
6,348

 
3,650

Total current liabilities
 
54,934

 
40,297

Non-current liabilities:
 
 
 
 
Revolving credit facility
 
161,000

 
90,000

Asset retirement obligations
 
3,340

 
3,177

Deferred tax liability
 
59

 
17

Other non-current liabilities
 
7,965

 
9,810

Total non-current liabilities
 
172,364

 
103,004

Equity:
 
 
 
 
Predecessors division equity
 

 
35,590

Common unitholders - public; 9,237,563 units issued and outstanding at September 30, 2013 (9,200,000 at December 31, 2012)
 
184,656

 
178,728

Common unitholders - Delek; 2,799,258 units issued and outstanding at September 30, 2013 (2,799,258 at December 31, 2012)
 
(181,071
)
 
(127,129
)
Subordinated unitholder - Delek; 11,999,258 units issued and outstanding at September 30, 2013 (11,999,258 at December 31, 2012)
 
58,697

 
52,875

General Partner unitholder - Delek; 490,532 units issued and outstanding at September 30, 2013 (489,766 at December 31, 2012)
 
(2,202
)
 
(49
)
Total equity
 
60,080

 
140,015

Total liabilities and equity
 
$
287,378

 
$
283,316

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

See accompanying notes to condensed consolidated financial statements

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Delek Logistics Partners, LP
Condensed Consolidated Statements of Income and Comprehensive Income (1) 
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
Predecessors
 
 
 
Predecessors
 
 
(In thousands)
Net sales
 
$
243,295

 
$
271,806

 
$
684,331

 
$
773,369

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

 
255,281

 
614,048

 
729,750

Operating expenses
 
7,474

 
9,540

 
23,075

 
20,637

General and administrative expenses
 
1,868

 
1,804

 
5,172

 
6,937

Depreciation and amortization
 
2,844

 
2,616

 
9,074

 
7,720

Loss on sale of assets
 

 
5

 

 
5

Total operating costs and expenses
 
230,408

 
269,246

 
651,369

 
765,049

Operating income
 
12,887

 
2,560

 
32,962

 
8,320

Interest expense, net
 
1,194

 
667

 
2,763

 
1,777

Income before income tax expense
 
11,693

 
1,893

 
30,199

 
6,543

Income tax expense
 
307

 
2,437

 
547

 
5,183

Net income (loss)
 
11,386

 
(544
)
 
29,652

 
1,360

Less: (loss) income attributable to Predecessors
 
(1,159
)
 
(544
)
 
(6,853
)
 
1,360

Net income attributable to partners
 
$
12,545

 
$

 
$
36,505

 
$

Comprehensive income attributable to partners
 
$
12,545

 
$

 
$
36,505

 
$

 
 
 
 
 
 
 
 
 
Less: General partner's interest in net income (2%)
 
250

 
 
 
$
729

 
 
Limited partners' interest in net income
 
$
12,295

 
 
 
$
35,776

 
 
 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common units - (basic)
 
$
0.51

 
 
 
$
1.49

 
 
Common units - (diluted)
 
$
0.51

 
 
 
$
1.48

 
 
Subordinated units - Delek (basic and diluted)
 
$
0.51

 
 
 
$
1.49

 
 
 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
Common units - (basic)
 
12,036,821

 
 
 
12,014,445

 
 
Common units - (diluted)
 
12,188,342

 
 
 
12,152,657

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

 
 
 
11,999,258

 
 
 
 
 
 
 
 
 
 
 
Cash distribution per unit
 
$
0.405

 
 
 
$
1.185

 
 
(1) Adjusted to include the historical results of the Tyler Terminal and Tank Assets. See Notes 1 and 2 for further discussion.
See accompanying notes to condensed consolidated financial statements

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Delek Logistics Partners, LP
Condensed Consolidated Statements of Cash Flows (Unaudited) (1)  
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
 
 
Predecessors
 
 
(In thousands)
Cash flows from operating activities:
 
 
Net income
 
$
29,652

 
$
1,360

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
9,074

 
7,720

Amortization of unfavorable contract liability to revenue
 
(1,956
)
 

Amortization of debt issuance costs
 
560

 
146

Accretion of asset retirement obligations
 
163

 
79

Deferred income taxes
 
42

 
(135
)
Loss on sale of assets
 

 
5

Unit-based compensation expense
 
179

 
92

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
(6,886
)
 
(14,605
)
Inventories and other current assets
 
(7,311
)
 
(13,742
)
Accounts payable and other current liabilities
 
9,907

 
16,134

Accounts payable from related parties
 
4,760

 
(369
)
Non-current assets and liabilities, net
 
(2,700
)
 
(1,217
)
Net cash provided by (used in) operating activities
 
35,484

 
(4,532
)
Cash flows from investing activities:
 
 
 
 
Business combinations
 
(5,722
)
 
(23,272
)
Purchases of property, plant and equipment
 
(7,881
)
 
(16,700
)
Proceeds from sale of property, plant and equipment
 

 
2

Net cash used in investing activities
 
(13,603
)
 
(39,970
)
Cash flows from financing activities:
 
 
 
 
Distributions to general partner
 
(492
)
 

Distributions to common unitholders - Public
 
(9,252
)
 

Distributions to common unitholders - Delek
 
(2,810
)
 

Distributions to subordinated unitholders - Delek
 
(12,047
)
 

Distributions to Delek for contribution of Tyler Terminal and Tank Assets
 
(94,800
)
 

Proceeds from revolving credit facility
 
138,000

 
226,200

Payments of revolving credit facility
 
(67,000
)
 
(203,300
)
Tax benefit from exercise of stock-based compensation
 

 
25

Deferred financing costs paid
 

 
(97
)
Capital contributions by Predecessors
 
9,317

 
21,852

Reimbursement of capital expenditures by sponsor
 
463

 

Net cash (used in) provided by financing activities
 
(38,621
)
 
44,680

Net (decrease) increase in cash and cash equivalents
 
(16,740
)
 
178

Cash and cash equivalents at the beginning of the period
 
23,452

 
35

Cash and cash equivalents at the end of the period
 
$
6,712

 
$
213

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
1,906

 
$
1,633

Income taxes
 
$
30

 
$
1,316

Non-cash financing activities:
 
 

 
 

Working capital retained by Sponsor
 
213

 

Sponsor contribution of fixed assets
 
105

 


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

See accompanying notes to condensed consolidated financial statements

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Delek Logistics Partners, LP
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Basis of Presentation
As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. References in this report to "Delek" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than Delek Logistics Partners, LP, its subsidiaries and its general partner.
The Partnership is a Delaware limited partnership formed in April 2012 by Delek Logistics GP, LLC, a subsidiary of Delek and our general partner. On November 7, 2012, we completed our initial public offering (the "Offering") of 9,200,000 common units representing limited partner interests.
The information presented in this Quarterly Report on Form 10-Q contains the unaudited condensed combined financial results of Delek Logistics Partners, LP Predecessor ("the DKL Predecessor"), our predecessor for accounting purposes, for the three and nine months ended September 30, 2012. The DKL Predecessor includes the financial results of the initial assets acquired from Delek during the Offering. The unaudited condensed consolidated financial results for the three and nine months ended September 30, 2013 include the results of operations for the Partnership. The balance sheet as of September 30, 2013 presents solely the condensed consolidated financial position of the Partnership.
Upon completion of the Offering, the Partnership consisted of the assets, liabilities and results of operations of certain crude oil and refined product pipelines and transportation, wholesale marketing and terminalling assets previously operated or held by Delek and certain of its subsidiaries including Delek Marketing & Supply, LLC ("Delek Marketing"), Paline Pipeline Company, LLC ("Paline") and Lion Oil Company ("Lion Oil"). Prior to the completion of the Offering, the assets, liabilities, and results of operations of the aforementioned assets related to the DKL Predecessor.
Transfers between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retrospectively adjusted to furnish comparative information. As an entity under common control with Delek, we record the assets that Delek has contributed to us on our balance sheet at Delek's historical basis instead of fair value.
On July 26, 2013, we acquired from Delek (i) the refined products terminal (the “Tyler Terminal”) located at Delek's Tyler, Texas Refinery (the "Tyler Refinery") and (ii) ninety-six storage tanks and certain ancillary assets (the "Tyler Tank Assets" and together, with the Tyler Terminal, the “Tyler Terminal and Tank Assets”) adjacent to the Tyler Refinery (such transaction, the “Tyler Acquisition”). The Tyler Acquisition was a transfer between entities under common control. Accordingly, the accompanying financial statements and related notes of the DKL Predecessor and the Partnership have been retrospectively adjusted to include the historical results of the Tyler Terminal and Tank Assets for all periods presented through July 26, 2013 (the "Tyler Predecessor"). We refer to the historical results of the DKL Predecessor and the Tyler Predecessor collectively as our "Predecessors." See Note 2 for information regarding the Tyler Acquisition.
The accompanying unaudited condensed combined financial statements and related notes for the three and nine months ended September 30, 2012 present the consolidated financial position, results of operations, cash flows and division equity of our Predecessors. The financial statements of our Predecessors have been prepared from the separate records maintained by Delek and may not necessarily be indicative of the conditions that would have existed or the results of operations if our Predecessors had been operated as an unaffiliated entity. Our Predecessors did not record all revenues for intercompany gathering, pipeline transportation, terminalling and storage services.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 (our "Annual Report on Form 10-K"). 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, 2012 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.

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The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance requiring companies to report, in one place, either on the face of the financial statements or in the notes, information about reclassifications out of accumulated other comprehensive income ("AOCI").  The guidance also requires companies to present current-period reclassifications out of AOCI and other amounts of current-period other comprehensive income ("OCI") separately for each component of OCI on the face of the financial statements or in the notes, whereas companies were previously required to present total changes in AOCI by component on the face of the financial statements or in the notes.  For each significant reclassification to net income in its entirety during their reporting period, companies must identify the line item(s) affected in the statement where net income is presented. For any significant reclassifications that are not reclassified directly to net income in their entirety during the reporting period, cross-references to the note where additional details about the effects of the reclassification are disclosed are required.  Companies can choose to present this information before tax or after tax, provided that they comply with the existing tax disclosure requirements in Statement of Accounting Standards Codification ("ASC") 220, Comprehensive Income.  The guidance is effective for interim and annual reporting periods beginning after December 15, 2012, or the first quarter of 2013 for calendar-year companies and should be applied prospectively.  The adoption of this guidance did not affect our business, financial position or results of operations, but may result in additional disclosures. We did not reclassify amounts out of AOCI during the three and nine months ended September 30, 2013.
In July 2012, the FASB issued guidance regarding testing indefinite-lived intangible assets for impairment that gives companies the option to perform a qualitative assessment before calculating the fair value of the indefinite-lived intangible asset. Under the guidance, if this option is selected, a company is not required to calculate the fair value of the indefinite-lived intangible unless the entity determines it is more likely than not that its fair value is less than its carrying amount. In October 2012, the FASB issued guidance regarding the application of the qualitative assessment permitted under the Accounting Standards Update 2012-02, issued in July. The guidance requires companies to focus on the significant inputs used to determine the fair value of indefinite-lived intangible assets when companies opt to perform the qualitative assessment. Companies must then evaluate the impact of certain events and circumstances that could have affected those inputs and weigh the identified factors prior to concluding whether the asset is impaired. As significant judgment is applied to conclude that an indefinite-lived intangible asset is not impaired based on a qualitative assessment, the analyses performed by the Company should be supported by clear documentation of the factors considered, including any necessary quantitative calculations. The guidance is effective for interim and annual reporting periods beginning January 1, 2013. The adoption of this guidance did not affect our business, financial position or results of operations.
In December 2011, the FASB issued guidance requiring the disclosure of information about offsetting and related arrangements to enable users of financial statements to understand the effect of these arrangements on financial position. The guidance requires the disclosure of both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued an update limiting the scope of the offsetting disclosure requirements established by the original guidance, to certain derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities lending and securities borrowing transactions that are eligible for offset on the balance sheet or are subject to an agreement similar to a master netting arrangement, irrespective of whether they are offset on the balance sheet.  This update amends the guidance that required companies to apply the requirements to all recognized financial instruments. The original and updated guidance is effective for interim and annual reporting periods beginning January 1, 2013 and retrospectively for all periods presented on the balance sheet.  The adoption of this guidance did not affect our business, financial position or results of operations, but may result in additional disclosures (see Note 11). 

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2. Acquisitions
Nettleton Acquisition
On January 31, 2012, Delek completed the acquisition of an approximately 35-mile long, eight and ten-inch pipeline system (the "Nettleton Pipeline") from Plains Marketing, L.P. (“Plains”), which was subsequently contributed to the Partnership in connection with the Offering. The Nettleton Pipeline is used to transport crude oil from our tank farms in and around Nettleton, Texas to the Bullard Junction at the Tyler Refinery. Prior to the acquisition of the Nettleton Pipeline, Delek leased the Nettleton Pipeline from Plains under the terms of the Pipeline Capacity Lease Agreement dated April 12, 1999, as amended, which was terminated in connection with the acquisition of the Nettleton Pipeline.
The aggregate purchase price of the Nettleton Pipeline was approximately $12.3 million. The allocation of the purchase price was based primarily upon a preliminary valuation. During 2012, we adjusted certain of the acquisition-date fair values previously disclosed, based primarily on the finalization of goodwill and intangible amounts, which were obtained subsequent to the acquisition.
The allocation of the aggregate purchase price of the Nettleton Pipeline as of December 31, 2012 is summarized as follows (in thousands):
Property, plant and equipment
$
8,590

Intangible assets
2,240

Goodwill (all expected to be deductible for tax purposes)
1,415

     Total
$
12,245

Big Sandy Acquisition
On February 7, 2012, Delek purchased (i) a light petroleum products terminal located in Big Sandy, Texas, the underlying real property, and other related assets from Sunoco Partners Marketing & Terminals L.P. (the "Big Sandy Terminal") and (ii) the 19-mile, eight-inch diameter Hopewell - Big Sandy Pipeline originating at the Hopewell Station in Smith County, Texas and terminating at the Big Sandy Station in Big Sandy, Texas from Sunoco Pipeline L.P (the "Big Sandy Pipeline"). The Big Sandy Terminal and Big Sandy Pipeline were subsequently contributed to the Partnership in connection with the Offering. The Big Sandy Terminal was supplied by the Tyler Refinery but has been idle since November 2008.
The aggregate purchase price of the Big Sandy Terminal and Big Sandy Pipeline was approximately $11.0 million. The allocation of the purchase price was based primarily upon a preliminary valuation. During 2012, we adjusted certain of the acquisition-date fair values previously disclosed, based primarily on the finalization of goodwill and intangible amounts.
The allocation of the aggregate purchase price of the Big Sandy Terminal and Big Sandy Pipeline as of December 31, 2012 is summarized as follows (in thousands):
Property, plant and equipment
$
8,258

Intangible assets
1,229

Goodwill (all expected to be deductible for tax purposes)
1,540

     Total
$
11,027

Pro Forma Financial Information - Nettleton and the Big Sandy Terminal
We began consolidating the results of operations of the Nettleton Pipeline and the Big Sandy Terminal on January 31, 2012 and February 7, 2012, respectively. The Nettleton Pipeline contributed $1.2 million and $4.4 million to net sales for the three and nine months ended September 30, 2013, respectively, and $0.8 million and $3.0 million to net income for the three and nine months ended September 30, 2013, respectively. The Big Sandy Terminal contributed $0.4 million and $1.1 million to net sales for the three and nine months ended September 30, 2013, respectively, and $0.3 million and $0.9 million to net income for the three and nine months ended September 30, 2013, respectively.

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Below are the unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2012, as if these acquisitions had occurred on January 1, 2011 (amounts in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2012
 
September 30, 2012
 
 
Predecessors
 
Predecessors
Net sales
 
$
271,935

 
$
773,498

Net (loss) income
 
$
(421
)
 
$
1,420

Hopewell Acquisition
On July 19, 2013, the Partnership purchased from Enterprise TE Products Pipeline Company LLC a 13.5 mile pipeline (the "Hopewell Pipeline") that originates at the Tyler Refinery and terminates at the Hopewell Station, where it effectively connects to the Big Sandy Pipeline. The Hopewell Pipeline and the Big Sandy Pipeline form essentially one pipeline link between the Tyler Refinery and the Big Sandy Terminal (the "Tyler-Big Sandy Pipeline"). The aggregate purchase price was approximately $5.7 million in cash, which has been preliminarily allocated to property, plant and equipment. The property, plant and equipment valuation is subject to change during the purchase price allocation period.
Amended and Restated Services Agreement (Big Sandy Terminal and Pipeline). In connection with the acquisition of the Hopewell Pipeline, on July 25, 2013, the Partnership and Delek entered into the Amended and Restated Services Agreement (Big Sandy Terminal and Pipeline), which amended and restated the Terminalling Services Agreement dated November 7, 2012 for the Big Sandy Terminal to include, among other things, a minimum throughput commitment and a per barrel throughput fee that Delek will pay us for throughput along the Tyler-Big Sandy Pipeline. See Note 13 for additional information on this agreement.
Pro Forma Financial Information - Hopewell Acquisition
We began consolidating the results of operations of the Hopewell Pipeline on July 19, 2013. Although the Hopewell Pipeline has not been operational, Delek paid to us pipeline fees for the Hopewell Pipeline in the third quarter 2013. The Hopewell Pipeline contributed $0.2 million to net sales for both the three and nine months ended September 30, 2013 and a nominal amount to net income for the three and nine months ended September 30, 2013. As the Hopewell Pipeline has not been operational since prior to January 1, 2012, there are no proforma revenue adjustments for the three and nine months ended September 30, 2013 or September 30, 2012.
Tyler Acquisition
On July 26, 2013, the Partnership completed the Tyler Acquisition and acquired the Tyler Terminal and Tank Assets. The purchase price paid for the assets acquired was $94.8 million in cash. The assets acquired consisted of the following:
The Tyler Terminal. The refined products terminal located at the Tyler Refinery, which consists of a truck loading rack with nine loading bays supplied by pipelines from storage tanks, also owned by the Partnership, located adjacent to the Tyler Refinery, along with certain ancillary assets. Total throughput capacity for the Tyler Terminal is approximately 72,000 barrels per day ("bpd").
The Tyler Tank Assets. Ninety-six storage tanks and certain ancillary assets (such as tank pumps and piping) located adjacent to the Tyler Refinery with an aggregate shell capacity of approximately 2.0 million barrels (the "Tyler Storage Tanks").
Delek retained any current assets, current liabilities and environmental liabilities related to the Tyler Terminal and Tank Assets as of the date of the Tyler Acquisition. The only historical balance sheet items that transferred to the Partnership in the Acquisition were property, plant and equipment assets and asset retirement obligations which were recorded by us at historical cost.
In connection with the Tyler Acquisition, the Partnership and Delek (i) entered into an asset purchase agreement, (ii) amended and restated the omnibus agreement (iii) entered into a throughput and tankage agreement with respect to the Tyler Terminal and Tank Assets, (iv) entered into a lease and access agreement and (v) entered into a site services agreement. See Note 13 for additional information regarding these agreements.

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Tyler Terminal and Tank Assets Financial Results
The acquisition of the Tyler Terminal and Tank Assets was considered a transfer of a business between entities under common control. Accordingly, the Tyler Acquisition was recorded at amounts based on the historical carrying value of the Tyler Terminal and Tank Assets as of July 26, 2013, which was $38.3 million. Our historical financial statements have been retrospectively adjusted to reflect the results of operations, financial position, cash flows and equity attributable to the Tyler Terminal and Tank Assets as if we owned the assets for all periods presented. The results of the Tyler Terminal and the Tyler Tank Assets are included in the wholesale marketing and terminalling segment and the pipelines and transportation segment, respectively.
The results of the Tyler Terminal and Tank Assets operations prior to the completion of the Tyler Acquisition on July 26, 2013 have been included in the Tyler Predecessor results in the tables below. The results of the Tyler Terminal and Tank Assets subsequent to July 26, 2013 have been included in the Partnership's results. Accordingly, for the three and nine months ended September 30, 2013, total operating revenues of $3.3 million and net income attributable to the Partnership of $2.1 million associated with the Tyler Terminal and Tank Assets are included in the condensed combined consolidated statements of operations of the Partnership. Nominal costs associated with the Tyler Acquisition are included in general and administrative expenses for the three and nine months ended September 30, 2013, respectively.
The tables on the following page present our results of operations, the effect of including the results of the Tyler Terminal and Tank Assets and the adjusted total amounts included in our condensed combined consolidated financial statements.


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Condensed Combined Consolidated Balance Sheet as of December 31, 2012
 
 
Delek Logistics
 
Tyler Terminal and Tank Assets
 
Delek Logistics Partners, LP
 
 
Partners, LP
 
(Tyler Predecessor)
 
December 31, 2012
 
 
 
 
(In thousands)
 
 
ASSETS
Current Assets:
 
 
 
 
 
 
   Cash and cash equivalents
 
$
23,452

 
$

 
$
23,452

   Accounts receivable
 
27,725

 

 
27,725

   Inventory
 
14,351

 

 
14,351

   Deferred tax assets
 
14

 

 
14

   Other current assets
 
169

 

 
169

     Total current assets
 
65,711

 

 
65,711

Property, plant and equipment:
 
 
 
 
 
 
   Property, plant and equipment
 
172,300

 
43,748

 
216,048

   Less: accumulated depreciation
 
(18,790
)
 
(6,201
)
 
(24,991
)
Property, plant and equipment, net
 
153,510

 
37,547

 
191,057

Goodwill
 
10,454

 

 
10,454

Intangible assets, net
 
12,430

 

 
12,430

Other non-current assets
 
3,664

 

 
3,664

     Total assets
 
$
245,769

 
$
37,547

 
$
283,316

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
   Accounts payable
 
$
21,849

 
$

 
$
21,849

   Accounts payable to related parties
 
10,148

 

 
10,148

   Fuel and other taxes payable
 
4,650

 

 
4,650

   Accrued expenses and other current liabilities
 
3,615

 
35

 
3,650

     Total current liabilities
 
40,262

 
35

 
40,297

Non-current liabilities:
 
 
 
 
 
 
   Revolving credit facility
 
90,000

 

 
90,000

   Asset retirement obligations
 
1,440

 
1,737

 
3,177

   Deferred tax liability
 
17

 

 
17

   Other non-current liabilities
 
9,625

 
185

 
9,810

     Total non-current liabilities
 
101,082

 
1,922

 
103,004

Equity:
 
 
 
 
 
 
Predecessors division equity
 

 
35,590

 
35,590

Common unitholders - public (9,200,000 units issued and outstanding)
 
178,728

 

 
178,728

Common unitholders - Delek (2,799,258 units issued and outstanding)
 
(127,129
)
 

 
(127,129
)
Subordinated unitholders - Delek (11,999,258 units issued and outstanding)
 
52,875

 

 
52,875

General Partner unitholders - Delek (489,766 units issued and outstanding)
 
(49
)
 

 
(49
)
Total equity
 
104,425

 
35,590

 
140,015

Total liabilities and equity
 
$
245,769

 
$
37,547

 
$
283,316



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Table of Contents

Condensed Statements of Combined Consolidated Operations
 
 
Delek Logistics
 
Tyler Terminal and Tank Assets
 
Three Months Ended
 
 
Partners, LP
 
(Tyler Predecessor)
 
September 30, 2013
 
 
 
 
(In thousands)
 
 
Net Sales
 
$
243,295

 
$

 
$
243,295

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

 

 
218,222

   Operating expenses
 
6,645

 
829

 
7,474

   General and administrative expenses
 
1,782

 
86

 
1,868

   Depreciation and amortization
 
2,600

 
244

 
2,844

     Total operating costs and expenses
 
229,249

 
1,159

 
230,408

   Operating income (loss)
 
14,046

 
(1,159
)
 
12,887

Interest expense, net
 
1,194

 

 
1,194

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

 
(1,159
)
 
11,693

Income tax expense
 
307

 

 
307

Net income (loss)
 
12,545

 
(1,159
)
 
11,386

  Less: (Loss) attributable to Predecessors
 

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

 
$

 
$
12,545


 
 
Delek Logistics
 
Tyler Terminal and
 
Three Months Ended
 
 
Partners, LP
 
Tank Assets
 
September 30, 2012
 
 
(DKL Predecessor)
 
(Tyler Predecessor)
 
(Predecessors)
 
 
 
 
(In thousands)
 
 
Net Sales
 
$
271,806

 
$

 
$
271,806

Operating costs and expenses:
 
 
 
 
 
 
   Cost of goods sold
 
255,281

 

 
255,281

   Operating expenses
 
6,579

 
2,961

 
9,540

   General and administrative expenses
 
1,614

 
190

 
1,804

   Depreciation and amortization
 
2,255

 
361

 
2,616

   Loss on sale of assets
 
5

 

 
5

     Total operating costs and expenses
 
265,734

 
3,512

 
269,246

   Operating income (loss)
 
6,072

 
(3,512
)
 
2,560

Interest expense, net
 
667

 

 
667

Income (loss) before income tax expense
 
5,405

 
(3,512
)
 
1,893

Income tax expense
 
2,437

 

 
2,437

Net income (loss)
 
2,968

 
(3,512
)
 
(544
)
  Less: Income (loss) attributable to Predecessors
 
2,968

 
(3,512
)
 
(544
)
Net income attributable to partners
 
$

 
$

 
$






12

Table of Contents

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

 
$

 
$
684,331

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

 

 
614,048

   Operating expenses
 
18,574

 
4,501

 
23,075

   General and administrative expenses
 
4,570

 
602

 
5,172

   Depreciation and amortization
 
7,324

 
1,750

 
9,074

     Total operating costs and expenses
 
644,516

 
6,853


651,369

   Operating income (loss)
 
39,815

 
(6,853
)
 
32,962

Interest expense, net
 
2,763

 

 
2,763

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

 
(6,853
)
 
30,199

Income tax expense
 
547

 

 
547

Net income (loss)
 
36,505

 
(6,853
)
 
29,652

  Less: (Loss) attributable to Predecessors
 

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

 
$

 
$
36,505


 
 
Delek Logistics
 
Tyler Terminal and
 
Nine Months Ended
 
 
Partners, LP
 
Tank Assets
 
September 30, 2012
 
 
(DKL Predecessor)
 
(Tyler Predecessor)
 
(Predecessors)
 
 
 
 
(In thousands)
 
 
Net Sales
 
$
773,369

 
$

 
$
773,369

Operating costs and expenses:
 
 
 
 
 
 
   Cost of goods sold
 
729,750

 

 
729,750

   Operating expenses
 
15,673

 
4,964

 
20,637

   General and administrative expenses
 
6,367

 
570

 
6,937

   Depreciation and amortization
 
6,649

 
1,071

 
7,720

   Loss on sale of assets
 
5

 

 
5

     Total operating costs and expenses
 
758,444

 
6,605

 
765,049

   Operating income (loss)
 
14,925

 
(6,605
)
 
8,320

Interest expense, net
 
1,777

 

 
1,777

Net income (loss) before income tax expense
 
13,148

 
(6,605
)
 
6,543

Income tax expense
 
5,183

 

 
5,183

Net income (loss)
 
7,965

 
(6,605
)
 
1,360

  Less: Income (loss) attributable to Predecessors
 
7,965

 
(6,605
)
 
1,360

Net income attributable to partners
 
$

 
$

 
$


3. Inventory
Inventories consisted of $21.2 million and $14.4 million of refined petroleum products as of September 30, 2013 and December 31, 2012, respectively. Cost of inventory is stated at the lower of cost or market, determined on a first-in, first-out basis.


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4. Amended and Restated Credit Agreement

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

Borrowings denominated in U.S. dollars under the Amended and Restated Credit Agreement bear interest at either a U.S. dollar prime rate, plus an applicable margin, or a LIBOR rate, plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars under the Amended and Restated Credit Agreement bear interest at either a Canadian dollar prime rate, plus an applicable margin, or a CDOR (Canadian Dealer Offered Rate), plus an applicable margin, at the election of the borrowers. The applicable margin in each case varies based upon the Partnership's most recently reported leverage ratio. At September 30, 2013, the weighted average interest rate was approximately 2.0%. Additionally, the Amended and Restated Credit Facility requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of September 30, 2013, this fee was 0.25% per year.

The obligations under the Amended and Restated Credit Agreement remain secured by first priority liens on substantially all of the Partnership's and its U.S. subsidiaries' tangible and intangible assets. Additionally, Delek Marketing continues to provide a limited guaranty of the Partnership's obligations under the Amended and Restated Credit Agreement. Delek Marketing's guaranty is (i) limited to an amount equal to the principal amount, plus unpaid and accrued interest, of a promissory note made by Delek US in favor of Delek Marketing (the "Holdings Note") and (ii) secured by Delek Marketing's pledge of the Holdings Note to our lenders under the Amended and Restated Credit Agreement. As of September 30, 2013, the principal amount of the Holdings Note was $102.0 million, plus unpaid interest accrued since the issuance date.
As of September 30, 2013, we had $161.0 million of outstanding borrowings under the Amended and Restated Credit Agreement. Additionally, we had in place letters of credit totaling approximately $13.5 million with Fifth Third Bank, primarily securing obligations with respect to gasoline and diesel purchases. No amounts were outstanding under these letters of credit at September 30, 2013. Amounts available under the Amended and Restated Credit Agreement as of September 30, 2013 were approximately $225.5 million.

5. Income Taxes
Our effective income tax rate decreased to 2.6% for the three months ended September 30, 2013 compared to the DKL Predecessor's effective income tax rate of 128.7% for the three months ended September 30, 2012. The decrease in our effective tax rate is due to the fact that we are not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. The effective tax rate for the three months ended September 30, 2012 is significantly higher than that of the three months ended September 30, 2013 due to the impact of the additional expense in connection with the Tyler Terminal and Tank Assets and the application of a federal income tax in 2012. 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.
Prior to the Offering, the DKL Predecessor was an entity included in its parent's consolidated tax return. As such, the DKL Predecessor was subject to both federal and state income taxes and recorded deferred income taxes for the differences between the book and tax bases of its assets and liabilities, which are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.

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Table of Contents


6. Net Income Per Unit
We use the two-class method when calculating the net income per unit applicable to limited partners because we have more than one participating security. The two-class method is based on the weighted-average number of common units outstanding during the period. Basic net income per unit applicable to limited partners (including subordinated unitholders) is computed by dividing limited partners’ interest in net income, after deducting our general partner’s 2% interest and incentive distributions, if any, by the weighted-average number of outstanding common and subordinated units. Our net income is allocated to our general partner and limited partners in accordance with their respective partnership percentages after giving effect to priority income allocations for incentive distributions, if any, to our general partner, which is the holder of the incentive distribution rights pursuant to our partnership agreement, which are declared and paid following the close of each quarter.
Net income per unit is only calculated for periods after the Offering as no units were outstanding prior to November 7, 2012. 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. The basic weighted-average number of units outstanding for the nine months ended September 30, 2013 increased to 24,503,469 units from 24,492,095 units in the second quarter 2013.
Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. At present, the only potentially dilutive units outstanding consist of unvested phantom units. Basic and diluted net income per unit applicable to subordinated limited partners are the same because there are no potentially dilutive subordinated units outstanding.



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Table of Contents

Our distributions are declared subsequent to quarter end. Therefore, the table represents total cash distributions applicable to the period in which the distributions are earned. The calculation of net income per unit is as follows (dollars in thousands, except per unit amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Net Income
 
$
12,545

 
$

 
$
36,505

 
$

Less: General partner's distribution
 
198

 

 
580

 

Less: Limited partners' distribution
 
4,875

 

 
14,249

 

Less: Subordinated partner's distribution
 
4,860

 

 
14,219

 

Earnings in excess of distributions
 
$
2,612

 
$

 
$
7,457

 
$

 
 
 
 
 
 
 
 
 
General partner's earnings:
 
 
 
 
 
 
 
 
Distributions
 
$
198

 

 
$
580

 

Allocation of earnings in excess of distributions
 
52

 

 
149

 

Total general partner's earnings
 
$
250

 
$

 
$
729

 
$

 
 
 
 
 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
 
 
 
 
Distributions
 
$
4,875

 

 
$
14,249

 

Allocation of earnings in excess of distributions
 
1,282

 

 
3,658

 

Total limited partners' earnings on common units
 
$
6,157

 
$

 
$
17,907

 
$

 
 
 
 
 
 
 
 
 
Limited partners' earnings on subordinated units:
 
 
 
 
 
 
 
 
Distributions
 
$
4,860

 

 
$
14,219

 

Allocation of earnings in excess of distributions
 
1,278

 

 
3,650

 

Total limited partner's earnings on subordinated units
 
$
6,138

 
$

 
$
17,869

 
$

 
 
 
 
 
 
 
 
 
Weighted average limited partner units outstanding:
 
 
 
 
 
 
 
 
Common units - (basic)
 
12,036,821

 
 
 
12,014,445

 
 
Common units - (diluted)
 
12,188,342

 
 
 
12,152,657

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

 
 
 
11,999,258

 
 
 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
Common - (basic)
 
$
0.51

 
 
 
$
1.49

 
 
Common - (diluted)
 
$
0.51

 
 
 
$
1.48

 
 
Subordinated - (basic and diluted)
 
$
0.51

 
 
 
$
1.49

 
 


7. Equity
We had 9,237,563 common limited partner units held by the public outstanding as of September 30, 2013. Additionally, as of September 30, 2013, Delek owned a 60.3% limited partner interest in us, consisting of 2,799,258 common limited partner units and 11,999,258 subordinated limited partner units as well as a 98.6% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 490,532 general partner units. In accordance with our partnership agreement, Delek's subordinated units may convert to common units once specified distribution targets and other requirements have been met.

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Table of Contents

Equity Activity
The summarized changes in the carrying amount of our equity are as follows:
 
 
Equity of Predecessors
 
Common - public
 
Common - Delek
 
Subordinated
 
General Partner
 
Total
Balance at December 31, 2012
 
$
35,590

 
$
178,728

 
$
(127,129
)
 
$
52,875

 
$
(49
)
 
$
140,015

Income attributable to Predecessors
 
(6,853
)
 

 

 

 

 
(6,853
)
Sponsor contributions of equity to the Predecessors
 
9,317

 

 

 

 

 
9,317

Liabilities not assumed by the Partnership
 
213

 

 

 

 

 
213

Allocation of net assets acquired by the unitholders (1)
 
(38,267
)
 

 
37,502

 

 
765

 

Cash Distributions (1)
 

 
(9,252
)
 
(95,714
)
 
(12,047
)
 
(2,388
)
 
(119,401
)
Sponsor contribution of fixed assets
 

 

 
101

 

 
4

 
105

Partnership Earnings
 

 
13,738

 
4,169

 
17,869

 
729

 
36,505

Unit-based compensation
 

 
1,442

 

 

 
(1,263
)
 
179

Balance at September 30, 2013
 
$

 
$
184,656

 
$
(181,071
)
 
$
58,697

 
$
(2,202
)
 
$
60,080

            

(1) Cash distributions include $94.8 million in cash payments for the Tyler Acquisition. As an entity under common control with Delek, we record the assets that we acquire from Delek on our balance sheet at Delek's historical book value instead of fair value. Additionally, any excess of cash paid over the historical book value of the assets acquired from Delek is recorded within equity. As a result of the Tyler Acquisition, our equity balance decreased $56.5 million from December 31, 2012 to September 30, 2013.
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, if any, to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our general partner.
Cash Distributions
Our partnership agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the common and subordinated unitholders and general partner will receive. Our distributions 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 Unit
 
Total Quarterly Distribution Per Unit, Annualized
 
Total Cash Distribution (in thousands)
 
Date of Distribution
 
Unitholders Record Date
December 31, 2012 (1)
 
$
0.224

 
$
0.90

 
$
5,486

 
February 14, 2013
 
February 6, 2013
March 31, 2013
 
$
0.385

 
$
1.54

 
$
9,428

 
May 15, 2013
 
May 7, 2013
June 30, 2013
 
$
0.395

 
$
1.58

 
$
9,687

 
August 13, 2013
 
August 6, 2013
September 30, 2013 (2)
 
$
0.405

 
$
1.62

 
$
9,933

 
November 14, 2013
 
November 7, 2013
            
(1) Represents the period from November 7, 2012, the date of the Offering, to December 31, 2012
(2) Declared on October 25, 2013.


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Table of Contents

The allocation of total quarterly cash distributions expected to be made to general and limited partners is as follows for the three and nine months ended September 30, 2013. Our distributions are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned (in thousands, except per unit amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
General partner's interest
 
$
198

 
$

 
$
580

 
$

 
 
 
 
 
 
 
 
 
Limited partners' distribution:
 
 
 
 
 
 
 
 
Common
 
4,875

 
$

 
14,249

 
$

Subordinated
 
4,860

 

 
14,219

 

  Total cash distributions
 
$
9,933

 
$

 
$
29,048

 
$

 
 
 
 
 
 
 
 
 
Cash distributions per unit
 
$
0.405

 
 
 
$
1.185

 
 
8. Equity Based Compensation
We incurred $0.1 million and $0.2 million of unit-based compensation expense related to the Partnership during the three and nine months ended September 30, 2013, respectively. The fair value of our phantom units is determined based on the closing price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized over the vesting period using the straight line method. Awards vest over a five-year service period. As of September 30, 2013, there was $1.1 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 4.2 years.
Sponsor's Stock-Based Compensation
Certain employees supporting the DKL Predecessor's operations received long-term incentive compensation that is part of the Delek US Holdings, Inc. 2006 Long-Term Incentive Plan, as amended (the “2006 Plan”). The 2006 Plan allows Delek to grant stock options, stock appreciation rights ("SARs"), restricted stock units and other stock-based awards denominated in shares of Delek's common stock to certain directors, officers, employees, consultants and other individuals who perform services for Delek or its affiliates, including these employees. Delek uses the Black-Scholes-Merton option-pricing model to determine the fair value of stock option and SAR awards, of the SARs granted to certain executive employees, which are valued under the Monte-Carlo simulation model. Restricted stock units are measured based on the fair market value of the underlying stock on the date of grant. Compensation expense related to stock-based awards is generally recognized with graded or cliff vesting on a straight-line basis over the vesting period.
Certain Delek employees supporting the DKL Predecessor's operations were historically granted these types of awards. These costs were recorded as compensation expense and additional paid-in capital and totaled a nominal amount related to the DKL Predecessor's employees for the three and nine months ended September 30, 2012. The DKL Predecessor recognized additional compensation expense related to equity-based compensation awards to related party employees of $0.2 million and $0.5 million for the three and nine months ended September 30, 2012 for allocated related party services and an allocation of director and executive officer equity-based compensation.
As of September 30, 2012, there was $0.5 million of total unrecognized compensation cost related to non-vested equity-based compensation arrangements for the DKL Predecessor's employees, which was expected to be recognized over a weighted-average period of 3.0 years. Subsequent to the Offering, these costs are allocated to the Partnership as part of the administrative fees under the omnibus agreement.
9. Segment Data
We report our assets and operating results in two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling:
The pipelines and transportation segment provides crude oil gathering, transportation and storage services to Delek's refining operations and independent third parties.

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Table of Contents

The wholesale marketing and terminalling segment provides marketing and terminalling services to Delek's refining operations and independent third parties.
Our operating segments adhere to the same accounting polices 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 the segment contribution margin. Segment contribution margin is defined as net sales less cost of sales and operating expenses, excluding depreciation and amortization.
On July 26, 2013, we acquired the Tyler Terminal and Tank Assets from Delek. Our and our Predecessors' historical financial statements have been retrospectively adjusted to reflect the results of operations attributable to the Tyler Terminal and Tank Assets as if we owned the assets for all periods presented. The results of the Tyler Terminal and the Tyler Tank Assets are included in the wholesale marketing and terminalling segment and the pipelines and transportation segment, respectively.
The following is a summary of business segment operating performance as measured by contribution margin for the period indicated (in thousands):
 
 
Three Months Ended September 30, 2013
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Net sales
 
$
15,743

 
$
227,552

 
$
243,295

Operating costs and expenses:
 
 
 
 
 
 
Cost of goods sold
 

 
218,222

 
218,222

Operating expenses
 
5,660

 
1,814

 
7,474

Segment contribution margin
 
$
10,083

 
$
7,516

 
17,599

General and administrative expenses
 
 
 
 
 
1,868

Depreciation and amortization
 
 
 
 
 
2,844

Operating income
 
 
 
 
 
$
12,887

Total assets
 
$
164,963

 
$
122,415

 
$
287,378

 Capital spending (excluding business combinations) (1)
 
1,065

 
517

 
$
1,582

            

(1) Capital spending includes expenditures incurred in connection with the assets acquired in the Tyler Acquisition.
 
 
Three Months Ended September 30, 2012
 
 
Predecessors
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Combined
Net sales
 
$
7,960

 
$
263,846

 
$
271,806

Operating costs and expenses:
 
 
 
 
 
 
Cost of goods sold
 

 
255,281

 
255,281

Operating expenses
 
7,241

 
2,299

 
9,540

Segment contribution margin
 
$
719

 
$
6,266

 
6,985

General and administrative expenses
 
 
 
 
 
1,804

Depreciation and amortization
 
 
 
 
 
2,616

Loss on sale of assets
 
 
 
 
 
5

Operating income
 
 
 
 
 
$
2,560

Total assets
 
$
145,380

 
$
139,446

 
$
284,826

 Capital spending (excluding business combinations) (1)
 
$
5,064

 
$
324

 
$
5,388


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Table of Contents

            

(1) Capital spending includes expenditures incurred in connection with the assets acquired in the Tyler Acquisition.

 
 
Nine Months Ended September 30, 2013
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Net sales
 
$
43,008

 
$
641,323

 
$
684,331

Operating costs and expenses:
 
 
 
 
 
 
Cost of goods sold
 

 
614,048

 
614,048

Operating expenses
 
18,193

 
4,882

 
23,075

Segment contribution margin
 
$
24,815

 
$
22,393

 
47,208

General and administrative expenses
 
 
 
 
 
5,172

Depreciation and amortization
 
 
 
 
 
9,074

Operating income
 
 
 
 
 
$
32,962

 Capital spending (excluding business combinations) (1)
 
6,513

 
1,368

 
$
7,881

            

(1) Capital spending includes expenditures incurred in connection with the assets acquired in the Tyler Acquisition.

 
 
Nine Months Ended September 30, 2012
 
 
Predecessors
 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Combined
Net sales
 
$
21,440

 
$
751,929

 
$
773,369

Operating costs and expenses:
 
 
 
 
 
 
Cost of goods sold
 

 
729,750

 
729,750

Operating expenses
 
16,149

 
4,488

 
20,637

Segment contribution margin
 
$
5,291

 
$
17,691

 
22,982

General and administrative expenses
 
 
 
 
 
6,937

Depreciation and amortization
 
 
 
 
 
7,720

Loss on sale of assets
 
 
 
 
 
5

Operating income
 
 
 
 
 
$
8,320

 Capital spending (excluding business combinations) (1)
 
$
15,400

 
$
1,300

 
$
16,700

            

(1) Capital spending includes expenditures incurred in connection with the assets acquired in the Tyler Acquisition.


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Property, plant and equipment, accumulated depreciation and depreciation expense by reporting segment as of and for the three and nine months ended September 30, 2013 were as follows (in thousands):

 
 
Pipelines and Transportation
 
Wholesale Marketing and Terminalling
 
Consolidated
Property, plant and equipment
 
$
173,962

 
$
55,791

 
$
229,753

Less: accumulated depreciation
 
(20,278
)
 
(12,986
)
 
(33,264
)
Property, plant and equipment, net
 
$
153,684

 
$
42,805

 
$
196,489

Depreciation expense for the three months ended September 30, 2013
 
$
2,144

 
$
469

 
$
2,613

Depreciation expense for the nine months ended September 30, 2013
 
$
6,856

 
$
1,421

 
$
8,277

In accordance with ASC 360, Property, Plant & Equipment, we evaluate the realizability of property, plant and equipment as events occur that might indicate potential impairment.
10. Fair Value Measurements
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of our assets and liabilities that fall under the scope of ASC 825, Financial Instruments.
We apply the provisions of ASC 820, Fair Value Measurements ("ASC 820"), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to our interest rate and commodity derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material at this time.
ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
Over the counter commodity swaps and sale contracts are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, 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 over the counter commodity swaps are valued using quotations provided by brokers based on exchange pricing and/or price index developers such as Platts or Argus. These are classified as Level 2.
The fair value hierarchy for our financial assets accounted for at fair value on a recurring basis at September 30, 2013 was as follows (in thousands):
 
 
As of September 30, 2013
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$
159

 
$

 
$
159

Commodity derivatives
 

 
120

 

 
120

Total assets
 
$

 
$
279

 
$

 
$
279

As of December 31, 2012, there was a nominal amount of financial liabilities accounted for at fair value on a recurring basis.
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy under the guidance of ASC 815-10-45, Derivatives and Hedging - Other Presentation Matters ("ASC 815-10-45"), wherein we have elected to offset the fair value amounts recognized

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for multiple derivative instruments executed with the same counterparty where the legal right of offset exists. As of December 31, 2012, a nominal amount of net derivative positions are included in other current assets and other current liabilities, respectively on the accompanying condensed consolidated balance sheets.
Our policy under the guidance of ASC 815-10-45, is to net the fair value amounts recognized for multiple derivative instruments executed with the same counterparty and offset these values against the cash collateral arising from these derivative positions. As of September 30, 2013 and December 31, 2012, $0.2 million and a nominal amount, respectively, of cash collateral was held by counterparty brokerage firms.
11. Derivative Instruments
From time to time, we enter into forward fuel contracts to limit the exposure to price fluctuations for physical purchases of finished products in the normal course of business. We use derivatives to reduce normal operating and market risks with a primary objective in derivative instrument use being the reduction of the impact of market price volatility on our results of operations.
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. During the three and nine months ended September 30, 2013 and September 30, 2012, we did not elect hedge treatment for these derivative positions. As a result, all changes in fair value are marked to market in the accompanying condensed consolidated statements of income.
From time to time, we may also enter into interest rate hedging agreements to limit variable interest rate exposure under the Amended and Restated Credit Agreement. The prior credit facility required us to maintain interest rate hedging arrangements on at least 50% of the amount funded on November 7, 2012 under the credit facility, which was required to be in place for at least a three-year period beginning no later than March 7, 2013. Effective February 25, 2013, we entered into interest rate hedges in the form of a LIBOR interest rate cap for a term of three years for a total notional amount of $45.0 million, thereby meeting the requirements.
The table below presents the fair value of our derivative instruments, as of September 30, 2013. As of December 31, 2012, there was a nominal amount of financial liabilities accounted for at fair value on a recurring basis (in thousands).
 
 
 
September 30, 2013
Derivative Type
Balance Sheet Location
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
Interest rate derivatives
Other long term assets
 
$
159

 
$

Commodity derivatives
Other current assets
 
$
120

 
$

Total net fair value of derivatives
 
 
$
279

 
$

Gains (losses) recognized associated with derivatives not designated as hedging instruments for the three and nine months ended September 30, 2013 were as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivative Type
Income Statement Location
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
Predecessors
 
 
 
Predecessors
Interest rate derivatives
Interest expense
 
$
(88
)
 
$

 
$
(63
)
 
$

Commodity derivatives
Cost of goods sold
 
(311
)
 
71

 
(481
)
 
304

 
 Total
 
$
(399
)
 
$
71

 
$
(544
)
 
$
304

As of December 31, 2012, unrealized gains or losses held on the condensed consolidated balance sheets were nominal.

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12. 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.
Rate Regulation of Petroleum Pipelines
The rates and terms and conditions of service on certain of our pipelines are subject to regulation by the Federal Energy Regulatory Commission (“FERC”) under the Interstate Commerce Act (“ICA”) and by the state regulatory commissions in the states in which we transport crude oil and refined products, including the Railroad Commission of Texas, the Louisiana Public Service Commission, and the Arkansas Public Service Commission. Certain of our pipeline systems are subject to such regulation and have filed tariffs with the appropriate entities. We also comply with the reporting requirements for these pipelines. Other of our pipelines have received a waiver from application of FERC's tariff requirements but will comply with other regulatory requirements.
FERC regulates interstate transportation under the ICA, the Energy Policy Act of 1992 and the rules and regulations promulgated under those laws. The ICA and its implementing regulations require that tariff rates for interstate service on oil pipelines, including pipelines that transport crude oil and refined products in interstate commerce (collectively referred to as “petroleum pipelines”), be just and reasonable and non-discriminatory and that such rates and terms and conditions of service be filed with FERC. Under the ICA, shippers may challenge new or existing rates or services. FERC is authorized to suspend the effectiveness of a challenged rate for up to seven months, though rates are typically not suspended for the maximum allowable period. Tariff rates are typically contractually subject to increase or decrease on July 1 of each year, beginning on July 1, 2013, by the amount of any change in FERC oil pipeline index or, in the case of the east Texas marketing agreement and the Tyler Throughput and Tankage Agreement to other inflation based indexes; provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
While FERC regulates rates for shipments of crude oil or refined products in interstate commerce, state agencies may regulate rates and service for shipments in intrastate commerce. We own pipeline assets in Texas, Arkansas, and Louisiana.
Environmental Health and Safety
We are subject to various federal, state and local environmental and safety laws enforced by agencies including the U.S. Environmental Protection Agency (the "EPA"), the U.S. Department of Transportation ("DOT") / Pipeline and Hazardous Materials Safety Administration, the U.S. Department of Labor / Occupational Safety and Health Administration, the Texas Commission on Environmental Quality, the Texas Railroad Commission, the Arkansas Department of Environmental Quality (the "ADEQ") and the Tennessee Department of Environment and Conservation as well as other state and federal agencies. Numerous permits or other authorizations are required under these laws for the operation of our terminals, pipelines, and related operations, and 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 manufactured, handled, used, released or disposed, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements as well as evolving interpretations and more strict enforcement of existing laws and regulations.
Magnolia Station Crude Oil Release
On March 9, 2013, a release of crude oil was detected within a pumping facility at our Magnolia Station located west of Delek's El Dorado, Arkansas refinery (the "El Dorado Refinery"). The pumping facility is owned by our subsidiary SALA Gathering Systems, LLC. Since detecting the release we have worked to contain the release, recover the released crude oil and remediate

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those areas impacted by the release, coordinating our efforts with the EPA and state authorities to restore the impacted area to the satisfaction of the appropriate regulatory authorities. As of the date of this filing, we believe we have substantially completed all necessary remediation, restoration and monitoring of the areas affected by the crude oil release, although there are on-going discussions with ADEQ regarding whether additional monitoring or remediation of soil may be necessary. The release did not impact the delivery of crude oil from the Magnolia Station to the El Dorado Refinery and did not interrupt the operations of the El Dorado Pipeline connected to the Magnolia Station.
We believe the total costs and liabilities associated with this event are immaterial to our operations and financial results as Delek is required, pursuant to the terms of the omnibus agreement (as described in Note 13—Related Party Transactions) to pay to us any costs in excess of $0.25 million with respect to this event that we incurred as a result of the failure at the pumping facility and resulting release.
Contracts and Agreements
Substantially all of the petroleum products we sell in west Texas are purchased from two suppliers, Noble Petro, Inc. ("Noble Petro") and Magellan Asset Services, L.P. ("Magellan"). Under the terms of a supply contract (the "Abilene Contract") with Noble Petro, we are able to purchase up to 20,350 bpd of petroleum products at the Abilene, Texas terminal, which we own, for sales at the Abilene and San Angelo terminals and to exchange barrels with third parties. We lease the Abilene and San Angelo, Texas terminals to Noble Petro, under a separate Terminal and Pipeline Lease and Operating Agreement, with a term that runs concurrent with that of the Abilene Contract. The Abilene Contract expires on December 31, 2017. There are no options to renew the contract.
Under the terms of our contract with Magellan (the "East Houston Contract"), we can purchase up to 7,000 bpd of refined products for delivery into the Magellan pipeline system in East Houston, Texas. This contract currently expires on December 31, 2015, but can also terminate earlier if Magellan's underlying supply contract with a third party is ever terminated or expires. While the primary purpose of the East Houston Contract is to supply products at Magellan's Aledo, Texas terminal, the agreement allows us to redirect products to other terminals along the Magellan pipeline.
Letters of Credit
As of September 30, 2013, we had in place letters of credit totaling approximately $13.5 million under the Amended and Restated Credit Agreement primarily securing obligations with respect to gasoline and diesel purchases. No amounts were outstanding under these letters of credit at September 30, 2013.
Operating Leases
We lease certain equipment and have surface leases under various operating lease arrangements, most of which provide the option, after the initial lease term, to renew the leases. None of these lease arrangements include fixed rental rate increases. Lease expense for all operating leases totaled $0.1 million and $0.3 million, respectively for the three and nine months ended September 30, 2013 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2012, respectively.
We have a five-year ground lease agreement with Lion Oil effective November 7, 2012 for the land on which an above ground storage tank and related facilities are located. The land measures approximately seven acres of Lion Oil's refinery site. The tank and related facilities are used for the storage and throughput of such crude oil or other hydrocarbon substances or any resulting refined products. The fees paid to Lion Oil were nominal for the three and nine months ended September 30, 2013.
In connection with the Tyler Acquisition, we and Delek entered into a lease and access agreement with respect to the real property at the Tyler Terminal and Tank Assets. Under this agreement, we will lease from Delek the real property on which the Tyler Terminal and Tank Assets are located for $100.00 annually, paid in advance, with an initial term of 50 years with automatic renewal for a maximum of four successive 10-year periods thereafter.
13. Related Party Transactions
Commercial Agreements in Connection with the Offering
The Partnership entered into various long-term, fee-based commercial agreements with Delek at the completion of the Offering. Except where noted, each of these agreements, described below, became effective on November 7, 2012, concurrent with the completion of the Offering. Each of these agreements include minimum quarterly volume or throughput commitments and have tariffs or fees indexed to inflation, provided that the tariffs or fees will not be decreased below the initial amount. Fees under each agreement are payable to us monthly by Delek or certain third parties to whom Delek has assigned certain of its rights. In most circumstances, if Delek or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek, and not any third party assignee, will be required to make a quarterly shortfall payment to us equal to the volume of the shortfall multiplied by the applicable fee. Carry-over of any volumes in excess of such

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commitment to any subsequent quarter is not permitted. Exceptions to this requirement that Delek make minimum payments under a given agreement can exist if (i) there is an event of force majeure affecting our asset, or (ii) after the first three years of the applicable commercial agreement's term (a) there is an event of force majeure affecting the applicable Delek asset, or (b) if Delek shuts down the applicable refinery upon giving 12 months' notice, which such notice may only be given after the first two years of the applicable commercial agreement's term. In addition, Delek may terminate any of these agreements under certain circumstances.
Under each of these agreements, we are required to maintain the capabilities of our pipelines and terminals such that Delek may throughput and/or store, as the case may be, specified volumes of crude oil and refined products. To the extent that Delek is prevented by our failure to maintain such capacities from throughputting or storing such specified volumes for more than 30 days per year, Delek's minimum throughput commitment will be reduced proportionately and prorated for the portion of the quarter during which the specified throughput capacity was unavailable, and/or the storage fee will be reduced, prorated for the portion of the month during which the specified storage capacity was unavailable. Such reduction would occur even if actual throughput or storage amounts were below the minimum volume commitment levels.
Each of the Partnership's commercial agreements with Delek entered into at the completion of the Offering, other than the marketing agreement described under "Wholesale Marketing and Terminalling—East Texas," has an initial term of five years, which may be extended at the option of Delek for up to two additional five-year terms. The marketing agreement has an initial term of ten years and may be renewed annually, thereafter.
The tariffs, throughput fees and the storage fees under our agreements with Delek are subject to increase or decrease on July 1 of each year, beginning on July 1, 2013, by the amount of any change in FERC oil pipeline index or, in the case of the east Texas marketing agreement and the Tyler Throughput and Tankage agreement, to FERC or other inflation based indexes, the consumer price index; provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
Lion Pipeline and SALA Gathering Systems. We entered into a pipelines and storage facilities agreement with Delek under which we provide transportation and storage services to the El Dorado Refinery for crude oil and finished products. Under this pipelines and storage facilities agreement, Delek is obligated to meet certain minimum aggregate throughput volumes on the pipelines of our Lion Pipeline System and our SALA Gathering System as follows:
Lion Pipeline System. The minimum throughput commitment on the Lion Pipeline System crude oil pipelines is an aggregate of 46,000 bpd (on a quarterly average basis) of crude oil shipped on the El Dorado, Magnolia and rail connection pipelines, other than crude oil volumes gathered on our SALA Gathering System, at a tariff rate of $0.89 per barrel, which tariff runs through June 30, 2014. For the Lion Pipeline System refined products pipelines, the minimum throughput commitment is an aggregate of 40,000 bpd (on a quarterly average basis) of diesel or gasoline shipped on these pipelines at a tariff rate of $0.104 per barrel, which tariff runs through June 30, 2014. Tariff rates are subject to increase or decrease on July 1 of each year by the amount of any change in the FERC oil pipeline index.
SALA Gathering System. The minimum throughput commitment is an aggregate of 14,000 bpd (on a quarterly average basis) of crude oil transported on the SALA Gathering System at a tariff rate of $2.35 per barrel, which tariff runs through June 30, 2014. Volumes initially gathered on the SALA Gathering System before injection into the Lion Pipeline System are not subject to an additional fee for transportation on our Lion Pipeline System to the El Dorado Refinery. Tariff rates are subject to increase or decrease on July 1 of each year by the amount of any change in the FERC oil pipeline index.
For a discussion of a third party's involvement in this agreement, see "El Dorado Refinery Crude Oil and Refined Products Supply and Offtake Arrangement."
East Texas Crude Logistics System. We entered into a five-year pipelines and tankage agreement with Delek pursuant to which we provide crude oil transportation and storage services for the Tyler Refinery. This agreement replaced the pipelines and tankage agreement between Delek and the DKL Predecessor. Going forward, crude oil volumes transported on our East Texas Crude Logistics System will decrease from approximately 55,000 bpd to approximately 12,000 bpd or less. Under the current pipelines and tankage agreement, Delek is obligated to meet minimum aggregate throughput volumes of crude oil of at least 35,000 bpd, calculated on a quarterly average basis, on our East Texas Crude Logistics System for a transportation fee of $0.42 per barrel. For any volumes in excess of 50,000 bpd, calculated on a quarterly average basis, Delek is required to pay an additional fee of $0.22 per barrel. In addition, Delek pays a storage fee of $261,480 per month for the use of our crude oil storage tanks along our East Texas Crude Logistics system. The fees paid to us are subject to increase or decrease on July 1 of each year.

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East Texas. We entered into a marketing agreement with Delek pursuant to which we market 100% of the output of the Tyler Refinery, other than jet fuel and petroleum coke. This agreement has a ten year initial term and automatically renews annually thereafter unless notice is given by either party ten months prior to the end of the then current term and replaced the marketing agreement between Delek and the DKL Predecessor. Under the marketing agreement, Delek is obligated to make available to us for marketing and sale at the Tyler Refinery and/or our Big Sandy Terminal an aggregate amount of refined products of at least 50,000 bpd, calculated on a quarterly average basis. In exchange for our marketing services, Delek pays us a base fee of $0.6065 per barrel of products it sells. In addition, Delek has agreed to pay us 50% of the margin, if any, above an agreed base level generated on the sale as an incentive fee, provided that the incentive fee shall not be less than $175,000 nor greater than $500,000 per quarter. Fees are subject to increase or decrease on July 1 of each year by the amount of any change in the consumer price index.

Terminalling. We entered into two five-year terminalling services agreements pursuant to which Delek pays us fees for providing terminalling and other services to Delek at our Memphis and Big Sandy Terminals, as well as for storing product at our Big Sandy Terminal. The minimum throughput commitment under these agreements are 10,000 bpd (on a quarterly average basis) for the Memphis terminal, representing approximately 75% of maximum loading capacity, and 5,000 bpd (on a quarterly average basis) for the Big Sandy Terminal, representing approximately 55% of maximum loading capacity, in each case at a fee of $0.52 per barrel. The fees paid to us are subject to increase or decrease on July 1 of each year.
Even though the Big Sandy Terminal has not been operational because the Hopewell Pipeline, which is necessary for the use of the terminal, is out of service, Delek paid to us terminal fees for the Big Sandy Terminal a minimum of 5,000 bpd of refined products from the Tyler Refinery and a storage fee of $52,250 per month, the minimum payment due per the agreement during the quarter ended September 30, 2013. We expect the Big Sandy Terminal to be operational in the fourth quarter 2013.
On July 19, 2013, we acquired the Hopewell Pipeline in order