Delek Logistics Partners Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

dkl-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2020


☐						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 incorporation or organization)			(I.R.S. Employer 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)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Units Representing Limited Partnership Interests	DKL	New York Stock Exchange

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 ☑ No ☐

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 ☑ No ☐

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

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

At October 30, 2020, there were 43,433,239 common limited partner units outstanding.

Table of Contents

Delek Logistics Partners, LP

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2020


PART I. FINANCIAL INFORMATION				PART II. OTHER INFORMATION

3	Item 1. Financial Statements (unaudited)			53	Item 1. Legal Proceedings
	3	Condensed Consolidated Balance Sheets
	4	Condensed Consolidated Statements of Income and Comprehensive Income		53	Item 1A. Risk Factors
	6	Condensed Consolidated Statements of Partner's Equity (Deficit)
	5	Condensed Consolidated Statements of Cash Flows		55	Item 6. Exhibits
	7	Notes to Condensed Consolidated Financial Statements
		7	Note 1 - Organization and Basis of Presentation	56	Signatures
		9	Note 2 - Acquisitions
		10	Note 3 - Related Party Transactions
		12	Note 4 - Revenues
		14	Note 5 - Net Income Per Unit
		15	Note 6 - Inventory
		15	Note 7 - Long-Term Obligations
		17	Note 8 - Equity
		19	Note 9 - Equity Based Compensation
		19	Note 10 - Equity Method Investments
		20	Note 11 - Segments


		22	Note 12 - Income Taxes
		22	Note 13 - Commitments and Contingencies
		23	Note 14 - Leases
		24	Note 15 - Subsequent Events

25	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	37	Summary Financial and Other Information
	39	Results of Operations
		39	Consolidated
		42	Pipelines and Transportation
		45	Wholesale Marketing and Terminalling
	48	Liquidity and Capital Resources

52	Item 3. Quantitative and Qualitative Disclosures about Market Risk

52	Item 4. Controls and Procedures


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Financial Statements

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)


	September 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	6,024	$	5,545
Accounts receivable	17,472		13,204
Accounts receivable from related parties	10,002		—
Inventory	1,696		12,617

Other current assets	410		2,204
Total current assets	35,604		33,570
Property, plant and equipment:
Property, plant and equipment	684,199		461,325
Less: accumulated depreciation	(216,698)		(166,281)
Property, plant and equipment, net	467,501		295,044
Equity method investments	255,368		246,984
Operating lease right-of-use assets	18,153		3,745
Goodwill	12,203		12,203
Marketing Contract Intangible, net	125,591		130,999
Rights-of-way	36,178		15,597
Other non-current assets	6,988		6,305
Total assets	$	957,586	$	744,447
LIABILITIES AND DEFICIT
Current liabilities:
Accounts payable	$	4,740	$	12,471
Accounts payable to related parties	—		8,898

Interest payable	6,745		2,572
Excise and other taxes payable	3,433		3,941
Current portion of operating lease liabilities	5,546		1,435
Accrued expenses and other current liabilities	3,482		5,765
Total current liabilities	23,946		35,082
Non-current liabilities:
Long-term debt	1,006,145		833,110

Asset retirement obligations	5,908		5,588
Deferred tax liabilities	1,205		215
Operating lease liabilities, net of current portion	12,607		2,310
Other non-current liabilities	19,229		19,261
Total non-current liabilities	1,045,094		860,484
Equity (Deficit):
Common unitholders - public; 8,687,371 units issued and outstanding at September 30, 2020 (9,131,579 at December 31, 2019)	164,313		164,436
Common unitholders - Delek Holdings; 34,745,868 units issued and outstanding at September 30, 2020 (15,294,046 at December 31, 2019)	(275,767)		(310,513)
General partner - no units issued and outstanding at September 30, 2020 (498,482 at December 31, 2019) (1)	—		(5,042)
Total deficit	(111,454)		(151,119)
Total liabilities and deficit	$	957,586	$	744,447

(1) See Note 3 for a description of the IDR Restructuring Transaction.

See accompanying notes to the condensed consolidated financial statements


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Financial Statements

Delek Logistics Partners, LP

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

(in thousands, except unit and per unit data)


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Net revenues:
Affiliates (1)	$	95,410	$	66,647	$	289,739	$	191,530
Third party	46,858		70,909		133,567		253,852
Net revenues	142,268		137,556		423,306		445,382
Cost of sales:
Cost of materials and other	60,692		72,594		205,877		262,713
Operating expenses (excluding depreciation and amortization presented below)	13,694		17,490		39,271		49,318
Depreciation and amortization	8,931		6,138		22,957		18,450
Total cost of sales	83,317		96,222		268,105		330,481
Operating expenses related to wholesale business (excluding depreciation and amortization presented below)	536		945		2,152		2,502
General and administrative expenses	6,122		5,280		16,973		15,046
Depreciation and amortization	528		450		1,495		1,351
Other operating income, net	—		(70)		(107)		(95)
Total operating costs and expenses	90,503		102,827		288,618		349,285
Operating income	51,765		34,729		134,688		96,097
Interest expense, net	10,360		12,509		32,854		35,164
Income from equity method investments	(4,860)		(8,394)		(16,875)		(14,860)
Other expense, net	105		—		103		461
Total non-operating expenses, net	5,605		4,115		16,082		20,765
Income before income tax expense	46,160		30,614		118,606		75,332
Income tax (benefit) expense	(168)		84		67		220


Net income attributable to partners	$	46,328	$	30,530	$	118,539	$	75,112
Comprehensive income attributable to partners	$	46,328	$	30,530	$	118,539	$	75,112

Less: General partner's interest in net income, including incentive distribution rights (2)	—		8,895		18,724		24,244
Limited partners' interest in net income	$	46,328	$	21,635	$	99,815	$	50,868

Net income per limited partner unit:
Common units - basic	$	1.26	$	0.89	$	3.30	$	2.08
Common units - diluted	$	1.26	$	0.89	$	3.30	$	2.08

Weighted average limited partner units outstanding:
Common units - basic	36,889,761		24,417,285		30,290,051		24,411,308
Common units - diluted	36,894,043		24,420,582		30,292,261		24,417,466

Cash distributions per limited partner unit	$	0.905	$	0.880	$	2.695	$	2.550

(1) See Note 3 for a description of our material affiliate revenue transactions.

(2) See Note 3 for a description of the IDR Restructuring Transaction.

See accompanying notes to the condensed consolidated financial statements


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Financial Statements

Delek Logistics Partners, LP

Condensed Consolidated Statements of Partners' Equity (Deficit) (Unaudited)

(in thousands)


	Common - Public		Common - Delek Holdings		General Partner		Total
Balance at June 30, 2020	$	160,870	$	(235,961)	$	(3,224)	$	(78,315)
Cash distributions	(7,819)		(18,671)		(9,478)		(35,968)

Net income attributable to partners	11,258		35,070		—		46,328
Cash distribution to general partner for conversion of its economic interest and IDR elimination	—		—		(45,000)		(45,000)
Non-cash conversion of general partner's economic interest and IDR elimination	—		(57,702)		57,702		—
Sponsor contribution of fixed assets	—		1,378		—		1,378
Other	4		119		—		123
Balance at September 30, 2020	$	164,313	$	(275,767)	$	—	$	(111,454)


	Common - Public		Common - Delek Holdings		General Partner		Total
Balance at June 30, 2019	167,254		(305,827)		(5,727)		(144,300)
Cash distributions	(7,755)		(13,000)		(8,159)		(28,914)

Net income attributable to partners	8,084		13,551		8,895		30,530
Other	67		124		3		194
Balance at September 30, 2019	$	167,650	$	(305,152)	$	(4,988)	$	(142,490)


	Common - Public		Common - Delek Holdings		General Partner		Total
Balance at December 31, 2019	$	164,436	$	(310,513)	$	(5,042)	$	(151,119)
Cash distributions (1)	(23,653)		(46,220)		(27,635)		(97,508)
General partner units issued to maintain 2% interest	—		—		10		10
Net income attributable to partners	28,172		71,642		18,725		118,539
Delek Holdings Unit purchases	(4,979)		4,979		—		—
Issuance of units in connection with the Big Spring Gathering Assets Acquisition	—		107,323		2,190		109,513
Cash distribution to Delek Holdings for Trucking Assets Acquisition	—		(46,607)		(951)		(47,558)
Cash distribution to general partner for conversion of its economic interest and IDR elimination	—		—		(45,000)		(45,000)
Non-cash conversion of general partner's economic interest and IDR elimination	—		(57,702)		57,702		—
Sponsor contribution of fixed assets	—		1,378		—		1,378
Other	337		(47)		1		291
Balance at September 30, 2020	$	164,313	$	(275,767)	$	—	(111,454)


	Common - Public		Common - Delek Holdings		General Partner		Total
Balance at December 31, 2018	$	171,023	$	(299,360)	$	(6,486)	$	(134,823)





Cash distributions (1)	(22,580)		(37,929)		(22,762)		(83,271)
General partner units issued to maintain 2% interest	—		—		8		8

Net income attributable to partners	19,027		31,841		24,244		75,112
Other	180		296		8		484



Balance at September 30, 2019	$	167,650	$	(305,152)	$	(4,988)	$	(142,490)

(1) Cash distributions include a nominal amount related to distribution equivalents on vested phantom units for the nine months ended September 30, 2020 and 2019.

See accompanying notes to the condensed consolidated financial statements


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Financial Statements

Delek Logistics Partners, LP

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	118,539	$	75,112
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	24,452		19,801
Non-cash lease expense	2,236		2,554
Amortization of customer contract intangible assets	5,408		5,408
Amortization of deferred revenue	(1,418)		(1,248)
Amortization of deferred financing costs and debt discount	1,786		2,054
Accretion of asset retirement obligations	320		298
Income from equity method investments	(16,875)		(14,860)
Dividends from equity method investments	17,572		9,188
Gain on asset disposals	(107)		(95)
Deferred income taxes	990		115
Other non-cash adjustments	292		484
Changes in assets and liabilities:
Accounts receivable	(4,268)		1,588
Inventories and other current assets	12,714		(3,290)
Accounts payable and other current liabilities	(7,638)		(7,613)
Accounts receivable/payable to related parties	(19,002)		(5,016)
Non-current assets and liabilities, net	(347)		2,391
Net cash provided by operating activities	134,654		86,871
Cash flows from investing activities:

Asset acquisitions from Delek Holdings, net of assumed liabilities	(100,527)		—
Purchases of property, plant and equipment	(6,918)		(4,964)
Proceeds from sales of property, plant and equipment	107		144

Distributions from equity method investments	2,723		804
Equity method investment contributions	(11,804)		(137,361)
Net cash used in investing activities	(116,419)		(141,377)
Cash flows from financing activities:
Proceeds from issuance of additional units to maintain 2% General Partner interest	10		8
Distributions to general partner	(27,635)		(22,762)
Distributions to common unitholders - public	(23,653)		(22,580)
Distributions to common unitholders - Delek Holdings	(46,220)		(37,929)
Distributions to Delek Holdings unitholders and general partner related to Trucking Assets Acquisition	(47,558)		—
Distribution to general partner for conversion of its interest and IDR elimination	(45,000)		—
Proceeds from revolving credit facility	515,900		476,400
Payments on revolving credit facility	(343,600)		(336,800)

Net cash (used in) provided by financing activities	(17,756)		56,337
Net increase in cash and cash equivalents	479		1,831
Cash and cash equivalents at the beginning of the period	5,545		4,522
Cash and cash equivalents at the end of the period	$	6,024	$	6,353
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	26,895	$	29,003
Income taxes	$	141	$	143
Non-cash investing activities:
(Decrease) increase in accrued capital expenditures	$	(948)	$	1,274
Equity issuance to Delek Holdings unitholders in connection with Big Spring Gathering Assets Acquisition	$	109,513	$	—
Non-cash financing activities:
Non-cash lease liability arising from obtaining right of use assets during the period	$	16,644	$	649
Non-cash lease liability arising from recognition of right of use assets upon adoption of ASU 2016-02	—		$	20,202
Sponsor contribution of property, plant and equipment	$	1,378	$	—

See accompanying notes to the condensed consolidated financial statements


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Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 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 Delek US Holdings, Inc. ("Delek Holdings") and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner").

Effective August 13, 2020, the Partnership closed the transaction contemplated by a definitive exchange agreement with the general partner to eliminate all of the incentive distribution rights ("IDRs") held by the general partner and convert the 2% general partner interest into a non-economic general partner interest, all in exchange for 14.0 million newly issued common limited partner units and $45.0 million in cash ("IDR Restructuring Transaction"). Refer to Note 3 - Related Party Transactions for further information, Note 5 - Net Income per Unit for more information on how these transactions impact our earnings per unit calculations, and Note 8 - Equity for additional information on the impact to our equity accounts.

Effective May 1, 2020, the Partnership, through its wholly-owned subsidiary DKL Transportation, LLC, acquired Delek Trucking, LLC consisting of certain leased and owned tractors and trailers and related assets (the "Trucking Assets") from Delek Holdings, such transaction the "Trucking Assets Acquisition." See Note 2 for further information.

In addition, effective March 31, 2020, the Partnership, through its wholly-owned subsidiary DKL Permian Gathering, LLC, acquired from Delek Holdings a crude oil gathering system located in Howard, Borden and Martin Counties, Texas (the "Big Spring Gathering System"), and certain related assets, such transaction the "Big Spring Gathering Assets Acquisition." See Note 2 for further information.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("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, 2019 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on February 27, 2020 and in accordance with the rules and regulations of the SEC. 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, 2019 included in our Annual Report on Form 10-K.

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 intercompany accounts and transactions have been eliminated. Such intercompany transactions do not include those with Delek Holdings or our general partner, which are presented as related parties in these accompanying condensed consolidated financial statements. 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.

Reclassifications

Certain immaterial reclassifications have been made to prior period presentation in order to conform to the current period presentation.

Risks and Uncertainties Arising from the COVID-19 Pandemic

The outbreak of COVID-19 and its development into a pandemic in March 2020 (the "COVID-19 Pandemic") has resulted in significant economic disruption globally, including in the U.S. and specific geographic areas where we operate. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel, many business operations, public gatherings and the overall level of individual movement and in-person interaction across the globe. This has in turn significantly reduced global economic activity and resulted in airlines dramatically cutting back on flights and a decrease in motor vehicle use at a time when seasonal driving patterns typically result in an increase of consumer demand for gasoline. As a result, there has also been a decline in the demand for, and thus also the market prices of, crude oil and certain products, particularly refined petroleum products that we receive revenue for the transportation and storage services we provide. In addition, the decline in demand impacted the sales volumes in our wholesale marketing business. There is continued uncertainty about the duration of the COVID-19 Pandemic which caused depressed consumer demand for gasoline and other hydrocarbons during 2020 in the United States. Therefore, downward pressure on commodity prices has remained and could continue for the foreseeable future.

Uncertainties related to the impact of the COVID-19 Pandemic and other events exist that could impact our future results of operations and financial position, the nature of which and the extent to which are currently unknown. To the extent these uncertainties have been identified and are believed to have an impact on our current period results of operations or financial position based on the requirements for assessing such financial statement impact under GAAP, we have considered them in the preparation of our unaudited financial statements as of and for the three and nine months ended September 30, 2020. The application of accounting policies impacted by such considerations include (but are not necessarily limited to) the following:


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Notes to Condensed Consolidated Financial Statements (Unaudited)

•The interim evaluation of indefinite-lived intangibles and goodwill for potential impairment, where indicators exist, as defined by GAAP;

•The interim evaluation of long-lived assets for potential impairment, where indicators exist, as defined by GAAP;

•The interim evaluation of joint ventures for potential impairment, where indicators exist, as defined by GAAP;

•The evaluation of inventory valuation allowances that may be warranted under the lower of cost or net realizable value analysis, pursuant to GAAP;

•The consideration of debt modifications and or covenant requirements, as applicable;

•The evaluation of commitments and contingencies, including changes in concentrations, as applicable;

•The interim evaluation of the risk of credit losses and the determination of our allowance for credit losses, pursuant to GAAP; and

•The interim evaluation of our ability to continue as a going concern.

New Accounting Pronouncements Adopted During 2020

ASU 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the Financial Accounting Standards Board (the "FASB") issued guidance related to disclosure requirements for fair value measurements. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We adopted this guidance on January 1, 2020 and the adoption did not have a material impact on our business, financial condition or results of operations.

ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance requiring the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Organizations will now use forward-looking information to better inform their credit loss estimates. This guidance is effective for interim and annual periods beginning after December 15, 2019. We adopted this guidance on January 1, 2020 using the modified retrospective approach as of the adoption date. The adoption did not have a material impact on the Partnership’s operating results, financial position or disclosures.

ASU 2018-15, Intangible - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued guidance related to customers' accounting for implementation costs incurred in a cloud computing arrangement that is considered a service contract. This pronouncement aligns the requirements for capitalizing implementation costs in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Entities can choose to adopt the new guidance prospectively or retrospectively. We adopted this guidance on January 1, 2020 and elected the prospective method. The adoption did not have a material impact on the Partnership's financial condition or results of operations.

Accounting Pronouncements Not Yet Adopted

ASU 2019-12, Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued guidance intended to simplify various aspects related to accounting for income taxes, eliminate certain exceptions within Accounting Standards Codification ("ASC") 740 and clarify certain aspects of the current guidance to promote consistency among reporting entities. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 2020, with early adoption permitted. We expect to adopt this guidance on the effective date and are currently evaluating the impact that adopting this new guidance may have on our business, financial condition and results of operations.

ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815

In January 2020, the FASB issued ASU 2020-01 which is intended to clarify interactions between the guidance to account for certain equity securities under Topics 321, 323 and 815, and improve current GAAP by reducing diversity in practice and increasing comparability of accounting. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020, and early adoption is permitted. We do not expect that the adoption of this ASU on its effective date will have a material impact on our business, financial condition or results of operations.


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Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)

In March 2020, the FASB issued an amendment which is intended to provide temporary optional expedients and exceptions to GAAP guidance on contracts, hedge accounting and other transactions affected by the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank rates. This guidance is effective for all entities any time beginning on March 12, 2020 through December 31, 2022 and may be applied from the beginning of an interim period that includes the issuance date of the ASU. The Partnership is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

Note 2 - Acquisitions

Trucking Assets Acquisition

Effective May 1, 2020, the Partnership, through its wholly-owned subsidiary DKL Transportation, LLC, acquired Delek Trucking, LLC consisting of certain leased and owned tractors and trailers and related assets from Delek Holdings. The total consideration is subject to certain post-closing adjustments and was approximately $48.0 million in cash. We financed this acquisition with a combination of cash on hand and borrowings under the DKL Credit Facility (as defined in Note 7).

The Trucking Assets are recorded in our pipelines and transportation segment and include approximately 150 trucks and trailers, which are primarily leased or owned, respectively.

In connection with the closing of the transaction, Delek Holdings, the Partnership and various of their respective subsidiaries entered into a Transportation Services Agreement (the “Trucking Assets TSA Agreement”). Under the Trucking Assets TSA Agreement, the Partnership will gather, coordinate pickup of, transport and deliver petroleum products for Delek Holdings, as well as provide ancillary services as requested. 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 Trucking Assets Acquisition was considered a transaction between entities under common control. Accordingly, the Trucking Assets were recorded at amounts based on Delek Holdings' historical carrying value as of the acquisition date. The carrying value of the Trucking Assets as of the acquisition date was $13.3 million, consisting of $0.5 million of owned assets and $12.8 million Right of Use asset for leased assets. The Right of Use assets offsets with an equivalent operating lease liability. 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 ("ASU 2017-01"). We incurred approximately $0.3 million of acquisition costs related to the Trucking Assets Acquisition.

Big Spring Gathering Assets Acquisition

Effective March 31, 2020, the Partnership, through its wholly-owned subsidiary DKL Permian Gathering, LLC, acquired the Big Spring Gathering Assets from Delek Holdings, located in Howard, Borden and Martin Counties, Texas. The total consideration was subject to certain post-closing adjustments and was comprised of $100.0 million in cash and 5.0 million common units representing limited partner interest in us. We financed the cash component of this acquisition with borrowings from the DKL Credit Facility.

The Big Spring Gathering Assets are recorded in our pipelines and transportation segment and include:

•Crude oil pipelines;

•Approximately 200 miles of gathering systems;

•Approximately 65 Tank battery connections;

•Terminals (total storage of approximately 650,000 bbls); and

•Applicable rights-of-way.

In connection with the closing of the transaction, Delek Holdings, the Partnership and various of their respective subsidiaries entered into a Throughput and Deficiency Agreement (the “Big Spring T&D Agreement”). Under the Big Spring T&D Agreement, the Partnership will operate and maintain the Big Spring Gathering Assets connecting Delek Holdings' interests in and to certain crude oil with the Partnership's Big Spring, Texas terminal and provide gathering, transportation and other related services with respect to any and all crude produced from shipper’s and certain other producers’ respective interests for delivery at the Big Spring Terminal. 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 Gathering Assets Acquisition was considered a transaction between entities under common control. Accordingly, the Big Spring Gathering Assets were recorded at amounts based on Delek Holdings' historical carrying value as of the acquisition date. The carrying value of the Big Spring Gathering Assets as of the acquisition date was $209.5 million. Pursuant to the common control guidance, the 5.0 million units issued (which had a closing market price of $9.10 per unit on the transaction date) were recorded in equity at $109.5 million, representing the net carrying value of the Big Spring Gathering Assets purchased of $209.5 million less the $100.0 million cash


9 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

consideration. Prior periods have not been recast as these assets do not constitute a business in accordance with ASU 2017-01. We incurred approximately $0.7 million of acquisition costs related to the Big Spring Gathering Assets Acquisition.

Note 3 - Related Party Transactions

Commercial Agreements

The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings 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 Holdings. 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 Holdings. In November 2017, Delek Holdings 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 Holdings with respect to the Tyler Refinery, the initial term has been extended through 2026. The current term of certain of our agreements with Delek Holdings were required to be further extended pursuant to the amended and restated DKL Credit Facility (as defined in Note 7), which extensions were effective in the fourth quarter of 2018. The fees under each agreement are payable to us monthly by Delek Holdings or certain third parties to whom Delek Holdings 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 Holdings or the applicable third party assignee fails to meet or exceed the minimum volume or throughput commitment during any calendar quarter, Delek Holdings, 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.

Under each of these agreements, we are required to maintain the capabilities of our pipelines and terminals, such that Delek Holdings may throughput and/or store, as the case may be, specified volumes of crude oil, intermediate and refined products. To the extent that Delek Holdings is prevented by our failure to maintain such capacities from throughputting or storing such specified volumes for more than 30 days per year, Delek Holdings' 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.

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

Effective May 1, 2020, we entered into the Trucking Assets TSA Agreement with Delek Holdings. Under the Trucking Assets TSA Agreement, we will operate a truck based operation that transports various products throughout Arkansas, Oklahoma and Texas and gather, coordinate the pickup of, transport and deliver such products, as well as provide ancillary services as requested. Pursuant to the Trucking Assets TSA Agreement, Delek Holdings has committed to minimum revenue of $39.0 million per year. The initial term of the Trucking Assets TSA Agreement is 10 years, and thereafter Delek Holdings has the option to extend the Trucking Assets TSA Agreement for two additional two-year terms.

Effective March 31, 2020, we entered into the Big Spring T&D Agreement with Delek Holdings. Under the Big Spring T&D Agreement, we will operate and maintain the Big Spring Gathering Assets connecting Delek Holdings' interests in and to certain crude oil with the Partnership's Big Spring, Texas terminal and provide gathering, transportation and other related services with respect to any and all crude produced from Delek Holdings' and certain other producers’ respective interests for delivery at the Big Spring Terminal. Pursuant to the Big Spring T&D Agreement, Delek Holdings has committed to ship 120,000 bpd on the Big Spring Gathering Assets and 50,000 bpd to a redelivery point in Howard County, Texas (collectively, the Minimum Volume Commitments “MVCs”). Pursuant to the Big Spring T&D Agreement, we also agreed to spend up to $33.8 million over three years to connect additional receipt points and, in connection with such expenditures, the MVCs will increase to provide the Partnership a 12.5% return on the actual costs directly incurred and paid by the Partnership pursuant to the terms set forth in the Big Spring T&D Agreement. The initial term of the Big Spring T&D Agreement is 10 years, and thereafter Delek Holdings has the option to extend the Big Spring T&D Agreement for two additional five-year terms. Following the initial term and any such extensions, the Big Spring T&D Agreement will continue on a year-to-year basis unless terminated by either party upon 90 days’ written notice.

Other Agreements with Delek Holdings

In addition to the commercial agreements described above, the Partnership has entered into the following agreements with Delek Holdings:

Omnibus Agreement


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Notes to Condensed Consolidated Financial Statements (Unaudited)

The Partnership entered into an omnibus agreement with Delek Holdings, Delek Logistics Operating, LLC, Lion Oil Company and certain of the Partnership's and Delek Holdings' other subsidiaries on November 7, 2012, which has been amended from time to time in connection with acquisitions from Delek Holdings (collectively, as amended, the "Omnibus Agreement"). The Omnibus Agreement governs the provision of certain operational services and reimbursement obligations, among other matters, between the Partnership and Delek Holdings, and obligates us to pay an annual fee of $4.1 million to Delek Holdings for its provision of centralized corporate services to the Partnership.

Pursuant to the terms of the Omnibus Agreement, we were reimbursed by Delek Holdings for certain capital expenditures of a nominal amount and $0.6 million during the three and nine months ended September 30, 2020, respectively, and $0.8 million and $2.3 million during the three and nine months ended September 30, 2019, 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 are 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 September 30, 2020, we have recorded a nominal receivable from related parties for these matters for which we expect to be reimbursed. These reimbursements are recorded as reductions to operating expense. We were reimbursed a nominal amount and $0.1 million for these matters during the three and nine months ended September 30, 2020, respectively, and $0.3 million and $6.0 million during the three and nine months ended September 30, 2019, respectively.

Other Transactions

The Partnership manages a long-term capital project on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of a 250-mile gathering system in the Permian Basin. The majority of the gathering system has been constructed, however, additional costs pertaining to a pipeline connection that was not contributed to the Partnership continue to be incurred and are still subject to the terms of the DPG Management Agreement. The Partnership is also considered the operator for the project and is responsible for oversight of the project design, procurement and construction of project segments and provides other related services. Pursuant to the terms of the DPG Management Agreement, the Partnership receives a monthly operating services fee and a construction services fee, which includes the Partnership's direct costs of managing the project plus an additional percentage fee of the construction costs of each project segment. The agreement extends through December 2022. Total fees paid to the Partnership were $0.4 million and $1.6 million for the three and nine months ended September 30, 2020, respectively, and $0.8 million and $3.6 million for the three and nine months ended September 30, 2019, respectively, which are recorded in affiliate revenue in our condensed consolidated statements of income. Additionally, the Partnership incurs the costs in connection with the construction of the assets and is subsequently reimbursed by Delek Holdings. Amounts reimbursable by Delek Holdings are recorded in accounts receivable from related parties.

Unregistered Sale of Equity Securities

In connection with the Partnership's issuance of the new units ("Additional Units") under the Big Spring Gathering Assets Acquisition and in accordance with the Partnership's First Amended and Restated Agreement of Limited Partnership, as amended (the"Partnership Agreement"), the Partnership issued general partner units to the general partner in an amount necessary to maintain its 2% general partner interest as defined in the Partnership Agreement. The sale and issuance of the Additional Units and such general partner units in connection with the Big Spring Gathering Assets Acquisition is exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

Additionally, in March 2020, Delek Marketing & Supply, LLC ("Delek Marketing") repurchased 451,822 units from an unaffiliated investor pursuant to a Common Unit Purchase Agreement between Delek Marketing and such investor. The purchase price of the units amounted to approximately $5.0 million. As a result of the transaction, Delek Holdings' ownership in our outstanding limited partner units increased to 64.5% from 62.6%. Delek Holdings' ownership in our common limited partner units was further increased to 70.5% as a result of the issuance of 5.0 million Additional Units in connection with the Big Spring Gathering Assets Acquisition described above.

In August 2020, Delek Holdings ownership in our common limited partner units was further increased to approximately 80.0% in connection with the IDR Restructuring Transaction, where the Partnership issued 14.0 million Additional Units to Delek Holdings.

Amendment No. 2 to the First Amended and Restated Agreement of Limited Partnership of Delek Logistics Partners, LP

On March 31, 2020, in connection with the completion of the Big Spring Gathering Assets Acquisition, the Board of the general partner adopted Amendment No. 2 (“Amendment No. 2”) to the Partnership Agreement, effective upon adoption. Amendment No. 2 amended the Partnership Agreement to provide for a waiver of distributions in respect of the Incentive Distribution Rights ("IDRs") for General Partner Additional Units ("GP Additional Units") associated with the 5.0 million Additional Units for at least two years, through at least the distribution for the quarter ending March 31, 2022 (the “IDR Waiver”). The IDR Waiver essentially reduced the distribution made to the holders of the IDRs during this period, as the holders would not receive a share of the distribution made on the GP Additional Units. The IDRs were eliminated in the IDR Restructuring Transaction on August 13, 2020.

Conversion of GP Economic Interest and Elimination of IDRs


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Notes to Condensed Consolidated Financial Statements (Unaudited)

On August 13, 2020, we closed the transaction contemplated by a definitive exchange agreement with Delek Holdings to eliminate all of the IDRs held by the general partner and convert the 2% general partner economic interest into a non-economic general partner interest, all in exchange for 14.0 million of the Partnership's newly issued common limited partner units and $45.0 million cash. Contemporaneously, Delek Holdings purchased a 5.2% ownership interest in our general partner from certain affiliates who were also members of our general partner's management and board of directors. Delek Holdings now owns 100% interest in the general partner and owns approximately 34.7 million common limited partner units, representing approximately 80% of the Partnership's outstanding common limited partner units. To implement the transaction, our Partnership Agreement was amended and restated.

Summary of Transactions

Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers ("RINs"), wholesale marketing and products terminalling services provided primarily to Delek Holdings based on regulated tariff rates or contractually based fees and product sales. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek Holdings, or our general partner, as the case may be, for the services provided to us under the Partnership Agreement. These expenses could also include reimbursement and indemnification amounts from Delek Holdings, as provided under the Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek Holdings for direct or allocated costs and expenses incurred by Delek Holdings on behalf of the Partnership and for charges Delek Holdings 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 expenses. In addition to these transactions, we purchase refined products and bulk biofuels from Delek Holdings, the costs of which are included in cost of materials and other.

A summary of revenue, purchases from affiliates and expense transactions with Delek Holdings and its affiliates are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues	$	95,410	$	66,647	$	289,739	$	191,530
Purchases from Affiliates	$	45,186	$	66,578	$	155,679	$	219,225
Operating and maintenance expenses	$	10,330	$	18,336	$	33,397	$	38,851
General and administrative expenses	$	3,250	$	4,317	$	9,322	$	7,430

Quarterly Cash Distributions

Prior to August 13, 2020, our common and general partner unitholders and the holders of IDRs were entitled to receive quarterly distributions of available cash as determined by the board of directors of our general partner in accordance with the terms and provisions of our Partnership Agreement. Pursuant to the IDR Restructuring Transaction on August 13, 2020, the general partner will no longer receive any cash distributions. In February, May and August 2020, we paid quarterly cash distributions of $30.6 million, $30.9 million and $36.0 million, respectively, of which $22.6 million, $23.2 million and $28.1 million, respectively, were paid to Delek Holdings' limited partner interest and our general partner. In February, May and August 2019, we paid quarterly cash distributions of $26.9 million and $27.4 million and $28.9 million, respectively, of which $19.6 million, $20.0 million and $21.2 million were paid to Delek Holdings and our general partner. On October 27, 2020, our board of directors declared a quarterly cash distribution totaling $39.3 million, based on the available cash as of the date of determination for the end of the third quarter of 2020, payable on November 12, 2020, of which $31.4 million is expected to be paid to Delek Holdings.

Note 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 Holdings' 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 Holdings, 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 Holdings, 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, New Mexico, 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.


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The majority of our commercial agreements with Delek Holdings meet the definition of a lease because: (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 Holdings 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 842, Leases ("ASC 842"), we applied the permitted practical expedient to not separate lease and non-lease components under the predominance principle to designated asset classes associated with the provision of logistics services. We have determined that the predominant component of the related agreements currently in effect is the lease component. Therefore, the combined component is accounted for under the applicable lease accounting guidance. Of our $467.5 million net property, plant, and equipment balance as of September 30, 2020, $394.6 million is subject to operating leases under our commercial agreements. These agreements do not include options for the lessee to purchase our leasing equipment, nor do they include any material residual value guarantees or material restrictive covenants.

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


	Three Months Ended September 30, 2020
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	3,035	$	163	$	3,198
Service Revenue - Affiliate	5,633		8,708		14,341
Product Revenue - Third Party	—		43,660		43,660
Product Revenue - Affiliate	—		5,844		5,844
Lease Revenue - Affiliate (1)	62,811		12,414		75,225
Total Revenue	$	71,479	$	70,789	$	142,268

(1) Net of $1.8 million of amortization expense for the three months ended September 30, 2020, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.


	Three Months Ended September 30, 2019
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	5,281	$	221	$	5,502
Service Revenue - Affiliate	2,856		9,578		12,434
Product Revenue - Third Party	—		65,407		65,407
Product Revenue - Affiliate	—		6,505		6,505
Lease Revenue - Affiliate (1)	36,448		11,260		47,708
Total Revenue	$	44,585	$	92,971	$	137,556

(1) Net of $1.8 million of amortization expense for the three months ended September 30, 2019, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.


	Nine Months Ended September 30, 2020
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	14,587	$	502	$	15,089
Service Revenue - Affiliate	13,848		$	24,500	38,348
Product Revenue - Third Party	—		118,478		118,478
Product Revenue - Affiliate	—		64,067		64,067
Lease Revenue - Affiliate (1)	154,437		32,887		187,324
Total Revenue	$	182,872	$	240,434	$	423,306

(1) Net of $5.4 million of amortization expense for the nine months ended September 30, 2020, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.


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Nine Months Ended September 30, 2019

Pipelines and Transportation

Wholesale Marketing and Terminalling

Price	1.00	EPS	-94,808,000
Shares	-0	P/E	-0
MCap	-0	P/FCF	-0
Net Debt	-6	EBIT	130
TEV	-6	TEV/EBIT	-0
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-11-09
10-Q	2020-06-30	Filed 2020-08-07
10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-02-28
10-Q	2019-09-30	Filed 2019-11-08
10-Q	2019-06-30	Filed 2019-08-08
10-Q	2019-03-31	Filed 2019-05-09
10-K	2018-12-31	Filed 2019-03-01
10-Q	2018-09-30	Filed 2018-11-09
10-Q	2018-06-30	Filed 2018-08-09
10-Q	2018-03-31	Filed 2018-05-10
10-K	2017-12-31	Filed 2018-03-01
10-Q	2017-09-30	Filed 2017-11-09
10-Q	2017-06-30	Filed 2017-08-07
10-Q	2017-03-31	Filed 2017-05-09
10-K	2016-12-31	Filed 2017-02-28
10-Q	2016-09-30	Filed 2016-11-03
10-Q	2016-06-30	Filed 2016-08-05
10-Q	2016-03-31	Filed 2016-05-06
10-K	2015-12-31	Filed 2016-02-29
10-Q	2015-06-30	Filed 2015-11-06
10-Q	2015-06-30	Filed 2015-08-06
10-Q	2015-03-31	Filed 2015-05-08
10-K	2014-12-31	Filed 2015-02-26
10-Q	2014-09-30	Filed 2014-11-06
10-Q	2014-06-30	Filed 2014-08-08
10-Q	2014-03-31	Filed 2014-05-08
10-K	2013-12-31	Filed 2014-03-05
10-Q	2013-09-30	Filed 2013-11-07
10-Q	2013-06-30	Filed 2013-08-08
10-Q	2013-03-31	Filed 2013-05-09
10-K	2012-12-31	Filed 2013-03-12
10-Q	2012-09-30	Filed 2012-12-14

8-K	2021-02-23	Earnings, Exhibits
8-K	2021-01-26	Officers, Regulation FD, Exhibits
8-K	2021-01-25	Regulation FD, Exhibits
8-K	2020-12-07	Regulation FD, Exhibits
8-K	2020-11-24
8-K	2020-11-04
8-K	2020-10-27
8-K	2020-09-01
8-K	2020-08-12
8-K	2020-08-11
8-K	2020-08-04
8-K	2020-07-27
8-K	2020-07-26
8-K	2020-05-21
8-K	2020-05-15
8-K	2020-05-05
8-K	2020-04-21
8-K	2020-04-06
8-K	2020-03-31
8-K	2020-03-31
8-K	2020-02-25
8-K	2020-02-25
8-K	2020-01-24
8-K	2019-12-10
8-K	2019-11-04
8-K	2019-10-25
8-K	2019-08-16
8-K	2019-08-05
8-K	2019-07-24
8-K	2019-05-28
8-K	2019-05-14
8-K	2019-05-06
8-K	2019-04-26
8-K	2019-03-05
8-K	2019-02-19
8-K	2019-01-24
8-K	2018-12-03
8-K	2018-11-13
8-K	2018-11-06
8-K	2018-10-23
8-K	2018-09-28
8-K	2018-08-24
8-K	2018-08-13
8-K	2018-08-08
8-K	2018-08-07
8-K	2018-07-24
8-K	2018-05-22
8-K	2018-05-21
8-K	2018-05-07
8-K	2018-04-26
8-K	2018-03-28
8-K	2018-03-20
8-K	2018-03-20
8-K	2018-03-02
8-K	2018-03-01
8-K	2018-02-26
8-K	2018-02-16
8-K	2018-01-23

EX-31.1	dkl-ex311xceocertifica.htm
EX-31.2	dkl-ex312xcfocertifica.htm
EX-32.1	dkl-ex321xceocertifica.htm
EX-32.2	dkl-ex322xcfocertifica.htm

DKL 10Q Quarterly Report

Delek Logistics Partners Earnings 2020-09-30