Delek Logistics Partners - 10-Q quarterly report FY2019 Q2

Delek Logistics Partners - 10-Q quarterly report FY2019 Q2

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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	June 30, 2019



☐		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 August 2, 2019, there were 24,417,285 common limited partner units and 498,312 general partner units outstanding.

Table of Contents

Delek Logistics Partners, LP

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2019



PART I. FINANCIAL INFORMATION				PART II. OTHER INFORMATION

3	Item 1. Financial Statements (unaudited)			46	Item 1. Legal Proceedings
	3	Condensed Consolidated Balance Sheets
	4	Condensed Consolidated Statements of Income and Comprehensive Income		46	Item 1A. Risk Factors
	6	Condensed Consolidated Statements of Partner's Equity (Deficit)
	5	Condensed Consolidated Statements of Cash Flows		46	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	7	Notes to Condensed Consolidated Financial Statements
		7	Note 1 - Organization and Basis of Presentation	46	Item 6. Exhibits
		8	Note 2 - Acquisitions
		8	Note 3 - Related Party Transactions	47	Signatures
		11	Note 4 - Revenues
		12	Note 5 - Net Income Per Unit
		12	Note 6 - Inventory
		13	Note 7 - Long-Term Obligations
		14	Note 8 - Equity
		15	Note 9 - Equity Based Compensation
		16	Note 10 - Equity Method Investments
		17	Note 11 - Segments
		19	Note 12 - Income Taxes
		19	Note 13 - Commitments and Contingencies
		20	Note 14 - Leases
		21	Note 15 - Subsequent Events

22	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	30	Summary Financial and Other Information
	32	Results of Operations
		32	Consolidated
		36	Pipelines and Transportation
		39	Wholesale Marketing and Terminalling
	43	Liquidity and Capital Resources

45	Item 3. Quantitative and Qualitative Disclosures about Market Risk

45	Item 4. Controls and Procedures



2 \|

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)



	June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	5,440		$	4,522
Accounts receivable	26,852			21,586
Inventory	4,682			5,491
Other current assets	467			969
Total current assets	37,441			32,568
Property, plant and equipment:
Property, plant and equipment	454,581			452,746
Less: accumulated depreciation	(153,036		)	(140,184		)
Property, plant and equipment, net	301,545			312,562
Equity method investments	241,597			104,770
Operating lease right-of-use assets	18,793			—
Goodwill	12,203			12,203
Marketing Contract Intangible, net	134,605			138,210
Other non-current assets	23,126			24,280
Total assets	$	769,310		$	624,593
LIABILITIES AND DEFICIT
Current liabilities:
Accounts payable	$	8,214		$	14,226
Accounts payable to related parties	9,636			7,833
Excise and other taxes payable	4,238			4,069
Pipeline release liabilities	2,888			4,419
Current portion of operating lease liabilities	4,572			—
Accrued expenses and other current liabilities	5,622			5,958
Total current liabilities	35,170			36,505
Non-current liabilities:
Long-term debt	840,920			700,430
Asset retirement obligations	5,389			5,191
Operating lease liabilities, net of current portion	14,220			—
Other non-current liabilities	17,911			17,290
Total non-current liabilities	878,440			722,911
Deficit:
Common unitholders - public; 9,123,239 units issued and outstanding at June 30, 2019 (9,109,807 at December 31, 2018)	167,254			171,023
Common unitholders - Delek Holdings; 15,294,046 units issued and outstanding at June 30, 2019 (15,294,046 at December 31, 2018)	(305,827		)	(299,360		)
General partner - 498,312 units issued and outstanding at June 30, 2019 (498,038 at December 31, 2018)	(5,727		)	(6,486		)
Total deficit	(144,300		)	(134,823		)
Total liabilities and deficit	$	769,310		$	624,593

See accompanying notes to the condensed consolidated financial statements



3 \|

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						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018
Net revenues:
Affiliates ⁽¹⁾	$	61,918		$	53,080		$	124,883		$	114,724
Third party	93,424			113,200			182,942			219,477
Net revenues	155,342			166,280			307,825			334,201
Cost of sales:
Cost of materials and other	93,854			106,016			190,119			225,048
Operating expenses (excluding depreciation and amortization presented below)	16,521			14,114			31,828			26,012
Depreciation and amortization	6,188			6,571			12,312			12,035
Total cost of sales	116,563			126,701			234,259			263,095
Operating expenses related to wholesale business (excluding depreciation and amortization presented below)	806			803			1,557			1,482
General and administrative expenses	5,293			3,747			9,766			6,722
Depreciation and amortization	451			448			901			984
Gain on asset disposals	(27		)	(129		)	(25		)	(69		)
Total operating costs and expenses	123,086			131,570			246,458			272,214
Operating income	32,256			34,710			61,367			61,987
Interest expense, net	11,354			10,926			22,655			18,988
Income from equity method investments	(4,515		)	(1,899		)	(6,466		)	(2,757		)
Other expense, net	461			—			461			—
Total non-operating expenses, net	7,300			9,027			16,650			16,231
Income before income tax expense	24,956			25,683			44,717			45,756
Income tax expense	71			101			136			179
Net income attributable to partners	$	24,885		$	25,582		$	44,581		$	45,577
Comprehensive income attributable to partners	$	24,885		$	25,582		$	44,581		$	45,577

Less: General partner's interest in net income, including incentive distribution rights	8,079			6,212			15,348			11,842
Limited partners' interest in net income	$	16,806		$	19,370		$	29,233		$	33,735

Net income per limited partner unit:
Common units - (basic)	$	0.69		$	0.79		$	1.20		$	1.38
Common units - (diluted)	$	0.69		$	0.79		$	1.20		$	1.38

Weighted average limited partner units outstanding:
Common units - (basic)	24,409,359			24,386,031			24,408,270			24,384,341
Common units - (diluted)	24,414,343			24,394,103			24,414,077			24,391,760

Cash distributions per limited partner unit	$	0.850		$	0.770		$	1.670		$	1.520


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

See accompanying notes to the condensed consolidated financial statements



4 \|

Financial Statements

Delek Logistics Partners, LP

Condensed Consolidated Statements of Partner's Equity (Deficit) (Unaudited)

(in thousands)



	Common - Public			Common - Delek Holdings			General Partner			Total
Balance at March 31, 2019	$	168,388		$	(303,902	)	$	(6,391	)	$	(141,905	)
Cash distributions ⁽¹⁾	(7,473		)	(12,541		)	(7,424		)	(27,438		)
General partner units issued to maintain 2% interest	—			—			6			6
Net income attributable to partners	6,279			10,527			8,079			24,885
Unit-based compensation	54			89			3			146
Other	6			—			—			6
Balance at June 30, 2019	$	167,254		$	(305,827	)	$	(5,727	)	$	(144,300	)

⁽¹⁾ Cash distributions include a nominal amount related to distribution equivalents on vested phantom units.



	Common - Public			Common - Delek Holdings			General Partner			Total
Balance at March 31, 2018	$	173,197		$	(296,015	)	$	(7,828	)	$	(130,646	)
Cash distributions	(6,873		)	(11,470		)	(5,710		)	(24,053		)
Net income attributable to partners	7,226			12,144			6,212			25,582
Unit-based compensation	57			94			4			155
Balance at June 30, 2018	$	173,607		$	(295,247	)	$	(7,322	)	$	(128,962	)



	Common - Public			Common - Delek Holdings			General Partner			Total
Balance at December 31, 2018	$	171,023		$	(299,360	)	$	(6,486	)	$	(134,823	)
Cash distributions	(14,825		)	(24,929		)	(14,603		)	(54,357		)
General partner units issued to maintain 2% interest	—			—			8			8
Net income attributable to partners	10,943			18,289			15,349			44,581
Unit-based compensation	107			177			6			290
Other	6			(4		)	(1		)	1
Balance at June 30, 2019	$	167,254		$	(305,827	)	$	(5,727	)	$	(144,300	)



	Common - Public			Common - Delek Holdings			General Partner			Total
Balance at December 31, 2017	$	174,378		$	(197,206	)	$	(6,397	)	$	(29,225	)
Distributions to Delek Holdings for Big Spring Asset Acquisition	—			(96,822		)	(1,976		)	(98,798		)
Cash distributions	(13,463		)	(22,558		)	(10,810		)	(46,831		)
General partner units issued to maintain 2% interest	—			—			13			13
Net income attributable to partners	12,581			21,154			11,842			45,577
Unit-based compensation	111			185			6			302
Balance at June 30, 2018	$	173,607		$	(295,247	)	$	(7,322	)	$	(128,962	)

See accompanying notes to the condensed consolidated financial statements



5 \|

Financial Statements

Delek Logistics Partners, LP

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	44,581		$	45,577
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,213			13,019
Non-cash lease expense	1,409			—
Amortization of customer contract intangible assets	3,605			2,404
Amortization of deferred revenue	(803		)	(723		)
Amortization of deferred financing costs and debt discount	1,480			1,334
Accretion of asset retirement obligations	198			175
Deferred income taxes	(3		)	—
Income from equity method investments	(6,466		)	(2,757		)
Dividends from equity method investments	3,833			2,302
Gain on asset disposals	(25		)	(69		)
Unit-based compensation expense	290			302
Changes in assets and liabilities:
Accounts receivable	(5,266		)	1,132
Inventories and other current assets	1,311			8,226
Accounts payable and other current liabilities	(8,928		)	(9,123		)
Accounts receivable/payable to related parties	1,803			(8,446		)
Non-current assets and liabilities, net	95			(1,710		)
Net cash provided by operating activities	50,327			51,643
Cash flows from investing activities:
Asset acquisitions, net of assumed asset retirement obligation liabilities	—			(72,376		)
Purchases of property, plant and equipment	(2,437		)	(5,949		)
Proceeds from sales of property, plant and equipment	75			356
Purchases of intangible assets	—			(144,219		)
Distributions from equity method investments	804			660
Equity method investment contributions	(134,998		)	(172		)
Net cash (used in) investing activities	(136,556		)	(221,700		)
Cash flows from financing activities:
Proceeds from issuance of additional units to maintain 2% General Partner interest	8			13
Distributions to general partner	(14,603		)	(10,810		)
Distributions to common unitholders - public	(14,825		)	(13,463		)
Distributions to common unitholders - Delek Holdings	(24,929		)	(22,558		)
Distributions to Delek Holdings unitholders and general partner related to Big Spring Logistic Assets Acquisition	—			(98,798		)
Proceeds from revolving credit facility	364,300			517,000
Payments of revolving credit facility	(224,300		)	(203,000		)
Deferred financing costs paid	—			(525		)
Reimbursement of capital expenditures by Delek Holdings	1,496			2,700
Net cash provided by financing activities	87,147			170,559
Net increase in cash and cash equivalents	918			502
Cash and cash equivalents at the beginning of the period	4,522			4,675
Cash and cash equivalents at the end of the period	$	5,440		$	5,177
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	21,068		$	17,890
Income taxes	$	141		$	2
Non-cash investing activities:
Decrease in accrued capital expenditures	$	(191	)	$	(1,529	)
Non-cash financing activities:
Non-cash lease liability arising from recognition of right of use assets upon adoption of ASU 2016-02	$	20,202		$	—

See accompanying notes to the condensed consolidated financial statements



6 \|

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

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 1, 2019 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, 2018 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 prior period amounts have been reclassified in order to conform to the current period presentation. Additionally, certain changes to presentation of the prior period statements of income have been made in order to conform to the current period presentation, primarily relating to the addition of a subtotal entitled 'cost of sales' which includes all costs directly attributable to the generation of the related revenue, as defined by GAAP, and the retitling of what was previously referred to as 'cost of goods sold' to 'cost of materials and other'. In connection with this change in presentation, we have revised our related accounting policy, as presented in our 2018 Annual Report on Form 10-K.

New Accounting Pronouncements Adopted During 2019

ASU 2016-02, Leases

In February 2016, the FASB issued guidance that requires the recognition of a lease liability and a right-of-use asset, initially measured at the present value of the lease payments, in the statement of financial condition for all leases with terms longer than one year. The guidance was subsequently amended to consider the impact of practical expedients and provide additional clarifications. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the new lease standard on January 1, 2019. We elected the package of practical expedients which, among other things, allows us to carry forward the historical lease classification. For certain lease classes, we have elected the practical expedient not to separate lease and non-lease components, which allows us to combine the components if certain criteria are met. Further, we elected the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings at the date of adoption and to not recast our comparative periods. We have not elected the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term. The adoption of the lease accounting guidance had no impact on January 1, 2019 retained earnings and resulted in the recognition of a $20.2 million lease liability and a corresponding right-of-use asset on our consolidated balance sheet. The adoption did not have a material impact on our consolidated income statement. See Note 16 for further information.

Accounting Pronouncements Not Yet Adopted

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

In August 2018, 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, with early adoption permitted. We expect to adopt this guidance on or before the effective date and do not expect adopting this new guidance will have a material impact on our business, financial condition or results of operations.



7 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.

Note 2 - Acquisitions

Big Spring Logistic Assets Acquisition

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

The Big Spring Logistic Assets include:


•	Approximately 75 storage tanks and certain ancillary assets (such as tank pumps and piping) primarily located adjacent to the Big Spring Refinery;


•	An asphalt terminal and a light products terminal;


•	Certain crude oil and refined product pipelines; and


•	Other logistics assets, such as four underground saltwells used for natural gas liquids storage.

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

The Big Spring Logistic Assets Acquisition was considered a transaction between entities under common control. Accordingly, the Big Spring Logistic Assets were recorded at amounts based on Delek Holdings' historical carrying value as of the acquisition date. The excess of the cash paid over the historical carrying value of the assets acquired from Delek Holdings amounted to $98.8 million and was recorded as a reduction in equity. The historical carrying value of the Big Spring Logistic Assets as of the acquisition date was $72.0 million, which is net of $0.8 million of assumed asset retirement obligations. Prior periods have not been recast, as these assets did not constitute a business in accordance with ASU 2017-01, Clarifying the Definition of a Business. We capitalized approximately $0.4 million of acquisition costs related to the Big Spring Logistic Assets Acquisition during the six months ended June 30, 2018. We did not capitalize any acquisition costs during the three months ended June 30, 2018.

Marketing Contract Intangible Acquisition

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

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 in 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



8 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

Big Spring Pipeline, Storage and Throughput Facilities Agreement

In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP, a Texas limited partnership and an indirect, wholly-owned subsidiary of Delek Holdings (“Alon USA, LP”), and DKL Big Spring, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Partnership, entered into the Pipelines, Storage and Throughput Facilities Agreement (Big Spring Refinery Logistic Assets and Duncan Terminal) (the “Logistics Agreement”). Under the Logistics Agreement, the Partnership will provide storage and throughput services for crude oil and refined petroleum products owned by Alon USA, LP or its assignee, at certain of the Big Spring Logistic Assets owned and operated by the Partnership. The Partnership will charge fees to Alon USA, LP based on throughput volumes received or delivered ranging from $0.05 to $0.69 per barrel and related storage fees depending on the type of service or product. The fees under the Logistics Agreement may be adjusted annually for inflation. The initial term of the Logistics Agreement is ten years; the Partnership has a one-time option to extend the Logistics Agreement for up to five additional years; and the Logistics Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.

Big Spring Asphalt Services Agreement

In connection with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Partnership entered into the Big Spring Asphalt Services Agreement (the “Asphalt Services Agreement”). Under the Asphalt Services Agreement, the Partnership will provide asphalt storage and handling services at certain of the Big Spring Logistic Assets (such assets, the “Asphalt Facilities”). The Partnership will provide services to Alon USA, LP at the Asphalt Facilities and serve as bailee of all raw materials, and other hydrocarbons, used to make asphalt products owned by Alon USA, LP or its assignee held in the Asphalt Facilities. The Partnership will charge fees to Alon USA, LP based on throughput volumes delivered of $8.62 per barrel and related storage fees. The fees under the Asphalt Services Agreement may be adjusted annually for inflation. The initial term of the Asphalt Services Agreement is ten years; the Partnership has a one-time option to extend the Asphalt Services Agreement for up to five additional years; and the Asphalt Services Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.

Big Spring Marketing Agreement

Concurrent with the Big Spring Logistic Assets Acquisition, Alon USA, LP and the Partnership entered into the Marketing Agreement (the “Marketing Agreement”). Under the Marketing Agreement, the Partnership will provide Alon USA, LP with services for the marketing and selling of certain refined petroleum products that are produced or sold from the Big Spring Refinery. The Partnership will charge Alon USA, LP fees for such marketing and selling services of $0.52 to $0.74 per barrel depending on the type of product. The fees under the Marketing Agreement may be adjusted annually for inflation. The initial term of the Marketing Agreement is ten years; Alon USA, LP has a one-time option to extend the Marketing Agreement for up to five additional years; and the Marketing Agreement will continue on a year-to-year basis following such renewal term unless terminated by either party.

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

The Partnership entered into an omnibus agreement with Delek Holdings, our general partner, 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



9 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

to time in connection with acquisitions from Delek (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 $3.9 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 in the amount of $0.7 million and $1.5 million during the three and six months ended June 30, 2019, respectively, and $0.4 million and $2.7 million during the three and six months ended June 30, 2018, 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 June 30, 2019, 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 $2.2 million and $5.7 million for these matters during the three and six months ended June 30, 2019, respectively. We were reimbursed $6.4 million for such matters during both three and six months ended June 30, 2018.

Other Transactions

Starting in 2018, 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 "Delek Permian Gathering Project"). 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 provide 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 for the three and six months ended June 30, 2019 were $1.0 million and $2.8 million, respectively. 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.

Summary of Transactions

Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers, wholesale marketing and products terminalling services provided primarily to Delek 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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenues	$	61,918	$	53,080	$	124,883	$	114,724
Purchases from Affiliates	$	73,213	$	99,515	$	152,647	$	181,715
Operating and maintenance expenses	$	10,590	$	11,422	$	20,515	$	18,911
General and administrative expenses	$	1,748	$	2,505	$	3,118	$	3,462

Quarterly Cash Distributions

Our common and general partner unitholders and the holders of Incentive Distribution Rights ("IDRs") are entitled to receive quarterly distributions of available cash as it is determined by the board of directors of our general partner in accordance with the terms and provisions of our Partnership Agreement. In February and May 2019, we paid quarterly cash distributions of $26.9 million and $27.4 million, respectively, of which $19.6 million and $20.0 million, respectively, were paid to Delek Holdings and our general partner. In February and May 2018, we paid quarterly cash distributions of $22.8 million and $24.0 million, respectively, of which $16.2 million and $17.2 million, respectively, were paid to Delek Holdings and our general partner. On July 24, 2019, our general partner's board of directors declared a quarterly cash distribution totaling $28.9 million, based on the available cash as of the date of determination for the end of the second quarter of 2019, payable on



10 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

August 13, 2019, of which $21.2 million is expected to be paid to Delek Holdings and our general partner, including the distribution as holder of the IDRs described in Note 8.

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.

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 $301.5 million net property, plant, and equipment balance as of June 30, 2019, $251.4 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 June 30, 2019
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	7,477	$	184	$	7,661
Product Revenue - Third Party	—		85,763		85,763
Product Revenue - Affiliate	—		7,187		7,187
Lease Revenue - Affiliate ^{(1) (2)}	36,731		18,000		54,731
Total Revenue	$	44,208	$	111,134	$	155,342

⁽¹⁾ Disaggregated revenue for the three months ended June 30, 2019 may not be comparable to disaggregated revenue for the three months ended June 30, 2018 as a result of our adoption of ASC 842, under which we applied the predominance principle and opted to not separate lease and non-lease components.

⁽²⁾ Net of $1.8 million of amortization expense for the three months ended June 30, 2019, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.



	Three Months Ended June 30, 2018
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	3,714	$	493	$	4,207
Service Revenue - Affiliate	23,160		14,581		37,741
Product Revenue - Third Party	—		108,993		108,993
Product Revenue - Affiliate	—		794		794
Lease Revenue - Affiliate ⁽¹⁾	10,870		3,675		14,545
Total Revenue	$	37,744	$	128,536	$	166,280

⁽¹⁾ Net of $1.8 million of amortization expense for the three months ended June 30, 2018, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.



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Notes to Condensed Consolidated Financial Statements (Unaudited)



	Six Months Ended June 30, 2019
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	11,451	$	304	$	11,755
Product Revenue - Third Party	—		171,187		171,187
Product Revenue - Affiliate	—		16,573		16,573
Lease Revenue - Affiliate ^{(1) (2)}	73,390		34,920		108,310
Total Revenue	$	84,841	$	222,984	$	307,825

⁽¹⁾ Disaggregated revenue for the six months ended June 30, 2019 may not be comparable to disaggregated revenue for the six months ended June 30, 2018 as a result of our adoption of ASC 842, under which we applied the predominance principle and opted to not separate lease and non-lease components.

⁽²⁾ Net of $3.6 million of amortization expense for the six months ended June 30, 2019, respectively, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.



	Six Months Ended June 30, 2018
	Pipelines and Transportation		Wholesale Marketing and Terminalling		Consolidated
Service Revenue - Third Party	$	7,965	$	802	$	8,767
Service Revenue - Affiliate	43,057		24,147		67,204
Product Revenue - Third Party	—		210,710		210,710
Product Revenue - Affiliate	—		21,028		21,028
Lease Revenue - Affiliate ⁽¹⁾	20,435		6,057		26,492
Total Revenue	$	71,457	$	262,744	$	334,201

⁽¹⁾ Net of $2.4 million of amortization expense for the six months ended June 30, 2018, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment.

As of June 30, 2019, we expect to recognize $1.1 billion in service and lease revenues related to our unfulfilled performance obligations pertaining to the minimum volume commitments and capacity utilization under the non-cancelable terms of our commercial agreements with Delek Holdings. Most of these agreements have an initial term ranging from five to ten years, which may be extended for various renewal terms. We disclose information about remaining performance obligations that have original expected durations of greater than one year.

Our unfulfilled performance obligations as of June 30, 2019 were as follows (in thousands):



Remainder of 2019	$	87,325
2020	174,284
2021	174,023
2022	172,872
2023 and thereafter	491,927
Total expected revenue on remaining performance obligations	$	1,100,431

Note 5 - Net Income Per Unit

We use the two-class method when calculating the net income per unit applicable to limited partners because we have more than one participating class of securities. Our participating securities consist of common units, general partner units and IDRs. The two-class method is based on the weighted-average number of common units outstanding during the period. Basic net income per unit applicable to limited partners is computed by dividing limited partners’ interest in net income, after deducting our general partner’s 2% interest and IDRs, by the weighted-average number of outstanding common units. Our net income is allocated to our general partner and limited partners in accordance with their respective partnership percentages after giving effect to priority income allocations for IDRs, which are held by our general partner pursuant to our Partnership Agreement. The IDRs are paid following the close of each quarter.

Earnings in excess of distributions are allocated to our general partner and limited partners based on their respective ownership interests. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit.

Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. As of June 30, 2019, the only potentially dilutive units outstanding consist of unvested phantom units.

Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The expected date of distribution for the distributions earned during the period ended June 30, 2019 is August 13, 2019. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts):



	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018
Net income attributable to partners	$	24,885		$	25,582	$	44,581		$	45,577
Less: General partner's distribution (including IDRs) ⁽¹⁾	8,160			6,200		15,583			11,910
Less: Limited partners' distribution	20,754			18,784		40,769			37,071
Distributions (in excess of) less than earnings	$	(4,029	)	$	598	$	(11,771	)	$	(3,404	)

General partner's earnings:
Distributions (including IDRs) ⁽¹⁾	$	8,160		$	6,200	$	15,583		$	11,910
Distributions (in excess of) less than earnings	(81		)	12		(235		)	(68		)
Total general partner's earnings	$	8,079		$	6,212	$	15,348		$	11,842

Limited partners' earnings on common units:
Distributions	$	20,754		$	18,784	$	40,769		$	37,071
Distributions (in excess of) less than earnings	(3,948		)	586		(11,536		)	(3,336		)
Total limited partners' earnings on common units	$	16,806		$	19,370	$	29,233		$	33,735

Weighted average limited partner units outstanding:
Common units - (basic)	24,409,359			24,386,031		24,408,270			24,384,341
Common units - (diluted)	24,414,343			24,394,103		24,414,077			24,391,760

Net income per limited partner unit:
Common units - (basic)	$	0.69		$	0.79	$	1.20		$	1.38
Common units - (diluted) ⁽²⁾	$	0.69		$	0.79	$	1.20		$	1.38

⁽¹⁾General partner distributions (including IDRs) consist of the 2.0% general partner interest and IDRs, which represent the right of the general partner to receive increasing percentages of quarterly distributions of available cash from operating surplus in excess of 0.43125 per unit per quarter. See Note 8 for further discussion related to IDRs.

⁽²⁾ There were no outstanding common units excluded from the diluted earnings per unit calculation for the three and six months ended June 30, 2019 and 2018.

Note 6 - Inventory

Inventories consisted of $4.7 million and $5.5 million of refined petroleum products as of June 30, 2019 and December 31, 2018, respectively. Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We recognize lower of cost or net realizable value charges as a component of cost of materials and other in the consolidated statements of income and comprehensive income, which amounted to nominal amounts during the three and six months ended June 30, 2019 and 2018.



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Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 7 - Long-Term Obligations

DKL Credit Facility

Prior to September 28, 2018, the Partnership had a $700.0 million senior secured revolving credit agreement with Fifth Third Bank ("Fifth Third"), as administrative agent, and a syndicate of lenders (the "2014 Facility") bearing interest at (i) either a U.S. dollar prime rate or a LIBOR Rate for borrowings denominated in U.S. Dollars, or (ii) either a Canadian dollar prime rate, or a Canadian Dealer Offered Rate, for borrowings denominated in Canadian dollars (in each case plus applicable margins, at the election of the borrowers and as a function of draw down currency). The 2014 Facility had a maturity date of December 30, 2019. The obligations under the 2014 Facility were secured by a first priority lien on substantially all of the Partnership's tangible and intangible assets. Additionally, a subsidiary of Delek Holdings provided a limited guaranty of the Partnership's obligations under the 2014 Facility.

On September 28, 2018, the Partnership entered into a third amended and restated senior secured revolving credit agreement, which amended and restated the 2014 Facility (hereafter, the "DKL Credit Facility") with Fifth Third Bank, as administrative agent, and a syndicate of lenders. The DKL Credit Facility contains a dual currency borrowing tranche that permits draw downs in U.S. or Canadian dollars. Under the terms of the DKL Credit Facility, among other things, the lender commitments were increased from $700.0 million to $850.0 million. The DKL Credit Facility also contains an accordion feature whereby the Partnership can increase the size of the credit facility to an aggregate of $1.0 billion, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent.

The obligations under the DKL Credit Facility remain secured by first priority liens on substantially all of the Partnership's and its subsidiaries' tangible and intangible assets. Additionally, Delek Marketing & Supply, LLC ("Delek Marketing"), a subsidiary of Delek Holdings, continues to provide a limited guaranty of the Partnership's obligations under the DKL Credit Facility. 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 Holdings in favor of Delek Marketing (the "Holdings Note") and (ii) secured by Delek Marketing's pledge of the Holdings Note to the lenders under the DKL Credit Facility. As of June 30, 2019 the principal amount of the Holdings Note was $102.0 million.

The DKL Credit Facility has a maturity date of September 28, 2023. Borrowings denominated in U.S. dollars bear interest at either a U.S. dollar prime rate, plus an applicable margin, or the London Interbank Offered Rate ("LIBOR"), plus an applicable margin, at the election of the borrowers. Borrowings denominated in Canadian dollars bear interest at either a Canadian dollar prime rate, plus an applicable margin, or the Canadian Dealer Offered Rate, plus an applicable margin, at the election of the borrowers. The applicable margin in each case and the fee payable for the unused revolving commitments vary based upon the Partnership's most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the DKL Credit Facility. At June 30, 2019, the weighted average interest rate for our borrowings under the facility was approximately 4.9%. Additionally, the DKL Credit Facility requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of June 30, 2019, this fee was 0.40% per year.

As of June 30, 2019, we had $596.7 million of outstanding borrowings under the DKL Credit Facility, with no letters of credit in place. Unused credit commitments under the DKL Credit Facility as of June 30, 2019, were $253.3 million.

6.750% Senior Notes Due 2025

On May 23, 2017, the Partnership and Delek Logistics Finance Corp., a Delaware corporation and a wholly-owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), issued $250.0 million in aggregate principal amount of 6.75% senior notes due 2025 (the “2025 Notes”) at a discount. The 2025 Notes are general unsecured senior obligations of the Issuers. The 2025 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Finance Corp., the "Guarantors") and will be unconditionally guaranteed on the same basis by certain of the Partnership’s future subsidiaries. The 2025 Notes rank equal in right of payment with all existing and future senior indebtedness of the Issuers, and senior in right of payment to any future subordinated indebtedness of the Issuers. Interest on the 2025 Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.

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

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



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Notes to Condensed Consolidated Financial Statements (Unaudited)

In May 2018, the 2025 Notes were exchanged for new notes with terms substantially identical in all material respects with the 2025 Notes except that the new notes do not contain terms with respect to transfer restrictions.

As of June 30, 2019, we had $250.0 million in outstanding principal amount of the 2025 Notes. As of June 30, 2019, the effective interest rate related to the Delek Logistics Notes was approximately 7.2%.

Outstanding borrowings under the 2025 Notes are net of deferred financing costs and debt discount of $4.4 million and $1.4 million, respectively, as of June 30, 2019, and $4.8 million and $1.5 million, respectively, as of December 31, 2018.

Note 8 - Equity

We had 9,123,239 common limited partner units held by the public outstanding as of June 30, 2019. Additionally, as of June 30, 2019, Delek Holdings owned a 61.4% limited partner interest in us, consisting of 15,294,046 common limited partner units and a 94.6% interest in our general partner, which owns the entire 2.0% general partner interest consisting of 498,312 general partner units. Affiliates, who are also members of our general partner's management and board of directors, own the remaining 5.4% interest in our general partner.

Equity Activity

The table below summarizes the changes in the number of units outstanding from December 31, 2018 through June 30, 2019.



	Common - Public	Common - Delek Holdings	General Partner	Total
Balance at December 31, 2018	9,109,807	15,294,046	498,038	24,901,891
General partner units issued to maintain 2% interest	—	—	274	274
Unit-based compensation awards ⁽¹⁾	13,432	—	—	13,432
Balance at June 30, 2019	9,123,239	15,294,046	498,312	24,915,597

⁽¹⁾ No units were withheld for taxes during the three and six months ended June 30, 2019.

Issuance of Additional Securities

Our Partnership Agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders. Costs associated with the issuance of securities are allocated to all unitholders' capital accounts based on their ownership interest at the time of issuance.

Allocations of Net Income

Our Partnership Agreement contains provisions for the allocation of net income and loss to the unitholders and our general partner. For purposes of maintaining partner capital accounts, the Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our general partner.

The following table presents the allocation of the general partner's interest in net income (in thousands, except percentage of ownership interest):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income attributable to partners	$	24,885		$	25,582		$	44,581		$	45,577
Less: General partner's IDRs	(7,736		)	(5,817		)	(14,751		)	(11,154		)
Net income available to partners	$	17,149		$	19,765		$	29,830		$	34,423
General partner's ownership interest	2.0		%	2.0		%	2.0		%	2.0		%
General partner's allocated interest in net income	$	343		$	395		597			$	688
General partner's IDRs	7,736			5,817			14,751			11,154
Total general partner's interest in net income	$	8,079		$	6,212		$	15,348		$	11,842



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Notes to Condensed Consolidated Financial Statements (Unaudited)

Incentive Distribution Rights

Our general partner is currently entitled to 2.0% of all quarterly distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute up to a proportionate amount of capital to us to maintain its current general partner interest. The general partner's 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest. Our general partner also currently holds IDRs that entitle it to receive increasing percentages, up to a maximum of 48.0%, of the cash we distribute from operating surplus (as defined in our Partnership Agreement) in excess of 0.43125 per unit per quarter. The maximum distribution is 48.0% and does not include any distributions that our general partner or its affiliates may receive on common or general partner units that it owns. The IDRs held by our general partner currently entitle it to receive the maximum distribution.

Cash Distributions

Our Partnership Agreement sets forth the calculation to be used to determine the amount and priority of available cash distributions that our limited partner unitholders and general partner will receive. Our distributions earned with respect to a given period are declared subsequent to quarter end. The table below summarizes the quarterly distributions related to our quarterly financial results:



Quarter Ended	Total Quarterly Distribution Per Limited Partner Unit		Total Quarterly Distribution Per Limited Partner Unit, Annualized		Total Cash Distribution, including general partner interest and IDRs (in thousands)		Date of Distribution	Unitholders Record Date
June 30, 2018	$	0.770	$	3.08	$	24,984	August 13, 2018	August 3, 2018
September 30, 2018	$	0.790	$	3.16	$	25,960	November 9, 2018	November 2, 2018
December 31, 2018	$	0.810	$	3.24	$	26,949	February 12, 2019	February 4, 2019
March 31, 2019	$	0.820	$	3.28	$	27,438	May 14, 2019	May 7, 2019
June 30, 2019	$	0.850	$	3.40	$	28,914	August 13, 2019 ⁽¹⁾	August 5, 2019

⁽¹⁾ Expected date of distribution.

The allocations of total quarterly cash distributions made to general and limited partners for the three and six months ended June 30, 2019 and 2018 are set forth in the table below. Distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below presents total cash distributions applicable to the period in which the distributions are earned (in thousands, except per unit amounts):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
General partner's distributions:
General partner's distributions	$	424	$	383	$	832	$	756
General partner's IDRs	7,736		5,817		14,751		11,154
Total general partner's distributions	8,160		6,200		15,583		11,910

Limited partners' distributions:
Common limited partners' distributions	20,754		18,784		40,769		37,071

Total cash distributions	$	28,914	$	24,984	$	56,352	$	48,981

Cash distributions per limited partner unit	$	0.850	$	0.770	$	1.670	$	1.520

Note 9 - Equity Based Compensation

We incurred approximately $0.1 million and $0.3 million of unit-based compensation expense related to the Partnership during the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.3 million of unit-based compensation expense related to the Partnership during the three and six months ended June 30, 2018, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income. The fair value of phantom unit



15 \|

awards under the Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") is determined based on the closing market price of our common limited partner units on the grant date. The estimated fair value of our phantom units is amortized over the vesting period using the straight line method. Awards vest over one- to five-year service periods, unless such awards are amended in accordance with the LTIP.

As of June 30, 2019 and 2018, there was $0.5 million of total unrecognized compensation cost related to non-vested equity-based compensation arrangements, which is expected to be recognized over a weighted-average period of 0.9 years.

Note 10 - Equity Method Investments

In May 2019, the Partnership, through its wholly owned indirect subsidiary DKL Pipeline, LLC (“DKL Pipeline”), entered into a Contribution and Subscription Agreement (the “Contribution Agreement”) with Plains Pipeline, L.P. (“Plains”) and Red River Pipeline Company LLC (“Red River”). Pursuant to the Contribution Agreement, DKL Pipeline contributed $124.7 million, substantially all of which was financed by borrowings under the DKL Credit Facility, to Red River in exchange for a 33% membership interest in Red River and DKL Pipeline’s admission as a member of Red River ("Red River Pipeline Joint Venture"). Red River owns a 16-inch crude oil pipeline running from Cushing, Oklahoma to Longview, Texas, with an expansion project planned to increase the pipeline capacity, which is expected to be completed during the first half of 2020. We contributed an additional $3.5 million related to such expansion project in May 2019.

Summarized unaudited financial information for Red River on a 100% basis is shown below (in thousands):



	June 30, 2019		December 31, 2018
Current Assets	$	8,783	$	6,594
Non-current Assets	$	375,416	$	375,618
Current liabilities	$	3,319	$	4,945



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenues	$	14,391	$	10,112	$	26,017	$	19,190
Gross profit	$	9,191	$	5,064	$	14,466	$	9,348
Net income	$	8,942	$	4,628	$	13,652	$	8,513

We have two joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek Holdings. We own a 50% membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC") to operate one of these pipeline systems and a 33% membership interest in the entity formed with Rangeland Energy II, LLC ("Rangeland Energy") to operate the other pipeline system. During 2018, Rangeland Energy was acquired by Andeavor and the legal entity in which we have an equity investment became Andeavor Logistics RIO Pipeline LLC ("Andeavor Logistics").

Combined summarized unaudited financial information for these two equity method investees on a 100% basis is shown below (in thousands):



	June 30, 2019		December 31, 2018
Current assets	$	23,031	$	15,450
Non-current assets	$	255,690	$	240,852
Current liabilities	$	8,103	$	4,362
Non-current liabilities	$	11	$	—



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenues	$	10,077	$	9,886	$	19,191	$	17,876
Gross profit	$	5,688	$	5,245	$	10,584	$	8,479
Net Income	$	5,249	$	4,800	$	9,666	$	7,512



16 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Partnership's investments in these three entities were financed through a combination of cash from operations and borrowings under the DKL Credit Facility. As of June 30, 2019 and December 31, 2018, the Partnership's investment balance in these joint ventures was $241.6 million and $104.8 million, respectively.

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

Note 11 - Segment Data

We aggregate our operating segments into two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling:


•	The assets and investments reported in the pipelines and transportation segment provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services to Delek Holdings' refining operations and independent third parties.


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

Our operating segments adhere to the accounting policies used for our consolidated financial statements. Our operating segments are managed separately because each segment requires different industry knowledge, technology and marketing strategies. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on segment contribution margin. Segment contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization.



17 \|

Notes to Condensed Consolidated Financial Statements (Unaudited)

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Pipelines and Transportation
Net revenues:
Affiliate	$	36,731		$	34,030		$	73,390		$	63,492
Third party	7,477			3,714			11,451			7,965
Total pipelines and transportation	44,208			37,744			84,841			71,457
Cost of materials and other	7,357			5,195			12,924			9,636
Operating expenses (excluding depreciation and amortization)	12,728			9,933			23,562			19,555
Segment contribution margin	$	24,123		$	22,616		$	48,355		$	42,266
Capital spending ⁽¹⁾	$	818		$	826		$	1,242		$	2,234

Wholesale Marketing and Terminalling
Net revenues:
Affiliate ⁽²⁾	$	25,187		$	19,050		$	51,493		$	51,232
Third party	85,947			109,486			171,491			211,512
Total wholesale marketing and terminalling	111,134			128,536			222,984			262,744
Cost of materials and other	86,497			100,821			177,195			215,412
Operating expenses (excluding depreciation and amortization)	4,599			4,984			9,823			7,939
Segment contribution margin	$	20,038		$	22,731		$	35,966		$	39,393
Capital spending ⁽¹⁾	$	524		$	1,426		$	1,004		$	2,215

Consolidated
Net revenues:
Affiliate	$	61,918		$	53,080		$	124,883		$	114,724
Third party	93,424			113,200			182,942			219,477
Total Consolidated	155,342			166,280			307,825			334,201
Cost of materials and other	93,854			106,016			190,119			225,048
Operating expenses (excluding depreciation and amortization presented below)	17,327			14,917			33,385			27,494
Contribution margin	$	44,161		$	45,347		$	84,321		$	81,659
General and administrative expenses	5,293			3,747			9,766			6,722
Depreciation and amortization	6,639			7,019			13,213			13,019
Gain on asset disposals	(27		)	(129		)	(25		)	(69		)
Operating income	$	32,256		$	34,710		$	61,367		$	61,987
Capital spending ⁽¹⁾	$	1,342		$	2,252		$	2,246		$	4,449

⁽¹⁾Capital spending excludes transaction costs capitalized in the amount of $0.4 million that relate to the Big Spring Logistic Assets Acquisition for the six months ended June 30, 2018.

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



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Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the total assets for each segment as of June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019		December 31, 2018
Pipelines and transportation	$	525,070	$	387,333
Wholesale marketing and terminalling	244,240		237,260
Total assets	$	769,310	$	624,593

Property, plant and equipment and accumulated depreciation as of June 30, 2019 and depreciation expense by reporting segment for the three and six months ended June 30, 2019 were as follows (in thousands):



	Pipelines and Transportation			Wholesale Marketing and Terminalling			Consolidated
Property, plant and equipment	$	359,632		$	94,949		$	454,581
Less: accumulated depreciation	(117,158		)	(35,878		)	(153,036		)
Property, plant and equipment, net	$	242,474		$	59,071		$	301,545
Depreciation expense for the three months ended June 30, 2019	$	5,303		$	1,336		$	6,639
Depreciation expense for the six months ended June 30, 2019	$	10,544		$	2,669		$	13,213

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. There were no indicators of impairment of our property, plant and equipment as of June 30, 2019.

Note 12 - Income Taxes

For tax purposes, each partner of the Partnership is required to take into account its share of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and fair market value of our assets, the acquisition price of such partner's units and the taxable income allocation requirements under our Partnership Agreement.

The Partnership is not a taxable entity for federal income tax purposes. While most states do not impose an entity level tax on partnership income, the Partnership is subject to entity level tax in both Tennessee and Texas.

Note 13 - 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 financial statements. See "Crude Oil Releases" below for discussion of an enforcement action.

Environmental, Health and Safety

We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the Environmental Protection Agency (the "EPA"), the United States Department of Transportation, the Occupational Safety and Health Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices and pollution prevention measures, as well as the safe operation of our pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our terminals, pipelines, saltwells, trucks and related operations, and may be subject to revocation, modification and renewal. See "Crude Oil Releases" below for discussion of an enforcement action.

These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters, which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and we expect that there will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.

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



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Notes to Condensed Consolidated Financial Statements (Unaudited)

Crude Oil Releases

We have experienced several crude oil releases involving our assets, including four releases that occurred in the first quarter of 2019, three releases that occurred in the first quarter of 2018, and three releases that occurred in the fourth quarter of 2018. Cleanup operations and site maintenance and remediation efforts on these and other releases have been substantially completed. Confirmatory sampling is currently underway. We expect regulatory closure by the end of 2019. There were no significant spills in the second quarter of 2019. Regulatory authorities could require additional remediation based on the results of our remediation efforts. We may incur additional expenses as a result of further scrutiny by regulatory authorities and continued compliance with laws and regulations to which our assets are subject. As of June 30, 2019, we have accrued $0.7 million for remediation and other such matters related to these releases, which excludes the accrual discussed below for the release of crude oil from a pumping facility at our Magnolia Station near the El Dorado Refinery (the "Magnolia Release"). Expenses incurred for the remediation of these crude oil releases are included in operating expenses in our condensed consolidated statements of income and comprehensive income and the majority are subsequently reimbursed by Delek Holdings pursuant to the terms of the Omnibus Agreement. Reimbursements are recorded as a reduction to operating expense. We do not believe the total costs associated with these events, whether alone or in the aggregate, including any fines or penalties and net of available insurance reimbursement, will have a material adverse effect upon our business, financial condition or results of operations as we are reimbursed by Delek Holdings for such costs.

During the three and six months ended June 30, 2019, we recorded approximately $0.2 million and $0.3 million of expenses, respectively, and $0.1 million of expenses during both the three and six months ended June 30, 2018, which is net of total reimbursable costs from Delek Holdings pursuant to the terms of the Omnibus Agreement of $0.7 million and $4.0 million for the three and six months ended June 30, 2019, respectively, and $4.1 million and $7.0 million for the three and six months ended June 30, 2018, respectively, to cover the costs of asset failures.

Many of the releases have occurred on our SALA Gathering System. Currently, we are in the process of decommissioning certain sections of the SALA Gathering System in an effort to improve the safety and integrity of the system. We do not expect for the decommissioning of certain gathering lines on the system to have a material effect on the operational capabilities of the system.

The United States Department of Justice (the "DOJ"), on behalf of the EPA, and the state of Arkansas, on behalf of the Arkansas Department of Environmental Quality, have been pursuing an enforcement action against the Partnership with regard to potential violations of the Clean Water Act and certain state laws arising from the Magnolia Release since June 2015. On July 13, 2018, the DOJ and the State of Arkansas filed a civil action against two of the Partnership's wholly-owned subsidiaries, Delek Logistics Operations, LLC and SALA Gathering Systems LLC, in the United States District Court for the Western District of Arkansas.

In December 2018, the Partnership, the United States and the state of Arkansas reached an agreement to settle the claims related to the Magnolia Release for $2.2 million and the claims against the Partnership were resolved and an additional demand for a compliance audit at the Magnolia terminal was abandoned in exchange for payment of monetary penalties and other relief. As of June 30, 2019, we accrued $2.2 million for the Magnolia Release. We believe this amount is adequate to cover our expected obligations related to these proceedings. The accrual is recorded in pipeline release liabilities in our condensed consolidated balance sheet. In July 2019, we signed and submitted to the DOJ, a consent decree (the "Magnolia Consent Decree") to settle the release. We expect the Magnolia Consent Decree to be finalized and to settle the accrual in the second half of 2019.

Letters of Credit

As of June 30, 2019, we had no letters of credit in place.

Note 14 - Leases

We lease certain pipeline and transportation equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Our leases do not have any outstanding renewal options. Certain leases also include options to purchase the leased equipment.



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Notes to Condensed Consolidated Financial Statements (Unaudited)

Certain of our lease agreements include rates based on equipment usage and others include rate inflationary indices based increases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.



	Three Months Ended June 30,			Six Months Ended June 30,
(in thousands)	2019			2019
Lease Cost
Operating lease cost	$	1,472		$	2,899
Short-term lease cost ⁽¹⁾	326			803
Total lease cost	$	1,798		$	3,702

Other Information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	(1,472	)	$	(2,899	)

Weighted-average remaining lease term (years) for operating leases	4.0			4.0

Weighted-average discount rate ⁽²⁾ operating leases	8.0		%	8.0		%

⁽¹⁾Includes an immaterial amount of variable lease cost.

⁽²⁾Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842.

The following is an estimate of the maturity of our lease liabilities for operating leases having remaining noncancelable terms in excess of one year as of June 30, 2019 (in thousands) under ASC 842:



July 1 to December 31, 2019	$	2,967
2020	5,857
2021	5,557
2022	5,004
2023	2,409
Thereafter	—
Total lease payments	21,794
Less: Interest	3,002
Present value of lease liabilities	$	18,792

The following is an estimate of our future minimum lease payments for operating leases having remaining noncancelable terms in excess of one year as of December 31, 2018 (in thousands) under ASC 840:



2019	$	5,755
2020	5,659
2021	5,337
2022	5,031
2023	2,429
Thereafter	8
Total future minimum lease payments	$	24,219

Note 15 - Subsequent Events

Distribution Declaration

On July 24, 2019, our general partner's board of directors declared a quarterly cash distribution of $0.850 per unit, payable on August 13, 2019, to unitholders of record on August 5, 2019.



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Management's Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 1, 2019 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.

Unless otherwise noted or the context requires otherwise, references in this report to "Delek Logistics Partners, LP," the "Partnership," "we," "us," "our," or like terms, may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Holdings" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than the Partnership and its subsidiaries and its general partner.

Effective March 1, 2018, the Partnership acquired from Delek Holdings certain logistics assets primarily located at or adjacent to Delek Holdings' Big Spring, Texas refinery (the "Big Spring Refinery"). See Note 2 to our accompanying condensed consolidated financial statements for additional information on the acquisition.

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

Forward-Looking Statements

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

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


•	our substantial dependence on Delek Holdings or its assignees and their support of and respective ability to pay us under our commercial agreements;


•	our future coverage, leverage, financial flexibility and growth, and our ability to improve performance and achieve distribution growth at any level or at all;


•	Delek Holdings' future growth, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution;


•	positive industry dynamics, including Permian Basin growth, efficiencies and takeaway capacity;


•	the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or

legal actions and other effects related to spills, releases and tank failures;


•	changes in insurance markets impacting costs and the level and types of coverage available;


•	the timing and extent of changes in commodity prices and demand for refined products;


•	the wholesale marketing margins we are able to obtain and the number of barrels of product we are able to purchase and sell in our west Texas wholesale business;


•	the suspension, reduction or termination of Delek Holdings' or its assignees' or third-party's obligations under our commercial agreements, including the duration, fees or terms thereof;


•	the results of our investments in joint ventures;



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Management's Discussion and Analysis


•	the ability to secure commercial agreements with Delek Holdings or third parties upon expiration of existing agreements;


•	disruptions due to equipment interruption or failure, or other events, including cyber attacks, at our facilities, Delek Holdings’ facilities or third-party facilities on which our business is dependent;


•	changes in the availability and cost of capital of debt and equity financing;


•	our reliance on information technology systems in our day-to-day operations;


•	changes in general economic conditions;


•	the effects of existing and future laws and governmental regulations, including, but not limited to, the rules and regulations promulgated by the Federal Energy Regulatory Commission ("FERC") and those relating to environmental protection, pipeline integrity and safety;


•	competitive conditions in our industry;


•	actions taken by our customers and competitors;


•	the demand for crude oil, refined products and transportation and storage services;


•	our ability to successfully implement our business plan;


•	an inability to have growth projects completed on time and on budget;


•	our ability to successfully integrate acquired businesses;


•	disruptions due to acts of God, including natural disasters, weather-related delays, casualty losses and other matters beyond our control;


•	changes or volatility in interest and inflation rates;


•	labor relations;


•	large customer defaults;


•	changes in tax status and regulations;


•	the effects of future litigation; and


•	other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K.

In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.

All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.

Business Overview


•	The Partnership primarily owns and operates crude oil, intermediate and refined products logistics and marketing assets.


•	We gather, transport, offload and store crude oil and intermediate products and market, distribute, transport and store refined products primarily in select regions of the southeastern United States and Texas for Delek Holdings and third parties.


•	A substantial majority of our existing assets are both integral to and dependent upon the success of Delek Holdings' refining operations, as many of our assets are contracted exclusively to Delek Holdings in support of its Tyler, El Dorado and Big Spring refineries.

•

The Partnership is 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. Instead, for purposes of such income taxes, each partner of the Partnership is required to take into account its share of items 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 the fair market value of our assets and financial reporting bases of assets and liabilities, the acquisition price of the partner's units and the taxable income allocation requirements under the Partnership's First Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement").

Our Reporting Segments and Assets

Our business consists of two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling.

The assets and investments in our pipelines and transportation segment consist of and have been made in pipelines, tanks, offloading facilities, trucks and ancillary assets, which provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services primarily in support of Delek Holdings' refining operations in Tyler, Texas, El Dorado, Arkansas and Big Spring, Texas. Additionally, the assets in this segment provide crude oil transportation services to certain third parties. In providing these services, we do not take ownership of the products or crude oil that we transport or store and, therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment.



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Management's Discussion and Analysis

The assets in our wholesale marketing and terminalling segment consist of refined products terminals and pipelines in Texas, Tennessee, Arkansas and Oklahoma. We generate revenue in our wholesale marketing and terminalling segment by providing marketing services for the refined products output of the Tyler and Big Spring refineries, engaging in wholesale activity at our terminals in west Texas and at terminals owned by third parties, whereby we purchase light products for sale and exchange to third parties, and by providing terminalling services at our refined products terminals to independent third parties and Delek Holdings.

2019 Developments

Inflation Adjustments

On July 1, 2019, the tariffs on our FERC regulated pipelines and the throughput fees and storage fees under certain of our agreements with Delek and third parties that are subject to adjustment using FERC indexing decreased by approximately 0.1%, the amount of the change in the FERC oil pipeline index. Under certain of our other agreements with Delek and third parties, the fees decreased and increased, respectively, based on the consumer price index or the producer price index, which decrease and increased approximately 1.7% and 4.7%, respectively.

Paline Pipeline Capacity

During the year ended December 31, 2018, we had separate agreements with an unrelated third party and a related party, Delek Refining, Ltd., for such parties to utilize certain capacity on the Paline Pipeline System. Pursuant to the terms of these agreements, each party executed a Transportation and Service Agreement, committing to a minimum volume commitment of 30,000 bpd (subject to proration), collectively using approximately 90% of the line capacity each month. The parties received the right to ship at a volume incentive rate of $0.75 per barrel. The initial term of each agreement ran through February 2019. The Partnership elected not to offer to extend these agreements and these agreements terminated on February 28, 2019. As a result, since March 1, 2019, the capacity previously used by these parties has been available for any party to ship on the capacity of the pipeline subject to a tariff on file with the FERC for service provided on the Paline Pipeline System, which is currently $1.57 per barrel.

Red River Pipeline Joint Venture

In May 2019, Delek Logistics Partners, LP (the “Partnership”), through its wholly owned indirect subsidiary DKL Pipeline, LLC (“DKL Pipeline”), entered into a Contribution and Subscription Agreement (the “Contribution Agreement”) with Plains Pipeline, L.P. (“Plains”) and Red River Pipeline Company LLC (“Red River”). Pursuant to the Contribution Agreement, DKL Pipeline contributed $124.7 million to Red River, which was financed by borrowings under the DKL Credit Facility, in exchange for a 33% membership interest in Red River and DKL Pipeline’s admission as a member of Red River ("Red River Pipeline Joint Venture"). Red River intends to proceed with an expansion project to increase the capacity of the pipeline from 150,000 barrels per day to 235,000 barrels per day and, pursuant to the Contribution Agreement, in May 2019 we contributed an additional $3.5 million for such expansion project. This joint venture supports our initiative to grow the midstream business, while increasing our crude oil sourcing flexibility. We expect this investment to generate significant EBITDA in its first twelve months, which will increase following the expansion project in the first half of 2020. See Note 10 to our accompanying condensed consolidated financial statements for additional information on the Red River Pipeline Joint Venture.

How We Generate Revenue

The Partnership generates revenue by charging fees to Delek Holdings and third parties for gathering, transporting, offloading and storing crude oil and for marketing, distributing, transporting, throughputting and storing intermediate and refined products. We also wholesale market refined products primarily in the west Texas market. A substantial majority of our contribution margin, which we define as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization, is derived from commercial agreements with Delek Holdings with initial terms ranging from five to ten years, which gives us a contractual revenue base that we believe enhances the stability of our cash flows. As more fully described below, our commercial agreements with Delek Holdings typically include minimum volume or throughput commitments by Delek Holdings, which we believe will provide a stable revenue stream in the future. The fees charged under our agreements with Delek Holdings and third parties are indexed to inflation-based indices. In addition, the rates charged with respect to our assets that are subject to inflation indexing may increase or decrease, typically on July 1 of each year, by the amount of any change in various inflation-based indices, including FERC, provided that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.

Commercial Agreements with Delek Holdings



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Management's Discussion and Analysis

amount. See our Annual Report on Form 10-K filed with the SEC on March 1, 2019 for a discussion of our material commercial agreements with Delek Holdings.

Other Transactions

How We Evaluate Our Operations

We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) volumes (including pipeline throughput and terminal volumes); (ii) contribution margin per barrel; (iii) operating and maintenance expenses; (iv) cost of materials and other; and (v) EBITDA and distributable cash flow (as such terms are defined below).

Volumes

The amount of revenue we generate primarily depends on the volumes of crude oil and refined products that we handle in our pipeline, transportation, terminalling, storage and marketing operations. These volumes are primarily affected by the supply of and demand for crude oil, intermediate and refined products in the markets served directly or indirectly by our assets. Although Delek Holdings has committed to minimum volumes under certain of the commercial agreements, as described above, our results of operations will be impacted by:


•	Delek Holdings' utilization of our assets in excess of its minimum volume commitments;


•	our ability to identify and execute acquisitions and organic expansion projects, and capture incremental volume increases from Delek Holdings or third parties;


•	our ability to increase throughput volumes at our refined products terminals and provide additional ancillary services at those terminals;


•	our ability to identify and serve new customers in our marketing and trucking operations; and


•	our ability to make connections to third-party facilities and pipelines.

Contribution Margin per Barrel

Because we do not allocate general and administrative expenses by segment, we measure the performance of our segments by the amount of contribution margin generated in operations. Contribution margin is calculated as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization.

For our wholesale marketing and terminalling segment, we also measure gross margin per barrel. Gross margin per barrel reflects the gross margin (net revenues less cost of materials and other) of the wholesale marketing operations divided by the number of barrels of refined products sold during the measurement period. Both contribution margin and gross margin per barrel can be affected by fluctuations in the prices and cost of gasoline, distillate fuel, ethanol and Renewable Identification Numbers ("RINs".) Historically, the profitability of our wholesale marketing operations has been affected by commodity price volatility, specifically as it relates to changes in the price of refined products between the time we purchase such products from our suppliers and the time we sell the products to our wholesale customers, and the fluctuation in the value of RINs. Commodity price volatility may also impact our wholesale marketing operations when the selling price of refined products does not adjust as quickly as the purchase price. Our wholesale marketing gross margin can also be impacted by fixed price ethanol agreements that we enter into to fix the price we pay for ethanol.

Operating and Maintenance Expenses

We seek to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses include the costs associated with the operation of owned terminals and pipelines and terminalling expenses at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business. These expenses generally remain relatively stable across broad ranges of throughput volumes, but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses. Additionally, compliance with federal, state and local laws and regulations relating to the protection of the environment, health and safety may require us to incur additional expenditures. We will seek to manage our maintenance expenditures on our pipelines



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Management's Discussion and Analysis

and terminals by scheduling maintenance over time to avoid significant variability in our maintenance expenditures and minimize their impact on our cash flow.

Cost of Materials and Other

These costs include (i) all costs of purchased refined products in our wholesale marketing and terminalling segment, as well as additives and related transportation of such products, (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance, (iii) the cost of pipeline capacity leased from any third parties, and (iv) gains and losses related to our commodity hedging activities.

Financing

The Partnership has declared its intent to make a cash distribution to its unitholders at a distribution rate of $0.850 per unit for the quarter ended June 30, 2019 ($3.40 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute to its unitholders quarterly all of its available cash as defined in the Partnership Agreement. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our senior secured revolving credit agreement and any potential future issuances of equity and debt securities. See Note 8 to the condensed consolidated financial statements for a discussion of historic cash distributions.

Market Trends

Master Limited Partnerships

Fluctuations in crude oil prices and the prices of related refined products impact our operations and the operations of other master limited partnerships in the midstream energy sector. In particular, crude oil prices and the prices of related refined products have the ability to influence drilling activity in many basins and the amounts of capital spending that crude oil exploration and production companies incur to support future growth. Throughout the majority of 2018, the prices of crude oil and related refined products remained relatively consistent. However, during the fourth quarter of 2018, the prices of crude oil and related refined products decreased significantly due to seasonal impacts. During the first half of 2019, the prices of crude oil and related refined products began to rebound and increase. Drilling activity, particularly in the Permian Basin, which has attractive drilling economics supported by improved efficiencies and drilling cost, continues to be a source of favorable market conditions in the area. As market conditions are improving, our assets remain in demand and our operations will benefit from this environment, particularly in the west Texas area where our results are most driven by market factors. Additionally, we believe these market conditions will continue to facilitate the development of profitable growth projects that are needed to support future distribution growth in the midstream energy sector and for the Partnership.

We are aware that certain industry participants structured as master limited partnerships have addressed certain key variables (including investor sentiments, declining distributions, and recent changes in tax law, among others) by restructuring as entities subject to tax as corporations. These variables are unique for each such restructuring or restructured master limited partnership. We have no current plan or intention to undertake a similar restructuring.

West Texas Marketing Operations

Overall demand for gathering and terminalling services in a particular area is generally driven by crude oil production in the area, which can be impacted by crude oil prices, refining economics and access to alternate delivery and transportation infrastructure. Additionally, volatility in crude oil, intermediate and refined products prices in the west Texas area and the value attributable to RINs can affect the results of our west Texas operations. For example, as discussed above, drilling activity and the prices of crude oil and related refined products were stable for the majority of 2018 and in spite of a decrease in prices during the fourth quarter of 2018, demand for refined products from our west Texas operations to industries that support crude oil exploration and production began to rebound in the first half of 2019. See below for the high, low and average price per barrel of WTI crude oil for each of the quarterly periods in 2018 and for the two quarterly periods in 2019.



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Management's Discussion and Analysis

Also, the volatility of refined products prices may impact our margin in the west Texas operations when the selling price of refined products does not adjust as quickly as the purchase price. See below for the range of prices per gallon of gasoline and diesel for each of the quarterly periods in 2018 and for the two quarterly periods in 2019.



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Management's Discussion and Analysis

Our west Texas operations can benefit from RINs that are generated by ethanol blending activities. As a result, changes in the price of RINs can affect our results of operations. The RINs we generate are sold primarily to Delek Holdings at market prices. We sold approximately$0.3 million of RINs to Delek Holdings during the second quarter of 2019 and $0.6 million of RINs to Delek Holdings for the six months ended June 30, 2019. We sold approximately $0.8 million of RINs to Delek Holdings during the second quarter of 2018 and $2.0 million of RINs to Delek Holdings for the six months ended June 30, 2018. See below for the high, low and average prices of RINs for each of the quarterly periods in 2018 and in the two quarterly periods in 2019 .

All of these factors are subject to change over time. As part of our overall business strategy, management considers aspects such as location, acquisition and expansion opportunities and factors impacting the utilization of the refineries (and therefore throughput volumes), which may impact our performance in the market.

Contractual Obligations

There have been no material changes to our contractual obligations and commercial commitments during the six months ended June 30, 2019, from those disclosed in our Annual Report on Form 10-K.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, complex or subjective judgments or estimates. Based on this definition and as further described in our Annual Report on Form 10-K, we believe our critical accounting policies include the following: (i) evaluating impairment for property, plant and equipment and definite life intangibles, (ii) evaluating potential impairment of goodwill, and (iii) estimating environmental expenditures. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies or estimates since our most recently filed Annual Report on Form 10-K. See Note 1 of the condensed consolidated financial statements in Item 1, Financial Statements for discussion of updates to our accounting policies.

Non-GAAP Measures

Our management uses certain "non-GAAP" operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include:



28 \|

Management's Discussion and Analysis


•	Earnings before interest, taxes , depreciation and amortization ("EBITDA") - calculated as net income before net interest expense, income tax expense, depreciation and amortization expense, including amortization of customer contract intangible assets, which is included as a component of net revenues in our accompanying condensed consolidated statements of income.

•

Distributable cash flow - calculated as net cash flow from operating activities plus or minus changes in assets and liabilities, less maintenance capital expenditures net of reimbursements and other adjustments not expected to settle in cash. Delek Logistics believes this is an appropriate reflection of a liquidity measure by which users of its financial statements can assess its ability to generate cash.

EBITDA and distributable cash flow are non-U.S. GAAP supplemental financial measures that management and external users of our condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:


•	our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods;


•	the ability of our assets to generate sufficient cash flow to make distributions to our unitholders;


•	our ability to incur and service debt and fund capital expenditures; and


•	the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of EBITDA and distributable cash flow provide information useful to investors in assessing our financial condition and results of operations. EBITDA and distributable cash flow should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. EBITDA and distributable cash flow have important limitations as analytical tools, because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA and distributable cash flow may be defined differently by other partnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other partnerships, thereby diminishing their utility. For a reconciliation of EBITDA and distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, please refer to "Results of Operations" below.



29 \|

Management's Discussion and Analysis

Results of Operations

A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.

The following table and discussion present a summary of our consolidated results of operations for the three and six months ended June 30, 2019 and 2018, including a reconciliation of net income to EBITDA and net cash flow provided by operating activities to distributable cash flow:

Statement of Operations Data (in thousands, except unit and per unit amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net revenues:
Pipelines and transportation	$	44,208		$	37,744		$	84,841		$	71,457
Wholesale marketing and terminalling	111,134			128,536			222,984			262,744
Total	155,342			166,280			307,825			334,201
Operating costs and expenses:
Cost of materials and other	93,854			106,016			190,119			225,048
Operating expenses (excluding depreciation and amortization)	17,327			14,917			33,385			27,494
General and administrative expenses	5,293			3,747			9,766			6,722
Depreciation and amortization	6,639			7,019			13,213			13,019
Gain on asset disposals	(27		)	(129		)	(25		)	(69		)
Total operating costs and expenses	123,086			131,570			246,458			272,214
Operating income	32,256			34,710			61,367			61,987
Interest expense, net	11,354			10,926			22,655			18,988
Income from equity method investments	(4,515		)	(1,899		)	(6,466		)	(2,757		)
Other expense, net	461			—			461			—
Total non-operating costs and expenses	7,300			9,027			16,650			16,231
Income before income tax expense	24,956			25,683			44,717			45,756
Income tax expense	71			101			136			179
Net income attributable to partners	$	24,885		$	25,582		$	44,581		$	45,577
Comprehensive income attributable to partners	$	24,885		$	25,582		$	44,581		$	45,577
EBITDA⁽¹⁾	$	44,751		$	45,431		$	84,190		$	80,167

Less: General partner's interest in net income, including incentive distribution rights	8,079			6,212			15,348			11,842
Limited partners' interest in net income	$	16,806		$	19,370		$	29,233		$	33,735

Net income per limited partner unit:
Common units - (basic)	$	0.69		$	0.79		$	1.20		$	1.38
Common units - (diluted)	$	0.69		$	0.79		$	1.20		$	1.38

Weighted average limited partner units outstanding:
Common units - (basic)	24,409,359			24,386,031			24,408,270			24,384,341
Common units - (diluted)	24,414,343			24,394,103			24,414,077			24,391,760

⁽¹⁾For a definition of EBITDA, please see "Non-GAAP Measures" above.



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Management's Discussion and Analysis

Non-GAAP Reconciliations

The following table provides a reconciliation of EBITDA and distributable cash flow to the most directly comparable U.S. GAAP measure, or net income and net cash from operating activities, respectively.

Reconciliation of net income to EBITDA (in thousands)



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net income	$	24,885	$	25,582	$	44,581	$	45,577
Add:
Income tax expense	71		101		136		179
Depreciation and amortization	6,639		7,019		13,213		13,019
Amortization of customer contract intangible assets	1,802		1,803		3,605		2,404
Interest expense, net	11,354		10,926		22,655		18,988
EBITDA ⁽¹⁾	$	44,751	$	45,431	$	84,190	$	80,167

Reconciliation of net cash from operating activities to distributable cash flow (in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net cash provided by operating activities	$	24,123		$	27,987		$	50,327		$	51,643
Changes in assets and liabilities	7,816			6,215			10,985			9,921
Distributions from equity method investments in investing activities	—			—			804			660
Non-cash lease expense	(393		)	—			(1,409		)	—
Maintenance and regulatory capital expenditures ⁽²⁾	(963		)	(1,017		)	(1,781		)	(1,341		)
Reimbursement from Delek Holdings for capital expenditures ⁽³⁾	670			314			1,384			705
Accretion of asset retirement obligations	(99		)	(97		)	(198		)	(175		)
Deferred income taxes	3			—			3			—
Gain on asset disposals	27			129			25			69
Distributable cash flow ⁽¹⁾	$	31,184		$	33,531		$	60,140		$	61,482



(1)	For a definition of EBITDA and distributable cash flow, please see "Non-GAAP Measures" above.

(2)	Maintenance and regulatory capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance and regulatory capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

(3)	For the three and six month periods ended June 30, 2019 and 2018, Delek Holdings reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements).



31 \|

Management's Discussion and Analysis

Consolidated Results of Operations — Comparison of the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018

The table below presents a summary of our consolidated results of operations. The discussion immediately following presents the consolidated results of operations (in thousands):



Consolidated
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net Revenues:
Affiliates	$	61,918		$	53,080		$	124,883		114,724
Third-Party	93,424			113,200			182,942			219,477
Total Consolidated	155,342			166,280			307,825			334,201
Cost of materials and other	93,854			106,016			190,119			225,048
Operating expenses (excluding depreciation and amortization presented below)	17,327			14,917			33,385			27,494
Contribution margin	44,161			45,347			84,321			81,659
General and administrative expenses	5,293			3,747			9,766			6,722
Depreciation and amortization	6,639			7,019			13,213			13,019
Gain on asset disposals	(27		)	(129		)	(25		)	(69		)
Operating income	$	32,256		$	34,710		$	61,367		$	61,987

Net Revenues

Q2 2019 vs. Q2 2018

Net revenues decreased by $10.9 million, or 6.6%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	decreases in the average sales prices per gallon of gasoline and diesel and in the average volumes sold in our west Texas marketing operations.


◦	the average sales prices per gallon of gasoline and diesel sold decreased $0.26 per gallon and $0.24 per gallon, respectively.


◦	the average volumes of gasoline and diesel sold decreased 2.3 million gallons and 0.4 million gallons, respectively.

Such decreases were partially offset by the following:


•	net revenues for marketing and terminalling services under the agreements associated with our assets in Big Spring, Texas;


•	increased revenues associated with our Paline Pipeline as a result of increased rates and a change in the fee structure from the second quarter of 2018, during which the capacity of the Paline Pipeline was contracted to separate parties for a monthly fee, compared to the second quarter of 2019, during which the pipeline was subject to a FERC tariff; and


•	increased revenues from fees received by the Partnership related to the management of the Delek Permian Gathering Project during the second quarter of 2019 for which there were no fees earned during the second quarter of 2018.

YTD 2019 vs. YTD 2018

Net revenues decreased by $26.4 million, or 7.9%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	decreases in the average sales prices per gallon of gasoline and diesel and in the average volumes sold in our west Texas marketing operations.


◦	the average volumes of gasoline and diesel sold decreased 6.3 million gallons and 7.2 million gallons, respectively.



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Management's Discussion and Analysis


◦	the average sales prices per gallon of gasoline and diesel sold decreased $0.21 per gallon and $0.17 per gallon, respectively.

Such decreases were partially offset by the following:


•	net revenues under the agreements executed in connection with the Big Spring Logistic Assets Acquisition, which were effective March 1, 2018. Refer to Note 3 to our accompanying condensed consolidated financial statements for additional information about the agreements executed in connection with the Big Spring Logistic Assets Acquisition;


•	increased revenues associated with our Paline Pipeline as a result of increased rates and a change in the fee structure from the six months ended June 30, 2018, during which the capacity of the Paline Pipeline was contracted to separate parties for a monthly fee, compared to the six months ended June 30, 2019, during which the pipeline was subject to a FERC tariff; and


•	increased revenues from fees received by the Partnership related to the management of the Delek Permian Gathering Project during the six months ended June 30, 2019 for which there were no fees earned during the six months ended June 30, 2018.

Cost of Materials and Other

Q2 2019 vs. Q2 2018

Cost of materials and other decreased by $12.2 million, or 11.5%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	decreases in the average cost per gallon and in the average volumes of gasoline and diesel sold in our west Texas marketing operations.


◦	the average cost per gallon of gasoline and diesel sold decreased $0.23 per gallon and $0.17 per gallon, respectively.


◦	the average volumes of gasoline and diesel sold decreased 2.3 million gallons and 0.4 million gallons, respectively.

YTD 2019 vs. YTD 2018

Cost of materials and other decreased by $34.9 million, or 15.5%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	decreases in the average volumes and in the average cost per gallon of gasoline and diesel sold in our west Texas marketing operations.


◦	the average volumes of gasoline and diesel sold decreased 6.3 million gallons and 7.2 million gallons, respectively.


◦	the average cost per gallon of gasoline and diesel sold decreased $0.21 per gallon and $0.13 per gallon, respectively.

Operating Expenses

Q2 2019 vs. Q2 2018

Operating expenses increased by $2.4 million, or 16.2%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	higher operating costs associated with logistics assets at the Big Spring, Tyler and El Dorado refineries, including variable expenses such as utilities, contractor and materials costs; and


•	higher employee costs allocated to us as a result of an increase in allocated employee headcount in various operational groups.

YTD 2019 vs. YTD 2018

Operating expenses increased by $5.9 million, or 21.4%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	higher operating costs associated with the logistics assets acquired in the Big Spring Logistic Assets Acquisition, including allocated employee costs and variable expenses such as utilities, due to operating the acquired assets for the entirety of the six months ended June 30, 2019 compared to four months during the six months ended June 30, 2018;


•	higher operating costs associated with logistics assets at the Tyler and El Dorado refineries, including variable expenses such as utilities, contractor and materials costs; and



33 \|

Management's Discussion and Analysis


•	higher employee costs allocated to us as a result of an increase in allocated employee headcount in various operational groups.

General and Administrative Expenses

Q2 2019 vs. Q2 2018

General and administrative expenses increased by $1.5 million, or 41.3%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	a reduction in employee related expenses allocated to us in connection with the management of various projects for Delek Holdings pursuant to the DPG Management Agreement during the second quarter of 2018, with no comparable expense reduction during the second quarter of 2019; and


•	increases in professional consulting fees associated with the Red River Pipeline Joint Venture.

YTD 2019 vs. YTD 2018

General and administrative expenses increased by $3.0 million, or 45.3%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	a reduction in employee related expenses allocated to us in connection with the management of various projects for Delek Holdings pursuant to the DPG Management Agreement during the six months ended June 30, 2018, with no comparable expense reduction during the six months ended June 30, 2019, as these fees were reclassified to revenue for 2019;


•	increases in allocated employee headcount associated with our wholesale marketing business; and


•	increases in professional consulting fees associated with the Red River Pipeline Joint Venture.

Depreciation and Amortization

Q2 2019 vs. Q2 2018

Depreciation and amortization decreased by $0.4 million, or 5.4%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	higher expense in the second quarter of 2018 during which an asset with a one-year life incurred depreciation, compared to the second quarter of 2019, during which there was no comparable expense; and


•	the disposal of trucking assets.

YTD 2019 vs. YTD 2018

Depreciation and amortization increased by $0.2 million, or 1.5%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	addition of assets to our asset base as a result of the Big Spring Logistic Assets Acquisition, for which we incurred expense for the entirety of the six months ended June 30, 2019 compared to four months during the six months ended June 30, 2018.

Interest Expense

Q2 2019 vs. Q2 2018

Interest expense increased by $0.4 million, or 3.9% in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	increased borrowings under the DKL Credit Facility as a result of our contribution to the Red River Pipeline Joint Venture in May 2019, prior to which we had lower average debt balances; and


•	higher floating interest rates applicable to the DKL Credit Facility.



34 \|

Management's Discussion and Analysis

YTD 2019 vs. YTD 2018

Interest expense increased by $3.7 million, or 19.3%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	increased borrowings under the DKL Credit Facility as a result of the Big Spring Logistic Assets Acquisition that occurred late in the first quarter of 2018 and our contribution to the Red River Pipeline Joint Venture in May 2019, prior to which we had lower average debt balances; and


•	higher floating interest rates applicable to the DKL Credit Facility.

Results from Equity Method Investments

Q2 2019 vs. Q2 2018

We recognized income of $4.5 million from equity method investments during the second quarter of 2019 compared to $1.9 million for the second quarter of 2018, an increase of $2.6 million, or 137.8%. This increase was primarily driven by the following:


•	the addition of the Red River Pipeline Joint Venture as a result of the Partnership's efforts to grow the midstream business.

YTD 2019 vs. YTD 2018

During the six months ended June 30, 2019, we recognized income of $6.5 million from equity method investments, compared to $2.8 million for the six months ended June 30, 2018, an increase of $3.7 million, or 134.5%. This increase was primarily driven by the following:


•	the addition of the Red River Pipeline Joint Venture as a result of the Partnership's efforts to grow the midstream business; and


•	an increase in income from our investment in CP LLC, which operates the Caddo Pipeline System.

Income Tax Expense

Q2 2019 vs. Q2 2018

Income tax expense was $0.1 million for the second quarter of 2019 compared to $0.1 million for the second quarter of 2018. Our effective tax rate was 0.3% for the second quarter of 2019, compared to 0.4% for the second quarter of 2018. The Partnership is not subject to federal income taxes as a limited partnership. Accordingly, our taxable income or loss is included in the federal and state income tax returns of our partners. Income tax expense represents amounts incurred for state income taxes, as the Partnership is subject to entity level tax in both Tennessee and Texas.

YTD 2019 vs. YTD 2018

Income tax expense was $0.1 million for the six months ended June 30, 2019 compared to $0.2 million for the six months ended June 30, 2018. Our effective tax rate was 0.3% for the six months ended June 30, 2019 compared to 0.4% for the six months ended June 30, 2018. The Partnership is not subject to federal income taxes as a limited partnership. Accordingly, our taxable income or loss is included in the federal and state income tax returns of our partners. Income tax expense represents amounts incurred for state income taxes, as the Partnership is subject to entity level tax in both Tennessee and Texas.



35 \|

Management's Discussion and Analysis

Operating Segments

We review operating results in two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each reportable segment based on the segment contribution margin. Segment reporting is discussed in more detail in Note 11 to our accompanying condensed consolidated financial statements.



Segment contribution margin =	Net revenues -	Cost of materials and other -	Operating expenses, excluding depreciation and amortization

Pipelines and Transportation Segment

Our pipelines and transportation segment assets provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services to Delek Holdings and third parties. These assets include:

•the Lion Pipeline System

•the SALA Gathering System

•the Paline Pipeline System

•the East Texas Crude Logistics System

•the Tyler-Big Sandy Pipeline


•	the El Dorado Tank Assets and El Dorado Rail Offloading Racks

•the Tyler Tank Assets and Tyler Crude Tank


•	the Greenville-Mount Pleasant Pipeline and Greenville Storage Facility


•	refined product pipeline capacity leased from Enterprise TE Products Pipeline Company ("Enterprise") that runs from El Dorado, Arkansas to our Memphis terminal and the Big Spring Pipeline


•	Effective March 1, 2018, this segment also includes the pipelines and storage assets acquired in the Big Spring Logistic Assets Acquisition

In addition to these operating systems, we own or lease 125 tractors and 166 trailers used to haul primarily crude oil and other products for related and third parties.

The following tables and discussion present the results of operations and operating statistics of material assets of the pipelines and transportation segment for the three and six months ended June 30, 2019 and 2018:



Pipelines and Transportation
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net Revenues:
Affiliates	$	36,731	$	34,030	73,390		$	63,492
Third-Party	7,477		3,714		11,451		7,965
Total Pipelines and Transportation	44,208		37,744		84,841		71,457
Cost of materials and other	7,357		5,195		12,924		9,636
Operating expenses (excluding depreciation and amortization presented below)	12,728		9,933		23,562		19,555
Segment contribution margin	$	24,123	$	22,616	$	48,355	$	42,266



Throughputs (average bpd)
	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Lion Pipeline System:
Crude pipelines (non-gathered)	37,625	56,088	33,179	55,412
Refined products pipelines to Enterprise Systems	29,893	48,013	26,511	48,879
SALA Gathering System	17,777	16,738	17,390	16,705
East Texas Crude Logistics System	19,550	16,902	18,835	17,478



36 \|

Management's Discussion and Analysis

Comparison of the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018

Net Revenues

Q2 2019 vs. Q2 2018

Net revenues for the pipelines and transportation segment increased by $6.5 million, or 17.1%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	increased revenues associated with our Paline Pipeline as a result of increased rates and a change in the fee structure from the second quarter of 2018, during which the capacity of the Paline Pipeline was contracted to separate parties for a monthly fee, compared to the second quarter of 2019, during which the pipeline was subject to a FERC tariff;


•	increased revenues from fees received by the Partnership related to the management of the Delek Permian Gathering Project during the second quarter of 2019 for which there were no fees earned during the second quarter of 2018; and


•	increased revenues associated with our trucking assets.

YTD 2019 vs. YTD 2018

Net revenues for the pipelines and transportation segment increased by $13.4 million, or 18.7%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	increased revenues generated by the pipelines and storage assets acquired in the Big Spring Logistic Assets Acquisition, which we owned for the entirety of the six months ended June 30, 2019 compared to four months during the six months ended June 30, 2018;


•	increased revenues associated with our Paline Pipeline as a result of increased rates and a change in the fee structure from the six months ended June 30, 2018 during which the capacity of the Paline Pipeline was contracted to separate parties for a monthly fee compared to the six months ended June 30, 2019, during which the pipeline was subject to a FERC tariff; and


•	increased revenues from fees received by the Partnership related to the management of the Delek Permian Gathering Project during the six months ended June 30, 2019 for which there were no fees earned during the six months ended June 30, 2018 .

Cost of Materials and Other

Q2 2019 vs. Q2 2018

Cost of materials and other for the pipelines and transportation segment increased by $2.2 million, or 41.6%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	increased costs associated with product purchases from a third party for resale, which were resold at a loss, in the second quarter of 2019, with no comparable activity in the second quarter of 2018; and


•	increased costs associated with our leased refined product pipeline capacity pursuant to the provisions of a new agreement for the capacity that was effective June 1, 2018.

YTD 2019 vs. YTD 2018

Cost of materials and other for the pipelines and transportation segment increased by $3.3 million, or 34.1%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	increased costs associated with product purchases from a third party for resale, which were resold at a loss, in the six months ended June 30, 2019, with no comparable activity in the six months ended June 30, 2018;


•	increases in transportation costs related to our trucking assets, including driver wages and benefits and fuel expense proportionate to increase in fees, insurance, supplies and maintenance expenses; and


•	increased costs associated with our leased refined product pipeline capacity pursuant to the provisions of a new agreement for the capacity that was effective June 1, 2018.



37 \|

Management's Discussion and Analysis

Operating Expenses

Q2 2019 vs. Q2 2018

Operating expenses for the pipelines and transportation segment increased by $2.8 million, or 28.1%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	higher operating costs associated with logistics assets at the Big Spring, Tyler and El Dorado refineries, including variable expenses such as utilities, contractor and materials costs; and


•	higher employee costs allocated to us as a result of an increase in allocated employee headcount in various operational groups.

YTD 2019 vs. YTD 2018

Operating expenses for the pipelines and transportation segment increased $4.0 million, or 20.5%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	operating costs associated with the pipelines and storage assets acquired in the Big Spring Logistic Assets Acquisition, including allocated employee costs and variable expenses such as utilities, due to operating the acquired assets for the entirety of the six months ended June 30, 2019 compared to four months during the six months ended June 30, 2018;


•	higher operating costs associated with logistics assets at the Tyler and El Dorado refineries, including variable expenses such as utilities, contractor and materials costs; and


•	higher employee costs allocated to us as a result of an increase in allocated employee headcount in various operational groups.

Contribution Margin

Q2 2019 vs. Q2 2018

Contribution margin for the pipelines and transportation segment increased by $1.5 million, or 6.7%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	increases in net revenues associated with our Paline Pipeline System, the Delek Permian Gathering Project, and our trucking assets, as described above.

YTD 2019 vs. YTD 2018

Contribution margin for the pipelines and transportation segment increased by $6.1 million, or 14.4%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	increases in net revenues generated under the agreements executed in connection with our Paline Pipeline System, the Big Spring Logistic Assets Acquisition, and the Delek Permian Gathering Project, as described above.



38 \|

Management's Discussion and Analysis

Wholesale Marketing and Terminalling Segment

We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties.

The tables and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three and six months ended June 30, 2019 and 2018:



Wholesale Marketing and Terminalling
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net Revenues:
Affiliates	$	25,187	$	19,050	51,493		$	51,232
Third-Party	85,947		109,486		171,491		211,512
Total Wholesale Marketing and Terminalling	111,134		128,536		222,984		262,744
Cost of materials and other	86,497		100,821		177,195		215,412
Operating expenses (excluding depreciation and amortization presented below)	4,599		4,984		9,823		7,939
Segment contribution margin	$	20,038	$	22,731	$	35,966	$	39,393



Operating Information
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
East Texas - Tyler Refinery sales volumes (average bpd)⁽¹⁾	71,123		79,330		69,857		76,304
Big Spring marketing throughputs (average bpd) ⁽²⁾	82,964		80,536		85,339		79,165
West Texas marketing throughputs (average bpd)	11,404		12,261		12,418		14,091
West Texas gross margin per barrel	$	6.25	$	8.06	$	4.84	$	6.43
Terminalling throughputs (average bpd)⁽³⁾	156,922		162,383		154,643		154,917



(1)	Excludes jet fuel and petroleum coke.

(2)	Throughputs for the six months ended June 30, 2018 are for the 122 days we marketed certain finished products produced at or sold from the Big Spring Refinery following the execution of the Big Spring Marketing Agreement, effective March 1, 2018, as defined in Note 2 to our accompanying condensed consolidated financial statements.

(3)	Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, our El Dorado and North Little Rock, Arkansas and our Memphis and Nashville, Tennessee terminals. Throughputs for the Big Spring terminal for six months ended June 30, 2018 are for the 122 days we operated the terminal following its acquisition effective March 1, 2018. Barrels per day are calculated for only the days we operated each terminal. Total throughput for the six months ended June 30, 2018 was 26.0 million barrels, which averaged 143,593 bpd for the period.

Comparison of the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018

Net Revenues

Q2 2019 vs. Q2 2018

Net revenues for the wholesale marketing and terminalling segment decreased by $17.4 million, or 13.5%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	decreases in the average sales prices per gallon of gasoline and diesel and in the average volumes sold in our west Texas marketing operations.


◦	the average sales prices per gallon of gasoline and diesel sold decreased $0.26 per gallon and $0.24 per gallon, respectively.


◦	the average volumes of gasoline and diesel sold decreased 2.3 million gallons and 0.4 million gallons, respectively.



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Management's Discussion and Analysis

Such decreases were partially offset by the following:


•	net revenues for marketing and terminalling services under the agreements associated with our assets in Big Spring, Texas.

YTD 2019 vs. YTD 2018

Net revenues for the wholesale marketing and terminalling segment decreased by $39.8 million, or 15.1%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	decreases in the average sales prices per gallon of gasoline and diesel and in the average volumes sold in our west Texas marketing operations.


◦	the average sales prices per gallon of gasoline and diesel sold decreased $0.21 per gallon and $0.17 per gallon, respectively.


◦	the average volumes of gasoline and diesel sold decreased 6.3 million gallons and 7.2 million gallons, respectively.

Such decreases were partially offset by the following:


◦	net revenues under the agreements executed in connection with the Big Spring Logistic Assets Acquisition, which were effective March 1, 2018. Refer to Note 3 to our accompanying condensed consolidated financial statements for additional information about the agreements executed in connection with the Big Spring Logistic Assets Acquisition.

The following charts show summaries of the average sales prices per gallon of gasoline and diesel and refined products volume impacting our west Texas operations.



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Management's Discussion and Analysis

Cost of Materials and Other

Q2 2019 vs. Q2 2018

Cost of materials and other for our wholesale marketing and terminalling segment decreased by $14.3 million, or 14.2%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	decreases in the average volumes and in the average cost per gallon of gasoline and diesel sold in our west Texas marketing operations.


◦	the average volumes of gasoline and diesel sold decreased 2.3 million gallons and 0.4 million gallons, respectively.


◦	the average cost per gallon of gasoline and diesel sold decreased $0.23 per gallon and $0.17 per gallon, respectively.

YTD 2019 vs. YTD 2018

Cost of materials and other for our wholesale marketing and terminalling segment decreased by $38.2 million, or (17.7)%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	decreases in the average volumes and in the average cost per gallon of gasoline and diesel sold in our west Texas marketing operations.


◦	the average volumes of gasoline and diesel sold decreased 6.3 million gallons and 7.2 million gallons, respectively.


◦	the average cost per gallon of gasoline and diesel sold decreased $0.21 per gallon and $0.13 per gallon, respectively.

The following chart shows a summary of the average prices per gallon of gasoline and diesel sold in our west Texas operations for the three and six months ended June 30, 2019 and 2018. Refer to the Refined Products Volume chart above for a summary of volumes impacting our west Texas operations.

Operating Expenses

Q2 2019 vs. Q2 2018

Operating expenses decreased by $0.4 million, or 7.7%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	decreases in costs associated with the logistics assets acquired in the Big Sping Logistic Assets Acquisition, including allocated employee costs and variable expenses such as utilities.

Such decreases were partially offset by:


•	increases in employee expenses due primarily to an increase in headcount; and


•	increases in repairs and maintenance on certain of our assets in the wholesale marketing and terminalling segment.



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Management's Discussion and Analysis

YTD 2019 vs. YTD 2018

Operating expenses increased by $1.9 million, or 23.7%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	increases in employee expenses due primarily to an increase in headcount; and


•	increases in lease and rent expense.

Contribution Margin

Q2 2019 vs. Q2 2018

Contribution margin for the wholesale marketing and terminalling segment decreased by $2.7 million, or 11.8%, in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by the following:


•	decreases in the average sales prices per gallon of gasoline and diesel sold in our west Texas marketing operations as described above.

Such decreases were partially offset by:


•	revenue associated with our marketing and terminalling services associated with our assets in Big Spring, Texas.

YTD 2019 vs. YTD 2018

Contribution margin for the wholesale marketing and terminalling segment decreased by $3.4 million, or 8.7%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily driven by the following:


•	decreases in the average sales prices per gallon of gasoline and diesel sold in our west Texas marketing operations as described above.

Such decreases were partially offset by:


•	net revenues under the agreements executed in connection with the Big Spring Logistic Assets Acquisition as described above.



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Management's Discussion and Analysis

Liquidity and Capital Resources

We consider the following when assessing our liquidity and capital resources:


•	cash generated from operations;


•	borrowings under our revolving credit facility;


•	potential issuance of additional equity; and


•	potential issuance of additional debt securities.

We believe we have sufficient financial resources to meet our business requirements in the next 12 months, including minimum quarterly cash distributions and capital expenditures.

Cash Distributions

The table below summarizes the quarterly distributions related to our quarterly financial results:



Quarter Ended	Total Quarterly Distribution Per Limited Partner Unit		Total Quarterly Distribution Per Limited Partner Unit, Annualized		Total Cash Distribution, including general partner interest and IDRs (in thousands)		Date of Distribution	Unitholders Record Date
June 30, 2018	$	0.770	$	3.08	$	24,984	August 13, 2018	August 3, 2018
September 30, 2018	$	0.790	$	3.16	$	25,960	November 9, 2018	November 2, 2018
December 31, 2018	$	0.810	$	3.24	$	26,949	February 12, 2019	February 4, 2019
March 31, 2019	$	0.820	$	3.28	$	27,438	May 14, 2019	May 7, 2019
June 30, 2019	$	0.850	$	3.40	$	28,914	August 13, 2019 ⁽¹⁾	August 5, 2019


⁽¹⁾	Expected date of distribution.

Cash Flows

The following table sets forth a summary of our consolidated cash flows for the six months ended June 30, 2019 and 2018 (in thousands):



	Six Months Ended June 30,
	2019			2018
Net cash provided by operating activities	$	50,327		$	51,643
Net cash used in investing activities	(136,556		)	(221,700		)
Net cash provided by financing activities	87,147			170,559
Net increase in cash and cash equivalents	$	918		$	502

Operating Activities

Net cash provided by operating activities decreased $1.3 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease in cash provided by operations was primarily due to increases in accounts receivable, partially offset by decreases in accounts receivable/payable to related parties. Accounts receivable increased due to increases associated with customers in our west Texas operations and other third parties with accounts receivable as of June 30, 2019, with no comparable receivables as of June 30, 2018. Accounts receivable/payable to related parties was in a net payable position as of June 30, 2019, compared to a net receivable position as of June 30, 2018. The change from a net receivable to a net payable was due to increases in payables to Delek Holdings related to product purchases from the Big Spring Refinery.

Investing Activities

Net cash used in investing activities decreased $85.1 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease in cash used in investing activities was primarily due to acquisition activity that occurred during the six months ended June 30, 2018, with no comparable activity occurring during the six months ended June 30, 2019. During the six months ended June 30, 2018, the Partnership paid $72.0 million for the assets acquired in the Big Spring Logistic Assets Acquisition and $144.2



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Management's Discussion and Analysis

million in connection with the Marketing Contract Intangible Acquisition. Also contributing to the decrease was a decrease in cash purchases of property, plant and equipment, which amounted to $2.4 million during the six months ended June 30, 2019 compared to $5.9 million during the six months ended months ended June 30, 2018. Offsetting these decreases was an increase in contributions made to our joint ventures, which amounted to $135.0 million during the six months ended June 30, 2019, compared to contributions of $0.2 million made during the six months ended June 30, 2018.

Financing Activities

Net cash provided by financing activities decreased $83.4 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease in cash provided by financing activities was primarily due to a decrease in net proceeds under our revolving credit facility. We received net proceeds of $140.0 million under the revolving credit facility during the six months ended June 30, 2019, compared to net proceeds of $314.0 million under the revolving credit facility during the six months ended June 30, 2018. Further contributing to the decrease were increases in the quarterly cash distributions. We paid quarterly cash distributions totaling $54.4 million during the six months ended June 30, 2019, compared to quarterly cash distributions totaling $46.8 million during the six months ended June 30, 2018. Partially offsetting the decreases were distributions of $98.8 million related to the Big Spring Logistic Assets Acquisition made during the six months ended June 30, 2018, for which there was no comparable distribution during the six months ended June 30, 2019.

Cash Position and Indebtedness

As of June 30, 2019, we had $5.4 million cash and cash equivalents and we had total indebtedness of $840.9 million. Unused credit commitments under the revolving credit facility were $253.3 million, and we had no letters of credit in place at June 30, 2019. We believe we were in compliance with our covenants in all debt facilities as of June 30, 2019. See Note 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness.

Agreements Governing Certain Indebtedness of Delek Holdings

Although we are not contractually bound by and are not liable for Delek Holdings' debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, certain of Delek Holdings' credit arrangements require that Delek Holdings meet certain minimum covenant levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders' equity to adjusted total assets. Delek Holdings, due to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek Holdings to violate these and any other covenants in its credit arrangements or otherwise be in default under any of its credit arrangements. As a result we cannot assure you that such covenants will not impact our ability to use the full capacity under our revolving credit facility in the future. Delek Holdings' level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek Holdings' level of indebtedness and credit ratings.

Capital Spending

A key component of our long-term strategy is our capital expenditure program. The following table summarizes our actual capital expenditures for the six months ended June 30, 2019 and planned capital expenditures for the full year 2019 by segment and by major category (in thousands):



	Full Year 2019 Forecast		Six Months Ended June 30, 2019
Pipelines and Transportation
Regulatory ⁽²⁾	$	3,132	$	492
Maintenance ^{(1) (2)}	2,346		736
Discretionary projects	14		14
Pipelines and transportation segment total	$	5,492	$	1,242

Wholesale Marketing and Terminalling
Regulatory ⁽³⁾	$	281	$	214
Maintenance ^{(1) (3)}	2,242		195
Discretionary	804		595
Wholesale marketing and terminalling segment total	$	3,327	$	1,004

Total capital spending ⁽⁴⁾	$	8,819	$	2,246



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Management's Discussion and Analysis

⁽¹⁾

Maintenance capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines, tanks and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Delek Holdings has agreed to reimburse us with respect to certain assets it has transferred to us pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements).


⁽²⁾	The majority of the $2.3 million and $3.1 million budgeted for maintenance and regulatory projects in the pipelines and transportation segment is expected to be spent on scheduled maintenance and improvements to certain of our tanks and pipelines and asset integrity improvements at certain of our pipeline facilities, respectively.


⁽³⁾	The majority of the $0.3 million and $2.2 million budgeted for regulatory and maintenance projects in the wholesale marketing and terminalling segment relates to improvements to our terminalling facilities at the Tyler Refinery and scheduled maintenance on our terminalling tanks and racks at certain of our terminals, respectively.


⁽⁴⁾	We decreased our capital spending forecast for 2019 to $8.8 million, down from the prior forecast of $12.2 million. We decreased our forecast as a result of changes to the anticipated completion dates of certain maintenance and discretionary projects.

The amount of our capital expenditure budget is subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects. For example, we may experience increases in the cost of and/or timing to obtain necessary equipment required for our continued compliance with government regulations or to complete improvement projects. Additionally, the scope and cost of employee or contractor labor expense related to installation of that equipment could increase from our projections.

The following is a summary of business segment capital expenditures for the six months ended June 30, 2018 (in thousands):

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Changing Prices

Our revenues and cash flows, as well as estimates of future cash flows, are sensitive to changes in energy prices. Shifts in the cost of crude oil, the prices of refined products and the cost of ethanol can generate changes in the operating margin in our wholesale marketing and terminalling segment.

Interest Rate Risk

Debt that we incur under our revolving credit facility bears interest at floating rates and will expose us to interest rate risk. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt outstanding as of June 30, 2019 would be to change interest expense by approximately $6.0 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is accumulated and appropriately communicated to management. We carried out an evaluation required by Rule 13a-15(b) of the Exchange Act, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the reporting period. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the reporting period.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the second quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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Legal Proceedings and Risk Factors

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including, environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations. See Note 13 to our accompanying condensed consolidated financial statements, which is incorporated by reference in this Item 1, for additional information. There has been a material development to the proceeding related to the release at our Magnolia Station previously reported in our Annual Report on Form 10-K, filed with the SEC on March 1, 2019. In July 2019, we signed and submitted to the DOJ, a consent decree (the "Magnolia Consent Decree") to settle the release. The next step of the Magnolia Consent Decree is to be lodged with the court. Once it is lodged, it will be published for public comment in the Federal Register. It will remain open for comments for 30 days. After the 30 days has expired, and as long as there have not been substantive comments, the DOJ will likely move for entry, and the Court will enter it one to three weeks later. The Partnership will then have 30 days to make payment on the penalties.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

Pursuant to the terms of our limited Partnership Agreement, our general partner has the right to maintain its proportionate 2% general partner interest in the Partnership. The following table provides information regarding the exercise of such right by our general partner during the three months ended June 30, 2019. The sales listed below were exempt from registration under Section 4(a)(2) of the Securities Act.

ITEM 6. EXHIBITS



Exhibit No.		Description
2.1	*	Contribution and Subscription Agreement, dated as of May 24, 2019, by and among Plains Pipeline, L.P., DKL Pipeline, LLC, and Red River Pipeline Company LLC (incorporated by reference to Exhibit 2.1 to the Partnership's Current Report on Form 8-K filed on May 28, 2019, File No. 001-35721)
31.1	#	Certification of Delek Logistics GP, LLC's Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	#	Certification of Delek Logistics GP, LLC's Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	##	Certification of Delek Logistics GP, LLC's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	##	Certification of Delek Logistics GP, LLC's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Delek Logistics Partners, LP’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited), (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and 2018 (Unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (Unaudited).



#		Filed herewith
##		Furnished herewith
*		Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Delek Logistics Partners, LP
By:	Delek Logistics GP, LLC
	Its General Partner

By:	/s/ Ezra Uzi Yemin
	Ezra Uzi Yemin
	Chairman and Chief Executive Officer (Principal Executive Officer)

By:	/s/ Assaf Ginzburg
	Assaf Ginzburg
	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Dated: August 7, 2019



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Date of Sale

Number of General Partner Units Sold

Price per General Partner Unit

Consideration Paid to the Partnership

June 13, 2019