S-1 1 d372656ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on July 11, 2012

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Delek Logistics Partners, LP

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   4610   45-5379027

(State or other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

7102 Commerce Way

Brentwood, Tennessee 37027

(615) 771-6701

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

Kent B. Thomas

7102 Commerce Way

Brentwood, Tennessee 37027

(615) 771-6701

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:

 

Gerald M. Spedale

Baker Botts L.L.P.

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002-4995

(713) 229-1234

 

Catherine S. Gallagher

Adorys Velazquez

Vinson & Elkins L.L.P.

2200 Pennsylvania Avenue NW

Suite 500 West

Washington, D.C. 20037-1701

(202) 639-6500

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨
    (Do not check if a smaller reporting company)  

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered  

Proposed Maximum

Aggregate Offering
Price (1)(2)

 

Amount of

Registration Fee

Common units representing limited partner interests

  $135,000,000   $15,471

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.

 

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated July 11, 2012

PROSPECTUS

LOGO

            Common Units

Representing Limited Partner Interests

Delek Logistics Partners, LP

 

 

This is the initial public offering of our common units representing limited partner interests. We are offering              common units in this offering. We currently expect that the initial public offering price will be between $         and $         per common unit. Prior to this offering, there has been no public market for our common units. We intend to apply to list our common units on the New York Stock Exchange under the symbol “DKL.” We are an “emerging growth company” as defined under the federal securities laws and, as such, are eligible for reduced reporting requirements.

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 22.

These risks include the following:

 

   

Delek US Holdings, Inc., or Delek, accounts for a substantial majority of our contribution margin. Therefore, we are subject to the business risks of Delek. If Delek changes its business strategy, fails to satisfy its obligations under our commercial agreements with it for any reason or significantly reduces the volumes transported through our pipelines or handled at our terminals or its use of our marketing services, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected.

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to holders of our common and subordinated units.

 

   

On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for the year ended December 31, 2011 or the twelve-month period ended March 31, 2012.

 

   

Each of our commercial agreements with Delek and the agreement governing the capacity reservation on the Paline Pipeline System contain provisions that allow our counterparty to such agreement to suspend, reduce or terminate its obligations under such agreement in certain circumstances, including events of force majeure, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

 

   

Our general partner and its affiliates, including Delek, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

   

You will experience immediate and substantial dilution in net tangible book value of $         per common unit.

 

   

Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

   

Our unitholders’ share of our income will be taxable to them for U.S. federal income tax purposes even if they do not receive any cash distributions from us.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

    

Per Common Unit

      

Total

 

Public offering price

   $           $     

Underwriting discount (1)

   $           $     

Proceeds to Delek Logistics Partners, LP (before expenses)

   $           $     

 

 

  (1) Excludes a structuring fee of an aggregate of     % of the gross offering proceeds payable to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Capital Inc. Please read “Underwriting” beginning on page 207.

We have granted the underwriters a 30-day option to purchase up to an additional              common units on the same terms and conditions as set forth above if the underwriters sell more than              common units in this offering.

The underwriters expect to deliver the common units to purchasers on or about                     , 2012, through the book-entry facilities of The Depository Trust Company.

 

 

 

BofA Merrill Lynch    Barclays

 

 

The date of this prospectus is                     , 2012.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Delek Logistics Partners, LP

     1   

Overview

     1   

Assets and Operations

     2   

Business Strategies

     2   

Competitive Strengths

     3   

Our Relationship with Delek

     4   

Risk Factors

     5   

Management of Delek Logistics Partners, LP

     7   

Formation Transactions and Partnership Structure

     8   

Ownership of Delek Logistics Partners, LP

     9   

Principal Executive Offices and Internet Address

     10   

Summary of Conflicts of Interest and Duties

     10   

Implications of Being an Emerging Growth Company

     11   

The Offering

     12   

Summary Historical and Pro Forma Financial and Operating Data

     17   

RISK FACTORS

     22   

Risks Related to Our Business

     22   

Risks Inherent in an Investment in Us

     45   

Tax Risks to Common Unitholders

     56   

USE OF PROCEEDS

     61   

CAPITALIZATION

     62   

DILUTION

     63   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     64   

General

     64   

Our Minimum Quarterly Distribution

     66   

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December  31, 2011 and the Twelve-Month Period Ended March 31, 2012

     67   

Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2013

     69   

Assumptions and Considerations

     72   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     73   

Distributions of Available Cash

     73   

Operating Surplus and Capital Surplus

     74   

Capital Expenditures

     76   

Subordination Period

     77   

Distributions of Available Cash from Operating Surplus During the Subordination Period

     79   

Distributions of Available Cash from Operating Surplus After the Subordination Period

     79   

General Partner Interest and Incentive Distribution Rights

     80   

Percentage Allocations of Available Cash from Operating Surplus

     81   

General Partner’s Right to Reset Incentive Distribution Levels

     81   

Distributions from Capital Surplus

     84   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     84   

Distributions of Cash Upon Liquidation

     85   

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

     88   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     92   

Overview

     92   

How We Generate Revenue

     92   

How We Evaluate Our Operations

     96   

 

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Factors Affecting the Comparability of Our Financial Results

     97   

Other Factors That Will Significantly Affect Our Results

     98   

Results of Operations

     99   

Capital Resources and Liquidity

     103   

Critical Accounting Policies and Estimates

     109   

Qualitative and Quantitative Disclosures About Market Risk

     110   

BUSINESS

     111   

Overview

     111   

Assets & Operations

     112   

Business Strategies

     112   

Competitive Strengths

     113   

Our Commercial Agreements

     115   

Our Relationship with Delek

     117   

Industry Overview

     118   

Our Asset Portfolio

     118   

Delek’s Refining Operations

     128   

Safety and Maintenance

     131   

Insurance

     131   

Pipeline and Terminal Control Operations

     131   

Rate and Other Regulation

     132   

Environmental Regulation

     133   

Seasonality

     138   

Title to Properties and Permits

     138   

Facilities

     139   

Employees

     139   

Legal Proceedings

     139   

MANAGEMENT

     140   

Management of Delek Logistics Partners, LP

     140   

Directors and Executive Officers of Our General Partner

     141   

Board Leadership Structure

     142   

Board Role in Risk Oversight

     142   

Committees of the Board of Directors

     142   

Executive Compensation

     143   

Compensation of Directors

     144   

Long-Term Incentive Plan

     144   

Reimbursement of Expenses of Our General Partner

     146   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     147   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     149   

Distributions and Payments to Our General Partner and Its Affiliates

     149   

Agreements Governing the Transactions

     150   

Commercial Agreements with Delek

     154   

Review, Approval or Ratification of Transactions with Related Persons

     161   

CONFLICTS OF INTEREST AND DUTIES

     162   

Conflicts of Interest

     162   

Duties of the General Partner

     168   

DESCRIPTION OF THE COMMON UNITS

     171   

The Units

     171   

Transfer Agent and Registrar

     171   

Transfer of Common Units

     171   

THE PARTNERSHIP AGREEMENT

     173   

Organization and Duration

     173   

Purpose

     173   

 

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Capital Contributions

     173   

Voting Rights

     173   

Limited Liability

     175   

Issuance of Additional Partnership Interests

     176   

Amendment of the Partnership Agreement

     176   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     178   

Termination and Dissolution

     179   

Liquidation and Distribution of Proceeds

     179   

Withdrawal or Removal of the General Partner

     180   

Transfer of General Partner Units

     181   

Transfer of Ownership Interests in the General Partner

     181   

Transfer of Incentive Distribution Rights

     181   

Change of Management Provisions

     181   

Limited Call Right

     182   

Meetings; Voting

     182   

Status as Limited Partner

     183   

Ineligible Holders; Redemption

     183   

Indemnification

     183   

Reimbursement of Expenses

     184   

Books and Reports

     184   

Right to Inspect Our Books and Records

     184   

Registration Rights

     185   

UNITS ELIGIBLE FOR FUTURE SALE

     186   

Rule 144

     186   

Our Partnership Agreement and Registration Rights

     186   

Lock-Up Agreements

     187   

Registration Statement on Form S-8

     187   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     188   

Partnership Status

     188   

Limited Partner Status

     190   

Tax Consequences of Unit Ownership

     190   

Tax Treatment of Operations

     196   

Disposition of Common Units

     197   

Uniformity of Units

     199   

Tax-Exempt Organizations and Other Investors

     200   

Administrative Matters

     201   

State, Local, Foreign and Other Tax Considerations

     204   

INVESTMENT IN DELEK LOGISTICS PARTNERS, LP BY EMPLOYEE BENEFIT PLANS

     205   

UNDERWRITING

     207   

VALIDITY OF THE COMMON UNITS

     214   

EXPERTS

     214   

WHERE YOU CAN FIND MORE INFORMATION

     214   

FORWARD-LOOKING STATEMENTS

     215   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF DELEK LOGISTICS PARTNERS, LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS

     B-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any

 

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jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data is also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before investing in the common units. You should read the entire prospectus carefully, including “Risk Factors” beginning on page 22 and the historical and pro forma financial statements and the notes to those financial statements included elsewhere in this prospectus. Unless indicated otherwise, the information presented in this prospectus assumes (1) an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and (2) that the underwriters do not exercise their option to purchase additional units.

We include a glossary of some of the terms used in this prospectus as Appendix B. Unless otherwise noted, references in this prospectus to “Delek Logistics,” “we,” “our,” “us” or like terms when used in a historical context refer to the businesses and assets of Delek Logistics Partners, LP Predecessor as described in “—Summary Historical and Pro Forma Financial and Operating Data” beginning on page 17, our predecessor for accounting purposes, also referenced as “our predecessor,” and when used in the present tense or prospectively, refer to Delek Logistics Partners, LP and its subsidiaries. Unless the context otherwise requires, references in this prospectus to “Delek” are to Delek US Holdings, Inc. and its subsidiaries, other than us. References in this prospectus to (i) “Lion Oil” are to Lion Oil Company, a wholly owned subsidiary of Delek; (ii) “the Contributed Lion Oil Assets” are to the assets that are being contributed to us by Lion Oil; (iii) “Paline” are to Paline Pipeline Company, LLC, a wholly owned subsidiary of Delek that is being contributed to us; and (iv) “our general partner” are to Delek Logistics GP, LLC, the general partner of Delek Logistics.

Delek Logistics Partners, LP

Overview

We are a growth-oriented Delaware limited partnership recently formed by Delek to own, operate, acquire and construct crude oil and refined products logistics and marketing assets. A substantial majority of our existing assets are integral to the success of Delek’s refining and marketing operations. We gather, transport and store crude oil and market, distribute, transport and store refined products in select regions of the southeastern United States and west Texas for Delek and third parties, primarily in support of Delek’s refineries in Tyler, Texas and El Dorado, Arkansas.

We generate revenue by charging fees for gathering, transporting and storing crude oil and for marketing, distributing, transporting and storing refined products. Following the consummation of this offering, a substantial majority of our contribution margin, which we define as net sales less cost of goods sold and operating expenses, will be derived from our commercial agreements with Delek with initial terms ranging from five to ten years, which we believe will enhance the stability of our cash flows. Our commercial agreements with Delek will include minimum volume commitments, which we believe will provide us with a stable revenue stream in the future.

We intend to expand our business by acquiring logistics and marketing assets from Delek and third parties and through organic growth, including entering into fuel supply and marketing agreements, constructing new assets and increasing the utilization of our existing assets. Delek formed us to be the primary vehicle to grow its logistics and marketing operations in order to maximize the integrated value of its assets. In addition, Delek has granted us a right of first offer on certain logistics assets that it will retain following this offering, and Delek is required under certain circumstances to offer us the opportunity to purchase additional logistics assets that Delek may acquire or construct in the future as a condition to its ownership of such assets. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

 

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For the year ended December 31, 2011, we had pro forma EBITDA of approximately $45.5 million and pro forma net income of approximately $32.6 million. For the three months ended March 31, 2012, we had pro forma EBITDA of approximately $12.2 million and pro forma net income of approximately $9.0 million. Delek accounted for 86.9% of our pro forma contribution margin for the year ended December 31, 2011 and 80.5% of our pro forma contribution margin for the three months ended March 31, 2012. Please read “—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure” for the definition of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures, calculated and presented in accordance with generally accepted accounting principles in the United States, or GAAP.

Assets and Operations

We operate in two business segments: our Pipelines and Transportation segment and our Wholesale Marketing and Terminalling segment. On a pro forma basis for the year ended December 31, 2011 and the quarter ended March 31, 2012, our Pipelines and Transportation segment accounted for approximately 62.4% and 59.0%, respectively, of our contribution margin, and our Wholesale Marketing and Terminalling segment accounted for approximately 37.6% and 41.0%, respectively, of our contribution margin.

Pipelines and Transportation Segment. Our Pipelines and Transportation segment consists of approximately 400 miles of crude oil transportation pipelines, 16 miles of refined product pipelines, an approximately 600-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 1.4 million barrels of active shell capacity. These assets are primarily divided into four operating systems:

 

   

our Lion Pipeline System, which transports crude oil to, and refined products from, Delek’s 80,000 barrels per day, or bpd, El Dorado, Arkansas refinery, or the El Dorado refinery;

 

   

our SALA Gathering System, which gathers and transports crude oil production in southern Arkansas and northern Louisiana, primarily for the El Dorado refinery;

 

   

our Paline Pipeline System, which will transport crude oil from Longview, Texas to the Chevron-operated Beaumont terminal in Nederland, Texas; and

 

   

our East Texas Crude Logistics System, which currently transports substantially all of the crude oil delivered to Delek’s 60,000 bpd Tyler, Texas refinery, or the Tyler refinery.

Wholesale Marketing and Terminalling Segment. In our Wholesale Marketing and Terminalling segment, we provide marketing services for 100% of the refined products output of the Tyler refinery, other than jet fuel and petroleum coke, and own and operate five light product terminals. Two of these terminals, located in Big Sandy, Texas and Memphis, Tennessee, support the Tyler and El Dorado refineries, respectively. Our west Texas marketing business markets light products that we purchase from Noble Petro, Inc., or Noble Petro, using our terminals in Abilene and San Angelo, Texas. We also market light products that we purchase from Magellan Asset Services, L.P., or Magellan, using third-party terminals in Aledo, Odessa, Big Spring and Frost, Texas. In addition, we provide products terminalling services to independent third parties and Delek’s retail segment at our light products terminal in Nashville, Tennessee.

Business Strategies

Our objectives are to maintain stable cash flows and to grow the quarterly distributions paid to our unitholders. We intend to achieve these objectives through the following business strategies:

 

   

Generate Stable Cash Flow. We will continue to pursue opportunities to provide logistics, marketing and other services to Delek and third parties pursuant to long-term, fee-based contracts.

 

 

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In new service contracts, we will endeavor to negotiate minimum throughput commitments similar to those included under our current commercial agreements with Delek.

 

   

Focus on Growing Our Business. We intend to evaluate and pursue opportunities to grow our business through both strategic acquisitions and organic expansion projects.

 

   

Pursue Accretive Acquisitions. We plan to pursue strategic acquisitions that both complement our existing assets and provide attractive returns for our unitholders. Delek has granted us a right of first offer on certain logistics assets that it will retain following this offering. In addition, Delek is required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek may acquire or construct in the future. Furthermore, we believe that our current asset base and our knowledge of the regional markets in which we operate will allow us to target and consummate accretive third-party acquisitions.

 

   

Pursue Attractive Organic Expansion Opportunities. We intend to focus on organic growth opportunities that complement our existing businesses or that provide attractive returns within our current geographic footprint. We will continue to seek opportunities to further support our existing customers and attract new customers through the expansion and development of our logistics infrastructure.

 

   

Optimize Our Existing Assets and Expand Our Customer Base. We intend to enhance the profitability of our existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization. Additionally, we plan to further diversify our customer base by increasing third-party throughput volumes running through our existing system and expanding our asset portfolio to service more third-party customers.

Competitive Strengths

We believe we are well-positioned to successfully execute our business strategies because of the following competitive strengths:

 

   

Long-Term, Fee-Based Contracts with Minimum Volume Commitments Enhance Cash Flow Stability. Initially, we will generate a substantial majority of our contribution margin under long-term, fee-based contracts with Delek and third parties. Each of our commercial agreements with Delek will include minimum volume commitments and will have fees indexed to inflation, thereby providing us with a stable revenue stream.

 

   

Our Assets are Integral to Delek’s Operations and Strategically Located. Our marketing and logistics assets are instrumental to the operations of Delek. Our Pipelines and Transportation segment currently transports crude oil to, and refined products from, the El Dorado refinery and transports crude oil to the Tyler refinery. Our Wholesale Marketing and Terminalling segment provides marketing services for 100% of the refined products produced by the Tyler refinery, other than jet fuel and petroleum coke. In addition, our Paline Pipeline System has been reconfigured to take advantage of its strategic location by permitting the transportation of crude oil from inland markets to the U.S. Gulf Coast, which will allow our customers to realize potentially significant positive differentials in crude oil pricing between East Texas and the U.S. Gulf Coast.

 

   

Relationship with Delek. One of our key strengths is our relationship with Delek. We believe that Delek will be incentivized to grow our business as a result of its significant economic interest in us. In particular, we expect to benefit from the following aspects of our relationship with Delek:

 

   

Acquisition Opportunities. Under the omnibus agreement, Delek has granted a right of first offer on certain logistics assets that it will retain following this offering and is required, under

 

 

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certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek may acquire or construct in the future.

 

   

Strength and Stability of Delek’s Refining Business. Delek’s refineries have a combined crude oil throughput capacity of 140,000 barrels per day. These refineries are strategically located in eastern Texas and southern Arkansas, which gives Delek access to a diverse slate of advantageously priced crude oil feedstocks and attractive end-markets in which to sell its refined products. We believe these refineries’ inland locations limit their exposure to weather-related disruptions, such as hurricanes, that can impact refineries that are located closer to the coast.

 

   

Access to Operational and Industry Expertise. We expect to benefit from Delek’s extensive operational, commercial and technical expertise, as well as its industry relationships throughout the midstream and downstream value chain, as we look to optimize and expand our existing asset base.

 

   

Management and Operations Team with Extensive Acquisition and Project Management Experience. Both our management and our operations teams have significant experience in the management and operation of logistics and marketing assets and the execution of expansion and acquisition strategies. Our management team includes some of the most senior officers of Delek, who average over 20 years of experience in the energy industry.

 

   

Financial Flexibility. We believe that we will have the financial flexibility to execute our growth strategy through access to the debt and equity capital markets, as well as the approximately $75 million of available capacity under the $175 million revolving credit facility that we expect to enter into at the closing of this offering.

Our Relationship with Delek

One of our principal strengths is our relationship with Delek (NYSE: DK). Delek has a significant interest in our partnership through its ownership of a     % limited partner interest in us and a 2.0% general partner interest in us and all of our incentive distribution rights. Delek owns and operates the Tyler and El Dorado refineries, two independent refineries currently representing a combined 140,000 bpd of crude oil throughput capacity. Delek produces a variety of petroleum-based products used in transportation and industrial markets which are sold to a wide range of customers located principally in inland, domestic markets. In addition to its ownership and operation of the El Dorado and Tyler refineries, Delek also owns and operates one of the largest company-operated convenience store chains in the southeastern United States. For the year ended December 31, 2011 and the three months ended March 31, 2012, Delek reported net sales of $7.2 billion and $2.2 billion, respectively. As of March 31, 2012, Delek reported total assets of $2.3 billion. As of March 31, 2012, 68.3% of Delek’s common stock was indirectly owned by Delek Group Ltd., or Delek Group (TASE: DLEKG), an Israel-based holding company engaged in, among other things, oil and natural gas exploration, production, refining and marketing. For the year ended December 31, 2011 and the three months ended March 31, 2012, Delek Group reported revenues of $15.9 billion and $4.8 billion, respectively. As of March 31, 2012, Delek Group reported total assets of $29.9 billion. Delek Group information is reported in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board and has been converted to U.S. dollars from New Israeli shekels based on a foreign exchange rate of U.S. dollar 1.00 to New Israeli shekels 3.72 on March 31, 2012.

In connection with the closing of this offering, we will enter into long-term, fee-based commercial agreements with Delek, under which we will provide various logistics and marketing services. Each of these agreements will include minimum volume commitments, which we believe will enhance the stability of our cash flows and will have fees indexed to inflation.

 

 

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In addition to the benefits we expect to receive as a result of our long-term, fee-based commercial agreements with Delek, we also anticipate that our relationship with Delek will provide us with growth opportunities. Since 2005, Delek has made nine acquisitions valued at an aggregate of approximately $580 million. In addition, Delek and Delek Group have strong relationships with several leading international financial firms and a core competency in raising capital to fund growth opportunities.

In addition, in connection with the closing of this offering, we will enter into an omnibus agreement pursuant to which we will agree upon certain aspects of our relationship with Delek and our general partner, including Delek providing to us certain administrative services and employees, our reimbursement of Delek for the cost of providing such services and employees, certain indemnification obligations and other matters. Under the omnibus agreement, Delek has granted a right of first offer on certain logistics assets that it will retain following this offering and is required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek may acquire or construct after this offering. Our general partner will enter into an operation and management services agreement with Delek, pursuant to which our general partner will use employees of Delek to provide operating, routine maintenance and other services with respect to our business. Neither our general partner nor Delek will receive any management fee or other compensation in connection with our general partner’s management of our business. However, prior to making any distribution on our common units, we will pay an annual fee to Delek for the provision of centralized corporate services and reimburse Delek for direct or allocated costs and expenses incurred by Delek on our behalf pursuant to the omnibus agreement and the operation and management services agreement. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.”

Delek will own our general partner. Our general partner will own             general partner units representing a 2.0% general partner interest in us, which will entitle it to receive 2.0% of all the distributions we make. Our general partner will also own all of our incentive distribution rights, which will entitle it to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $         per unit per quarter after the closing of our initial public offering. In addition, Delek will own             common units             and         subordinated units. Please read “Certain Relationships and Related Party Transactions.”

Risk Factors

An investment in our common units involves risks associated with our business, our regulatory and legal matters, our limited partnership structure and the tax characteristics of our common units. You should carefully consider the risks described in “Risk Factors” beginning on page 22 of this prospectus and the other information in this prospectus before deciding whether to invest in our common units.

Risks Inherent in Our Business

 

   

Delek accounts for a substantial majority of our contribution margin. Therefore, we are subject to the business risks of Delek. If Delek changes its business strategy, fails to satisfy its obligations under our commercial agreements with it for any reason or significantly reduces the volumes transported through our pipelines or handled at our terminals or its use of our marketing services, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected.

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to holders of our common and subordinated units.

 

 

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On a pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for the year ended December 31, 2011 or the twelve-month period ended March 31, 2012.

 

   

The assumptions underlying the forecast of cash available for distribution that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

 

   

Each of our commercial agreements with Delek and the agreement governing the capacity reservation on the Paline Pipeline System contain provisions that allow our counterparty to such agreement to suspend, reduce or terminate its obligations under such agreement in certain circumstances, including events of force majeure, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

 

   

If Delek satisfies only its minimum obligations under, or if we are unable to renew or extend, the various commercial agreements we have with it, our ability to make distributions to our unitholders will be reduced.

 

   

We anticipate that, beginning in the first half of 2013, our East Texas Crude Logistics System will operate at levels significantly below Delek’s minimum volume commitment under its agreement with us for the foreseeable future.

 

   

A material decrease in the refining margins at either the Tyler or El Dorado refineries could materially reduce the volumes of crude oil or refined products that we handle, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

 

   

A material decrease in the supply of attractively priced crude oil could materially reduce the volumes of crude oil and refined products that we transport and store, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

 

   

Our substantial dependence on the Tyler and El Dorado refineries as well as the lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

 

   

Delek’s 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 future credit ratings and profile. Our ability to obtain credit in the future and our future credit ratings may also be affected by Delek’s level of indebtedness.

 

   

Our logistics and marketing operations and Delek’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Delek’s facilities and liability for damages. If a significant accident or event occurs that results in business interruption or shutdown, our operations and financial results could be adversely affected.

 

 

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Risks Inherent in an Investment in Us

 

   

Our general partner and its affiliates, including Delek, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

   

You will experience immediate and substantial dilution in net tangible book value of $         per common unit.

 

   

Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

   

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

Tax Risks to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

   

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.

 

   

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

   

Our unitholders’ share of our income will be taxable to them for U.S. federal income tax purposes even if they do not receive any cash distributions from us.

Management of Delek Logistics Partners, LP

We are managed and operated by the board of directors and executive officers of our general partner, Delek Logistics GP, LLC. Delek will own all of the ownership interests in our general partner and will be entitled to appoint the entire board of directors of our general partner. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. All of the initial officers and a majority of the initial directors of our general partner are also officers and/or directors of Delek. For information about the executive officers and directors of our general partner, please read “Management.”

Under the listing requirements of the New York Stock Exchange, or NYSE, the board of directors of our general partner will be required to have at least three independent directors meeting the NYSE’s independence standards. At the completion of this offering, the board of directors of our general partner will be comprised of seven directors, including three independent directors.

 

 

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Formation Transactions and Partnership Structure

We were formed in April 2012 by Delek US Holdings, Inc. and its wholly owned subsidiary, Delek Logistics GP, LLC, to own, operate, acquire and construct crude oil and refined products logistics and marketing assets. In connection with the closing of this offering, Delek will contribute all of our predecessor’s assets and operations to us (excluding working capital and other noncurrent liabilities).

At or prior to the closing of this offering the following transactions, which we refer to as the formation transactions, will occur:

 

   

Delek will contribute all of our initial assets and operations, including certain subsidiaries, to us (excluding working capital and other noncurrent liabilities);

 

   

we will issue             common units and             subordinated units, representing an aggregate     % limited partner interest in us, to Delek;

 

   

we will issue             general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights to our general partner;

 

   

we will issue             common units to the public in this offering, representing a     % limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds”;

 

   

we will enter into a new $175 million revolving credit facility, under which we will borrow $90 million to fund an additional cash distribution to Delek;

 

   

Delek will enter into multiple long-term commercial agreements with us; and

 

   

we will enter into an omnibus agreement, and our general partner will enter into an operation and management services agreement, with Delek.

The number of common units to be issued to Delek and its subsidiaries includes             common units that will be issued at the expiration of the underwriters’ option to purchase additional common units, assuming that the underwriters do not exercise their option. Any exercise of the underwriters’ option to purchase additional units would reduce the common units shown as issued to Delek by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Delek at the expiration of the option period. All of the net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to make an additional cash distribution to Delek.

 

 

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Ownership of Delek Logistics Partners, LP

The following diagram depicts our simplified organizational and ownership structure after giving effect to the formation transactions and this offering.

 

LOGO

After giving effect to the formation transactions and this offering, our units will be held as follows:

 

Public Common Units(1)

         

Delek Units:

  

Common Units

         

Subordinated Units

     49.0

General Partner Units

     2.0
  

 

 

 

Total

     100.0
  

 

 

 

 

(1) Includes up to              common units that may be purchased by certain of our directors, officers and related persons pursuant to a directed unit program, as described in more detail in “Underwriting—Reserved Common Units.”

 

 

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Principal Executive Offices and Internet Address

Our principal executive offices are located at 7102 Commerce Way, Brentwood, Tennessee 37027, and our telephone number is (615) 771-6701. Our website is located at www.                    .com and will be activated immediately following this offering. We expect to make available our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, which we refer to as the SEC, free of charge through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Duties

Our general partner has a duty to manage our partnership in a manner it subjectively believes is in our best interests. However, the officers and directors of our general partner also have duties to manage our general partner in a manner beneficial to its owner, Delek. Additionally, all of our initial executive officers and the majority of our initial directors are officers and/or directors of Delek. As a result, conflicts of interest may arise in the future between us and our common unitholders, on the one hand, and Delek and our general partner, on the other hand. For a more detailed description of the conflicts of interest of our general partner, please read “Risk Factors—Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties—Conflicts of Interest.”

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties owed by the general partner to limited partners and the partnership. Pursuant to these provisions, our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and the methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty. Our partnership agreement also provides that, subject to the provisions contained in the omnibus agreement, affiliates of our general partner, including Delek and its other subsidiaries and affiliates, are permitted to compete with us. We may enter into additional agreements in the future with Delek relating to the purchase of additional assets, the provision of certain services to us by Delek and other matters. In the performance of their obligations under these agreements, Delek and its subsidiaries are not held to a fiduciary duty standard of care to us, our general partner or our limited partners, but rather to the standard of care specified in these agreements. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and each common unitholder is treated as having consented to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under applicable state law.

For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

 

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Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in the recently enacted Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

an ability to provide only two years of audited financial statements and related disclosures;

 

   

an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

   

delayed adoption of certain accounting standards.

We may take advantage of these provisions for up to five years or through such earlier date that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. In this prospectus, we have taken advantage of the reduced disclosure obligations with respect to executive compensation disclosure. We may choose to take advantage of this and other reduced reporting requirements in future filings. As a result, the information that we provide you may be different than you might get from other public companies in which you hold equity interests. Also, we have irrevocably elected to “opt out” of the exemption for the delayed adoption of certain accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common units offered to the public

            common units, or            common units if the underwriters exercise their option to purchase additional common units in full.

 

Units outstanding after this offering

            common units and            subordinated units, representing a 49.0% and 49.0% limited partner interest in us, respectively. If the underwriters do not exercise their option to purchase additional common units, we will issue an additional             common units to Delek at the expiration of the option period for no additional consideration. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Delek at the expiration of the option period. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Our general partner will own                  general partner units, representing a 2.0% general partner interest in us.

 

Use of proceeds

We expect the net proceeds from this offering, after deducting underwriting discounts, the structuring fee and offering expenses, to be approximately $         million. We intend to use the net proceeds of this offering:

 

   

to fund an approximately $         million cash distribution to Delek;

 

   

to retire the approximately $         million of outstanding indebtedness under our predecessor’s revolving credit facility in connection with our refinancing of the facility at the closing of this offering;

 

   

to provide approximately $             million in working capital to replenish amounts distributed to Delek, in the form of trade and other accounts receivable, in connection with the closing of this offering; and

 

   

for other general partnership purposes.

 

  Additionally, at the closing of this offering, we will enter into a new $175 million credit facility, under which we will borrow $90 million to fund an additional $90 million cash distribution to Delek.

 

  If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds will be approximately $         million. The net proceeds from any exercise of such option will be used to make an additional cash distribution to Delek.

 

 

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Cash distributions

We intend to pay the minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement and in the glossary of terms attached as Appendix B. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  We will adjust the amount of our distribution for the period from the completion of this offering through September 30, 2012, based on the actual length of that period.

 

  Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner:

 

   

first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received the minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

   

second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received the minimum quarterly distribution of $         ; and

 

   

third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $         per unit in any quarter, our general partner will receive, in addition to distributions on its 2.0% general partner interest, increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions” because they incentivize our general partner to increase distributions to our unitholders. In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, will have the right to reset the minimum quarterly distribution and the target distribution levels at which the incentive distributions receive increasing percentages of the cash we distribute to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

 

Prior to making distributions, we will pay Delek an annual fee of $2.7 million for the provision of centralized corporate services and reimburse Delek for direct or allocated costs and expenses incurred by Delek on our behalf pursuant to the omnibus agreement and the

 

 

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operation and management services agreement. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.”

 

  Pro forma cash available for distribution generated during the year ended December 31, 2011 and the twelve-month period ended March 31, 2012 was approximately $40.7 million and $41.1 million, respectively. The amount of cash we will need to pay the minimum quarterly distribution for four quarters on our common units, subordinated units and general partner units to be outstanding immediately after this offering will be approximately $         million (or an average of approximately $         million per quarter). As a result, we would have had sufficient cash available for distribution to pay the full minimum quarterly distribution of $         per unit per quarter ($         per unit on an annualized basis) on all of our common units for both the year ended December 31, 2011 and the twelve-month period ended March 31, 2012 but only approximately     % and     % of our subordinated units for such periods. Please read “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2011 and the Twelve-Month Period Ended March 31, 2012.”

 

  We believe that, based on the financial forecasts and related assumptions included under the caption “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2013,” we will have sufficient cash available for distribution to make cash distributions for the twelve-month period ending September 30, 2013, at the minimum quarterly distribution rate of $         per unit per quarter ($         per unit on an annualized basis) on all common units, subordinated units and general partner units outstanding immediately after completion of this offering. However, our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast.

 

Subordinated units

Delek will initially indirectly own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. If we do not pay distributions on our subordinated units, our subordinated units will not accrue arrearages for those unpaid distributions.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid at least (i) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common, subordinated and general partner unit, for each of three consecutive,

 

 

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non-overlapping four-quarter periods ending on or after September 30, 2015, or (ii) $         (150% of the annualized minimum quarterly distribution) on each outstanding common unit, subordinated unit and general partner unit, in addition to any distribution made in respect of the incentive distribution rights, for any four-consecutive-quarter period ending on or after September 30, 2013, in each case provided that (a) our conflicts committee, or the board of directors of our general partner based on the recommendation of our conflicts committee, reasonably expects to satisfy the tests set forth above for the succeeding four-quarter period without treating as earned any shortfall payments under our existing commercial agreements with Delek and (b) there are no arrearages on our common units at that time. In addition, the subordination period will end upon the removal of our general partner other than for cause if the units held by our general partner and its affiliates are not voted in favor of such removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Related to Cash Distributions—Subordination Period.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Partnership Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will not have the right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of our outstanding common and subordinated units, including any common and subordinated units owned by our general partner and its affiliates, voting together as a single class. Upon closing of this offering, Delek will own an aggregate of approximately     % of our common and subordinated units. This will give Delek the ability to prevent the involuntary removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner will have the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price not less than the then-current market price of the common units, as calculated in accordance with our partnership agreement.

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2015, you will be allocated, on a cumulative basis, an

 

 

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amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per common unit, we estimate that your average allocable taxable income per year will be no more than $         per common unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

 

Material federal income tax consequences

For a discussion of other material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Federal Income Tax Consequences.”

 

New York Stock Exchange listing

We intend to apply to list our common units on the New York Stock Exchange under the symbol “DKL.”

 

 

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Summary Historical and Pro Forma Financial and Operating Data

The following table shows summary historical combined financial and operating data of Delek Logistics Partners, LP Predecessor, our predecessor for accounting purposes, and summary pro forma combined financial data of Delek Logistics Partners, LP for the periods and as of the dates indicated. Our summary historical combined financial data as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 are derived from the audited combined financial statements of our predecessor appearing elsewhere in this prospectus. Our summary historical combined financial data as of and for the three months ended March 31, 2012 and for the three months ended March 31, 2011 are derived from the unaudited combined financial statements of our predecessor appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical and unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Delek Logistics Partners, LP Predecessor consists of the assets, liabilities and results of operations of certain crude oil and refined product pipeline, storage, wholesale marketing and terminalling assets of Delek, operated and held by Delek Marketing & Supply, Inc., Paline and Lion Oil, each a wholly owned subsidiary of Delek, to be contributed to us in connection with this offering. The historical financial data include the assets, liabilities and results of operations of the assets to be contributed by Lion Oil to us in connection with this offering, other than Paline, for all periods after April 29, 2011. The assets, liabilities and results of operations of Paline are included in the accompanying financial statements for all periods after December 19, 2011 and, for all periods through April 28, 2011, are included in the assets, liabilities and results of operations of the assets to be contributed by Lion Oil to us in connection with this offering.

The summary pro forma combined financial data presented in the following table for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related formation transactions occurred as of March 31, 2012 and the pro forma statements of operations for the year ended December 31, 2011 and the three months ended March 31, 2012 assume that the offering and the related transactions occurred as of January 1, 2011. These transactions include, and the pro forma financial data give effect to, the following:

 

   

Delek’s contribution of all of our initial assets and operations, including certain subsidiaries, to us (excluding working capital and other noncurrent liabilities);

 

   

our execution of multiple long-term commercial agreements with Delek and recognition of incremental revenues under those agreements as discussed in “Certain Relationships and Related Party Transactions—Commercial Agreements with Delek”;

 

   

our execution of an omnibus agreement, and our general partner’s execution of an operation and management services agreement, with Delek;

 

   

the consummation of this offering and our issuance of common units to the public, general partner units and the incentive distribution rights to our general partner and common units and subordinated units to Delek; and

 

   

the application of the net proceeds of this offering, together with the proceeds from borrowings under our revolving credit facility, as described in “Use of Proceeds.”

The pro forma combined financial data do not give effect to the estimated $2.0 million in incremental annual general and administrative expense we expect to incur as a result of being a separate publicly traded partnership.

 

 

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The following table presents the non-GAAP financial measure of EBITDA, which we use in our business as a measure of performance and liquidity. For a definition of EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measure.”

 

    Delek Logistics Partners, LP Predecessor Historical     Delek Logistics Partners,
LP Pro Forma(4)
 
    Year Ended December 31,     Three Months
Ended March 31,
    Year Ended
December 31,
2011
    Three
Months
Ended
March 31,
2012
 
    2009(1)(2)     2010     2011(3)     2011     2012      
                      (unaudited)     (unaudited)  
    (In thousands, except per unit data and operating information)        

Statement of Operations Data:

             

Net sales:

             

Pipelines and transportation

  $ 6,633      $ 9,451      $ 21,878      $ 2,440      $ 6,680      $ 47,106      $ 11,573   

Wholesale marketing and terminalling(5)

    367,787        494,957        722,201        156,656        232,403        718,736        187,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

    374,420        504,408        744,079        159,096        239,083        765,842        199,211   

Cost of goods sold

    349,493        476,678        700,505        149,809        225,409        694,795        180,928   

Operating expenses(6)

    2,643        2,920        12,940        1,003        4,210        19,125        4,362   

General and administrative expenses(7)

    5,740        4,247        5,795        1,147        2,407        6,380        1,749   

Depreciation and amortization

    2,804        2,810        4,820        690        2,134        9,347        2,287   

(Gain) loss on sale of assets

                  (2            5        (2     5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    13,740        17,753        20,021        6,447        4,918        36,197        9,880   

Interest expense, net(8)

    2,173        2,564        2,011        467        488        3,569        871   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    11,567        15,189        18,010        5,980        4,430        32,628        9,009   

Income tax expense

    4,059        5,102        5,363        2,223        1,920               —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 7,508      $ 10,087      $ 12,647      $ 3,757      $ 2,510      $ 32,628      $ 9,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General partner interest in net income

            $        $     

Common unitholders interest in net income

             

Subordinated unitholders interest in net income

             

Pro forma net income per common unit

             

Pro forma net income per subordinated unit

             

Balance Sheet Data (at period end):

             

Property, plant and equipment, net

  $ 29,681      $ 27,934      $ 133,680        $ 156,092        $ 156,092   

Total assets

    65,096        71,831        199,827          229,880          222,002   

Total debt, including current maturities

    42,500        29,000        30,300          49,100          90,000   

Total liabilities

    63,064        59,626        92,105          120,692          131,909   

Total division equity/partners’ capital

    2,032        12,205        107,722          109,188          90,093   

Cash Flow Data:

             

Cash flows (used in) provided by operating activities

  $ 5,586      $ 13,421      $ (2,859   $ (4,361   $ 6,536       

Cash flows used in investing activities

    (1,607            (885            (24,285    

Cash flows (used in) provided by financing activities

    (4,577     (13,500     3,779        4,400        17,740       

Other Financial Data:

             

EBITDA(9)

  $ 16,544      $ 20,563      $ 24,841      $ 7,137      $ 7,052      $ 45,544      $ 12,167   

Capital expenditures:

             

Maintenance

  $ 540      $      $      $      $ 475       

Expansion

                  885               538       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

  $ 540      $      $ 885      $      $ 1,013       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

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    Delek Logistics Partners, LP Predecessor
Historical
    Delek Logistics
Partners, LP Pro Forma(4)
 
    Year Ended December 31,     Three Months
Ended March 31,
    Year Ended
December 31,
2011
    Three
Months
Ended
March 31,
2012
 
    2009(1)(2)     2010     2011(3)     2011     2012      
                      (unaudited)     (unaudited)  
    (In thousands, except per unit data and operating information)        

Operating Information:

             

Pipeline and transportation throughputs (bpd):

             

Lion Pipeline System:

             

Crude oil throughputs

                  57,442               52,969        57,180        52,969   

Light product throughputs

                  45,337               46,823        46,203        46,823   

SALA Gathering System

                  17,676               19,710        17,358        19,710   

Paline Pipeline System

                  13,576               22,301        20,529        22,301   

East Texas Crude Logistics System

    46,153        49,388        55,341        52,862        50,388        55,341        50,388   

Wholesale marketing and terminalling:

             

East Texas—Tyler refinery sales (bpd)(5)

    50,253        50,173        57,047        54,531        53,528        51,568        47,026   

West Texas marketing sales (bpd)(5)

    13,377        14,353        15,595        14,535        19,592        15,493        15,383   

West Texas marketing gross margin per barrel

  $ 1.48      $ 1.46      $ 1.53      $ 3.26      $ 2.21      $ 1.50      $ 2.24   

Terminalling throughputs (bpd)

                  17,907               18,059        18,217        18,059   

 

(1) The Tyler refinery did not operate during the period from November 21, 2008 through May 17, 2009 due to an explosion and fire on November 20, 2008. The Tyler refinery resumed full operations on May 18, 2009. During the period for which the Tyler refinery was not in operation, Delek continued to pay us amounts consistent with historical averages despite the absence of operations at portions of our business. Accordingly, while financial information for the period reflects actual amounts received during such period, operating information on a per day basis is calculated by dividing full year volumes (including minimal sales volumes of intermediate products prior to the restart of the refinery) by 228 (the number of days in 2009 for which the Tyler refinery was operational).

 

(2) Financial information and operating information for the East Texas Crude Logistics System for the year ended December 31, 2009 is for the 275 days that we operated the system and includes payments related to minimum volume commitments in April and May 2009 as a result of reduced volumes prior to the resumption of operations at the Tyler refinery in May 2009.

 

 

(3) Financial information and operating information (other than the information relating to operations in east and west Texas) for the year ended December 31, 2011 is for the 247 days and 11 days Delek operated the El Dorado refinery and the Paline Pipeline System, respectively, in 2011.

 

(4) The pro forma net sales reflect recognition of affiliate revenues for pipelines and terminals contributed to us that have not been previously recorded in the historical financial records of the predecessor. Pro forma product volumes used in the calculations are historical volumes transported on or terminalled in facilities included in the predecessor’s financial statements. Pro forma service fees were calculated using the rates and fees in the commercial agreements to be entered into with Delek at the closing of this offering. Pro forma volumes and sales do not include any amounts related to our commercial agreements for the Paline Pipeline System and the Big Sandy terminal, as such assets were not operational or currently configured during historical periods.

 

(5) The pro forma wholesale and marketing net sales and volumes reflect the removal of activities related to the sale of jet fuel and petroleum coke from Tyler refinery sales, and the pro forma wholesale and marketing net sales reflect the removal of activities related to the sale of bulk biofuel activity from our west Texas marketing operations.

 

(6) The pro forma operating expenses reflect $1.2 million per year ($0.3 million per quarter), an increase relative to historical amounts of $0.5 million for the year ended December 31, 2011 and $0.1 million for the three months ended March 31, 2012, for business interruption, property and pollution liability insurance premiums that we expect to incur based on estimates from our insurance broker, and employee-related expenses of $0.2 million per year related to Delek personnel who will support our day-to-day operations after the closing of the offering. Pro forma operating expenses also reflect the additional operating expenses related to entities and assets acquired during 2011 and 2012, as if those entities and assets were acquired as of January 1, 2011.

 

(7) Pro forma general and administrative expenses have been adjusted to give effect to the annual service fee of $2.7 million that we will pay Delek under the terms of our omnibus agreement for performing certain centralized corporate services.

 

(8) Pro forma interest expense reflects interest expense on our new $175.0 million revolving credit facility. The facility bears interest based on predetermined pricing grids that allow us to choose between Base Rate Loans or LIBOR Rate Loans. The weighted average rate on the $90.0 million of borrowings is approximately 2.5%. Pro forma interest expense also reflects an estimated 0.30% commitment fee for the unutilized portion of the facility and fees at 2.13% of letters of credit totaling $10.0 million, as well as the related five-year amortization of debt issuance costs incurred with entering into the revolving credit facility. The annualized impact of a hypothetical one percent change in interest rates associated with this floating rate borrowing would be to change interest expense by $1.1 million.

 

 

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(9) For a definition of EBITDA and reconciliations to its most directly comparable GAAP financial measures, please read “—Non-GAAP Financial Measure” below.

Non-GAAP Financial Measure

We define EBITDA as net income (loss) before net interest expense, income tax expense, depreciation and amortization expense. EBITDA is a supplemental financial measure that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies may use, to assess:

 

   

our operating performance as compared to those of other publicly traded partnerships in the midstream energy industry, without regard to capital structure or historical cost basis;

 

   

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

 

   

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 provides information useful to investors in assessing our financial condition and results of operations. EBITDA should not be considered an alternative to net income, operating income, cash from operations or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect the most directly comparable GAAP measures. Additionally, because EBITDA may be defined differently by other companies in our industry, our definition of EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

 

 

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The following table presents a reconciliation of EBITDA to net income (loss) and net cash from (used in) operating activities, the most directly comparable GAAP financial measures, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     Delek Logistics Partners, LP Predecessor Historical     Delek Logistics Partners,
LP Pro Forma
 
     Year Ended December 31,     Three Months
Ended March 31,
    Year Ended
December 31,
2011
     Three
Months
Ended
March 31,
2012
 
     2009     2010     2011     2011     2012       
                       (unaudited)    

(unaudited)

 
     (In thousands)  

Reconciliation of EBITDA to net income (loss):

               

Net income

   $ 7,508      $ 10,087      $ 12,647      $ 3,757      $ 2,510      $ 32,628       $ 9,009   

Add:

               

Income tax expense

     4,059        5,102        5,363        2,223        1,920                  

Depreciation and amortization

     2,804        2,810        4,820        690        2,134        9,347         2,287   

Interest expense, net

     2,173        2,564        2,011        467        488        3,569         871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

EBITDA

   $ 16,544      $ 20,563      $ 24,841      $ 7,137      $ 7,052      $ 45,544       $ 12,167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Reconciliation of EBITDA to net cash provided by operating activities:

               

Net cash provided by (used in) operating activities

   $ 5,586      $ 13,421      $ (2,859   $ (4,361   $ 6,536        

Amortization of deferred financing costs

     (173     (169     (208     (46     (47     

Accretion of asset retirement obligations

     (61     (73     (91     (20     (25     

Deferred taxes

     (650     (258     4,328        (6     (1,734     

Loss on asset disposals

                                 (5     

Stock-based compensation expense

     (190     (86     (64     (14     (16     

Changes in assets and liabilities

     5,800        62        16,361        8,894        (65     

Income taxes

     4,059        5,102        5,363        2,223        1,920        

Interest expense, net

     2,173        2,564        2,011        467        488        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

      

EBITDA

   $ 16,544      $ 20,563      $ 24,841      $ 7,137      $ 7,052        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

      

 

 

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RISK FACTORS

Limited partner interests are inherently different from shares of capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. We urge you to carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition or results of operations could be materially adversely affected. In that case, we might not be able to pay the minimum quarterly distribution on our common units, the trading price of our common units could decline, and you could lose all or part of your investment in us.

Risks Related to Our Business

Delek accounts for a substantial majority of our contribution margin. Therefore, we are subject to the business risks of Delek. If Delek changes its business strategy, fails to satisfy its obligations under our commercial agreements with it for any reason or significantly reduces the volumes transported through our pipelines or handled at our terminals or its use of our marketing services, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected.

Delek accounted for 86.9% and 80.5% of our pro forma contribution margin for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively. Delek is the only customer for our Lion Pipeline System, our East Texas Crude Logistics System and our Big Sandy terminal and the principal customer for our SALA Gathering System. Delek has historically operated these assets solely to support the Tyler and El Dorado refineries and not as a stand-alone business. We also derive a significant portion of our contribution margin under our marketing agreement with Delek for the output of the Tyler refinery (other than jet fuel and petroleum coke), which includes an incentive fee to us of 50% of the margin, if any, above an agreed base level. As we expect to continue to derive the substantial majority of our contribution margin from Delek for the foreseeable future, we are subject to the risk of nonpayment or nonperformance by Delek under our commercial agreements. If Delek were to significantly decrease the throughput transported on our pipelines or the volumes of refined products handled at our terminals, because of business or operational difficulties or strategic decisions by Delek’s management, it is unlikely that we would be able to utilize any additional capacity on these pipelines or at these terminal facilities to service third-party customers without substantial capital outlays and delays, if at all, which could materially and adversely affect our results of operations, financial condition and cash flows. For example, we expect a reconfigured third-party pipeline system will begin supplying crude oil to the Tyler and El Dorado refineries in 2013 and cause crude oil volumes transported on our East Texas Crude Logistics System to decrease. Additionally, any event, whether in our areas of operation or otherwise, that materially and adversely affects Delek’s financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are subject to the operational and business risks of Delek, including but not limited to the following:

 

   

the risk of contract cancellation, non-renewal or failure to perform by Delek’s customers, and Delek’s inability to replace such contracts and/or customers;

 

   

disruptions due to equipment interruption or failure at Delek’s facilities, such as the November 2008 fire at the Tyler refinery that resulted in a suspension of operations for more than five months, or at third-party facilities on which Delek’s business is dependent;

 

   

the timing and extent of changes in commodity prices and demand for Delek’s refined products, and the availability and costs of crude oil and other refinery feedstocks;

 

   

the effects of the global economic downturn on Delek’s business and the business of its suppliers, customers, business partners and lenders;

 

   

Delek’s ability to remain in compliance with its supply and offtake arrangements;

 

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Delek’s ability to remain in compliance with the terms of its outstanding indebtedness;

 

   

changes in the cost or availability of third-party pipelines, terminals and other means of delivering and transporting crude oil, feedstocks and refined products, such as the reconfigured third-party pipeline system that will begin supplying crude oil to the Tyler and El Dorado refineries in 2013, the temporary suspension of crude oil shipments by a third-party pipeline operator in May 2011 that caused the El Dorado refinery to operate at reduced rates for approximately five weeks and the temporary suspension of crude oil shipments by this third-party pipeline operator in May 2012 that continues to cause the El Dorado refinery to operate at reduced rates;

 

   

state and federal environmental, economic, health and safety, energy and other policies and regulations, and any changes in those policies and regulations;

 

   

environmental incidents and violations and related remediation costs, fines and other liabilities; and

 

   

changes in crude oil and refined product inventory levels and carrying costs.

Additionally, Delek continually considers opportunities presented by third parties with respect to its refinery assets. These opportunities may include offers to purchase and joint venture propositions. Delek may also change its refineries’ operations by constructing new facilities, suspending or reducing certain operations, or modifying or closing facilities. Changes may be considered to meet market demands, to satisfy regulatory requirements or environmental and safety objectives, to improve operational efficiency or for other reasons. Delek actively manages its assets and operations, and, therefore, changes of some nature, possibly material to its business relationship with us, may occur at some point in the future.

Furthermore, conflicts of interest may arise between Delek and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. We have no control over Delek, our largest source of contribution margin, and Delek may elect to pursue a business strategy that does not favor us or our business. Please read “—Risks Inherent in an Investment in Us—Our general partner and its affiliates, including Delek, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders” and “Conflicts of Interest and Duties.”

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to holders of our common and subordinated units.

In order to pay the minimum quarterly distribution of $         per unit, or $         per unit on an annualized basis, we will require available cash of approximately $         million per quarter, or $         million per year, based on the number of common, subordinated and general partner units to be outstanding immediately after completion of this offering. We may not have sufficient available cash each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the volume of crude oil and refined products we handle;

 

   

our entitlement to payments associated with minimum volume commitments;

 

   

the rates and terminalling and storage fees we charge for the volumes we handle;

 

   

the margins generated on the refined products we market or sell;

 

   

timely payments by our customers;

 

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the level of our operating, maintenance and general and administrative costs; and

 

   

prevailing economic conditions.

In addition, the actual amount of cash we will have available for distribution will depend on other factors, including:

 

   

the level and timing of capital expenditures we make;

 

   

the level of our operating and general and administrative expenses, including the administrative fee under the omnibus agreement and reimbursements to Delek for services provided to us;

 

   

the cost of acquisitions, if any;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

restrictions on distributions contained in our debt agreements;

 

   

the amount of cash reserves established by our general partner; and

 

   

other business risks affecting our cash levels.

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all of our units for the year ended December 31, 2011 or the twelve-month period ended March 31, 2012.

The amount of pro forma cash available for distribution for the year ended December 31, 2011 and the twelve-month period ended March 31, 2012 would have been sufficient to allow us to pay the full minimum quarterly distribution on all of our common units, but only approximately     % and     %, respectively, of the minimum quarterly distribution on all of our subordinated units for such periods. For a calculation of our ability to make cash distributions to our unitholders based on our pro forma results for the year ended December 31, 2011 and the twelve-month period ended March 31, 2012, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The assumptions underlying the forecast of cash available for distribution that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations, EBITDA and cash available for distribution for the twelve-month period ending September 30, 2013. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Our Cash Distribution Policy and Restrictions on Distributions.” Our financial forecast has been prepared by management, and we have neither received nor requested an opinion or report on it from our or

 

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any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks, including those discussed in this prospectus, which could cause our EBITDA to be materially less than the amount forecasted. If we do not generate the forecasted EBITDA, we may not be able to make the minimum quarterly distribution or pay any amount on our common units or subordinated units, and the market price of our common units may decline materially.

Each of our commercial agreements with Delek and the agreement governing the capacity reservation on our Paline Pipeline System contain provisions that allow our counterparty to such agreement to suspend, reduce or terminate its obligations under such agreement in certain circumstances, including events of force majeure, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

Each of our commercial agreements with Delek provide that Delek may suspend, reduce or terminate its obligations to us, including the requirement to pay the fees associated with the applicable minimum volume commitments, in the event of (i) a material breach of the agreement by us, (ii) Delek deciding to permanently or indefinitely suspend refining operations at one or more of its refineries or (iii) the occurrence of certain force majeure events that would prevent us or Delek from performing our or its obligations under the applicable agreement. Delek has the discretion to decide to suspend, reduce or terminate its obligations notwithstanding the fact that its decision may significantly and adversely affect us. For instance, under each of our commercial agreements with Delek, if, at any time after the second anniversary of the completion of this offering, Delek decides to permanently or indefinitely suspend refining operations at the refinery served under the applicable agreement for a period that will continue for at least twelve consecutive months, then it may terminate the agreement on no less than twelve months’ prior written notice to us. Furthermore, under such agreements, Delek has the right, commencing three years after this offering, to suspend or reduce its obligations for the duration of a force majeure event affecting its assets with respect to any affected services, and may terminate the agreements with respect to such services if the force majeure event lasts in excess of twelve months. In addition, if the force majeure event occurs on our assets at any time, Delek has the right to suspend or reduce its obligations for the duration of the force majeure event with respect to any affected services. As defined in our commercial agreements with Delek, force majeure events include any acts or occurrences that prevent services from being performed either by us or Delek under the applicable agreement, such as:

 

   

acts of God;

 

   

strikes, lockouts or other industrial disturbances;

 

   

acts of the public enemy, wars, blockades, insurrections, riots or civil disturbances;

 

   

storms, floods or washouts;

 

   

arrests or the order of any court or governmental authority having jurisdiction while the same is in force and effect;

 

   

explosions, breakage, accident to machinery, storage tanks or lines of pipe;

 

   

any inability to obtain or unavoidable delay in obtaining material or equipment;

 

   

any inability to deliver crude oil because of a failure of third-party pipelines; and

 

   

any other causes not reasonably within the control of the party claiming suspension and which by the exercise of due diligence such party is unable to prevent or overcome.

Our customer for the southbound capacity of the Paline Pipeline System is also excused from performance of its obligations under its agreement with us in the event of a force majeure, including acts of God, explosions, breakage of or accidents to machinery, equipment or pipelines and similar events. Additionally, this

 

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customer may terminate its agreement with us with it if we breach the terms of the agreement and fail to remedy the breach within 60 days.

Accordingly, there exists a broad range of events that could result in our no longer being able to utilize our pipelines or terminals and the counterparty to the applicable commercial agreement no longer having an obligation to meet its minimum volume commitments or pay amounts otherwise owing under the applicable agreement. Furthermore, a single event relating to one of Delek’s refineries could have such an impact on multiple of our commercial agreements with Delek. Any reduction, suspension or termination of any of our commercial agreements would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders. Please read “Certain Relationships and Related Party Transactions—Commercial Agreements with Delek.”

If Delek satisfies only its minimum obligations under, or if we are unable to renew or extend, the various commercial agreements we have with it, our ability to make distributions to our unitholders will be reduced.

Delek is not obligated to use our services with respect to volumes of crude oil or refined products in excess of the minimum volume commitments under the various commercial agreements with us. During refinery turnarounds, which typically last 30 to 60 days and are performed every three to five years, we expect that Delek may only satisfy its minimum volume commitments with respect to our assets that serve the refinery. Turnarounds are scheduled at the Tyler and El Dorado refineries in 2014. If Delek had satisfied only its minimum volume commitments during 2011 or the twelve-month period ended March 31, 2012 under each of the various commercial agreements with us, we would not have been able to make the full minimum quarterly distribution on all of our outstanding common units. In addition, the terms of Delek’s obligations under those agreements range from five to ten years. If Delek fails to use our facilities and services after expiration of those agreements and we are unable to generate additional revenues from third parties, our ability to make cash distributions to unitholders will be reduced. See “—We anticipate that, beginning in the first half of 2013, our East Texas Crude Logistics System will operate at levels significantly below Delek’s minimum volume commitment under its agreement with us for the foreseeable future.”

We anticipate that, beginning in the first half of 2013, our East Texas Crude Logistics System will operate at levels significantly below Delek’s minimum volume commitment under its agreement with us for the foreseeable future.

Our East Texas Crude Logistics System is currently the only pipeline system supplying crude oil to the Tyler refinery. Beginning in the first half of 2013, however, we expect a reconfigured pipeline system that is owned and operated by third parties to also begin transporting crude oil to the Tyler refinery from west Texas. Delek has a 10-year agreement with such third parties to transport a substantial majority of the Tyler refinery’s crude oil requirements on this reconfigured system. Consequently, crude oil volumes transported on our East Texas Crude Logistics System are expected to decrease from approximately 55,000 bpd to below 10,000 bpd. For so long as Delek is required to pay the associated minimum volume commitment under its commercial agreement with us relating to the East Texas Crude Logistics System, Delek will be obligated to pay us an amount equal to the fee it would pay were we to throughput 35,000 bpd, or approximately $5.1 million annually based on the per barrel fees in our agreement, as opposed to approximately $8.5 million annually based on pro forma revenues for the year ended December 31, 2011. Without the minimum volume commitment, assuming throughput levels of 10,000 bpd, we would be entitled to payments of approximately $1.5 million annually. Furthermore, our forecasted revenues for the twelve-month period ending September 30, 2013 include incremental revenues of approximately $             million associated with the increased throughput fee of $0.60 per barrel for amounts throughput in excess of 50,000 bpd on the East Texas Crude Logistics System. We do not expect to realize incremental revenues associated with this fee structure following the commencement of third-party transportation to the Tyler refinery.

 

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A material decrease in the refining margins at either of Delek’s refineries could materially reduce the volumes of crude oil or refined products that we handle, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

The volumes of crude oil and refined products that we transport and refined products that we market depend substantially on Delek’s refining margins. Refining margins are dependent mostly upon the price of crude oil or other refinery feedstocks and the price of refined products. These prices are affected by numerous factors beyond our or Delek’s control, including the global supply and demand for crude oil, gasoline and other refined products. The current global economic weakness and high unemployment in the United States could depress demand for refined products. The impact of low demand may be further compounded by excess global refining capacity and high inventory levels. Several refineries in North America and Europe have been temporarily or permanently shut down in response to falling demand and excess refining capacity.

In addition to current market conditions, there are long-term factors that may impact the supply and demand of refined products in the United States, including:

 

   

changes in capacity and utilization rates of refineries worldwide;

 

   

increased fuel efficiency standards for vehicles, including greater acceptance of electric and alternative fuel vehicles;

 

   

development and marketing of alternative and competing fuels, such as ethanol and biodiesel;

 

   

changes in fuel specifications required by environmental and other laws, particularly with respect to renewable fuel content;

 

   

potential and enacted climate change legislation;

 

   

the Environmental Protection Agency (EPA) regulation of greenhouse gas emissions under the Clean Air Act; and

 

   

other U.S. government regulations.

The price for a significant portion of the crude oil processed at Delek’s refineries is based upon the West Texas Intermediate (WTI) benchmark for such oil rather than the Brent benchmark. Although these two benchmarks have historically been similarly priced, elevated inventories of WTI-priced crude oil in the Mid-Continent have caused WTI prices to fall significantly below the Brent benchmark. During the year ended December 31, 2011, this differential ranged from a high of $27.88 per bbl to a low of $3.29 per bbl. During the three months ended March 31, 2012, this differential ranged from a high of $19.86 per bbl to a low of $9.17 per bbl. A substantial or prolonged narrowing in (or inversion to) the price differential between the WTI and Brent benchmarks for any reason, including, without limitation, actual or perceived reductions in Mid-Continent inventories or a continued weakening of economic conditions in the European Union, could negatively impact Delek’s refining margins. In addition, because the premium or discount Delek pays for a portion of the crude oil processed at its refineries is established based upon this differential during the month prior to the month in which the crude oil is processed, changes in the margin between the cost of crude oil and the sales price of refined products may negatively affect its results of operations and cash flows.

In addition to our indirect exposure to Delek’s refining margins, we are directly impacted by the wholesale margins of the Tyler refinery relative to U.S. Gulf Coast prices, where our marketing agreement with Delek provides that we share a portion of Delek’s margin, if any, above an agreed base level generated on the sale of refined products, other than jet fuel and petroleum coke.

 

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The Tyler refinery has historically processed primarily light sweet crude oils, while the El Dorado refinery processes primarily sour crude oils. Light sweet crude oils have historically been more costly than heavy sour crude oils, and an increase in the cost of light sweet crude oils could negatively impact Delek’s operations at the Tyler refinery, which would negatively impact revenues we generate under our marketing agreement and could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

If the demand for refined products, particularly in Delek’s primary market areas, decreases significantly, or if there were a material increase in the price of crude oil supplied to Delek’s refineries without an increase in the value of the refined products produced by those refineries, either temporary or permanent, which caused Delek to reduce production of refined products at its refineries, there would likely be a reduction in the volumes of crude oil and refined products we handle for Delek. Any such reduction could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

A material decrease in the supply of attractively priced crude oil could materially reduce the volumes of crude oil and refined products that we transport and store, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

The volumes of crude oil and refined products that we may transport on our pipelines in excess of Delek’s minimum volume commitments will depend on the volumes of crude oil purchased and refined products produced at Delek’s refineries. The volumes of crude oil purchased and refined products produced depends, in part, on the availability of attractively priced crude oil.

In order to maintain or increase product production levels at Delek’s refineries, Delek must continually contract for new crude oil supplies or consider connecting to alternative sources of crude oil. Adverse developments in major oil producing regions around the world could have a significantly greater impact on our financial condition, results of operations and cash flows because of our lack of industry and geographic diversity and substantial reliance on Delek as a customer. Accordingly, in addition to risks related to accessing, transporting and storing crude oil and refined products, we are disproportionately exposed to risks inherent in the broader oil and gas industry, including:

 

   

the volatility and uncertainty of regional pricing differentials for crude oil and refined products;

 

   

the ability of the members of the Organization of Petroleum Exporting Countries, or OPEC, to agree to and maintain production controls;

 

   

the nature and extent of governmental regulation and taxation; and

 

   

the anticipated future prices of crude oil and refined products in markets served by Delek’s refineries.

If, as a result of any of these or other factors, the volumes of attractively priced crude oil available to Delek’s refineries are materially reduced for a prolonged period of time, the volumes of crude oil and refined products that we transport and store, and the related fees for those services, could be materially reduced, which could materially adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders as well as the trading price of our common units.

Our substantial dependence on the Tyler and El Dorado refineries as well as the lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

We believe that a substantial majority of our contribution margin for the foreseeable future will be derived from operations supporting the Tyler and El Dorado refineries. Any event that renders either refinery temporarily or permanently unavailable would have a material adverse effect on our financial condition, results

 

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of operations, cash flows and ability to make distributions to our unitholders. Furthermore, we are indirectly impacted by limitations associated with attributes of the Tyler and El Dorado refineries. For example, for the year ended December 31, 2011 and the three months ended March 31, 2012, substantially all sales of the Tyler refinery products volume were completed through Delek’s rack system located at the Tyler refinery. Neither we nor Delek owns, and, unlike most refineries, the Tyler refinery has no access to, an outbound pipeline for distribution of its refined petroleum products outside the northeast Texas market. Such limited access to an outbound pipeline may impair Delek’s ability to attract new customers or increase sales for refined petroleum products from the Tyler refinery. The Tyler refinery is currently the only supplier of a full range of refined petroleum products within a radius of approximately 100 miles of its location. If competitors commence operations within the markets served by the Tyler refinery, it could result in reduced demand for refined products from the Tyler refinery. If demand for refined products from the Tyler refinery decreases, our revenues under our marketing agreement above specified minimum throughput fees with Delek may decrease. In addition, reduced demand for refined products from the Tyler refinery could decrease the demand for crude oil transported on our East Texas Crude Logistics System, which would reduce our revenues.

We rely on revenues generated from our pipelines, gathering systems, storage and terminal operations, which are primarily located in Arkansas and Texas and, to a lesser degree, Tennessee. Due to our lack of diversification in assets and geographic location, an adverse development in our businesses or areas of operations, including adverse developments due to catastrophic events, weather, regulatory action and decreases in demand for crude oil and refined products, could have a significantly greater impact on our results of operations and cash available for distribution to our common unitholders than if we maintained more diverse assets and locations. Such events may constitute force majeure events under our commercial agreements, potentially resulting in the suspension, reduction or termination of multiple commercial agreements in the impacted geographic area. In addition, during a refinery turnaround, we expect that Delek may only satisfy its minimum volume commitments with respect to our assets that serve such refinery. Please read “—Each of our commercial agreements with Delek and the agreement governing the capacity reservation on our Paline Pipeline System contain provisions that allow our counterparty to such agreement to suspend, reduce or terminate its obligations under such agreement in certain circumstances, including events of force majeure, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders” and “—If Delek satisfies only its minimum obligations under, or if we are unable to renew or extend, the various commercial agreements we have with it, our ability to make distributions to our unitholders will be reduced.”

Our ability to expand may be limited if Delek’s business does not grow as expected.

Part of our growth strategy depends on the growth of Delek’s business. For example, in our terminals and storage business, we believe our growth will be driven in part by identifying and executing organic expansion projects that will result in increased throughput volumes from Delek and third parties. Our prospects for organic growth currently include projects that we expect Delek to undertake, such as constructing new tankage, and that we expect to have an opportunity to purchase from Delek. In addition, our organic growth opportunities will be limited if Delek is unable to acquire new assets for which our execution of organic projects is needed. Additionally, if Delek focuses on other growth areas or does not make capital expenditures to fund the organic growth of its logistics operations, we may not be able to fully execute our growth strategy.

We may not be able to significantly increase our third-party revenue due to competition and other factors, which could limit our ability to grow and may extend our dependence on Delek.

Our ability to increase our third-party revenue is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when third-party shippers require it. Under our commercial agreements with Delek, we may not provide service to third parties on our Lion Pipeline System, SALA Gathering System or East Texas Crude Logistics System, or at our Memphis or Big Sandy terminals, without Delek’s consent, subject to limited exceptions. In addition, our ability to obtain third-party customers on our East Texas Crude Logistics System will be dependent on our ability to make

 

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connections to third-party facilities and pipelines. If we are unable to do so, or if Delek prohibits us from doing so, the throughput on our East Texas Crude Logistics System will be limited to the demand from the Tyler refinery not satisfied by third parties and the availability of crude oil shipped from third-party destinations. Furthermore, to the extent that we have capacity at our refined products terminals available for third-party volumes, competition from other existing or future refined products terminals owned by our competitors may limit our ability to utilize this available capacity.

We can provide no assurance that we will be able to attract material third-party revenues. Our efforts to establish our reputation and attract new unaffiliated customers may be adversely affected by our relationship with Delek and our desire to provide services pursuant to fee-based contracts. Our potential third-party customers may prefer to obtain services under contracts through which we could be required to assume direct commodity exposure.

If we are unable to obtain needed capital or financing on satisfactory terms to fund expansions of our asset base, our ability to make quarterly cash distributions may be diminished or our financial leverage could increase. We do not have any commitment with any of our affiliates to provide any direct or indirect financial assistance to us following the closing of this offering.

In order to expand our asset base, we will need to make expansion capital expenditures. If we do not make sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and may be unable to maintain or raise the level of our quarterly cash distributions. We will be required to use cash from our operations or incur borrowings or sell additional common units or other limited partner interests in order to fund our expansion capital expenditures. Using cash from operations will reduce cash available for distribution to our common unitholders. Our ability to obtain financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering as well as the covenants in our debt agreements, general economic conditions and contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining funds for expansion capital expenditures through equity or debt financings, the terms thereof could limit our ability to pay distributions to our common unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant common unitholder dilution and increase the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the then-current distribution rate.

Delek’s 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 ratings and profile. Our ability to obtain credit in the future and our future credit rating may also be affected by Delek’s level of indebtedness.

Delek has a significant amount of debt. As of March 31, 2012, Delek had total debt of $441.2 million, including current maturities of $110.1 million. In addition to its outstanding debt, as of March 31, 2012, letters of credit issued under Delek’s various credit facilities were $218.0 million. Delek’s significant level of debt could increase its and our vulnerability to general adverse economic and industry conditions and require Delek to dedicate a substantial portion of its cash flow from operations to service its debt and lease obligations, thereby reducing the availability of its cash flow to fund its growth strategy, including capital expenditures, acquisitions and other business opportunities. Furthermore, a higher level of indebtedness at Delek increases the risk that it may default on its obligations, including under its commercial agreements with us. In addition, a substantial portion of Delek’s debt has a variable rate of interest, which increases its exposure to interest rate fluctuations. The covenants contained in the agreements governing Delek’s outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may directly or indirectly impact our operations in a similar matter. For example, Delek’s indebtedness requires that any transactions it enters into with us must be on terms no less favorable to Delek than those that could have been obtained with an unrelated person. Furthermore, in the event that Delek were to default under certain of its debt obligations, there

 

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is a risk that Delek’s creditors would attempt to assert claims against our assets during the litigation of their claims against Delek. The defense of any such claims could be costly and could materially impact our financial condition, even absent any adverse determination. In the event these claims were successful, our ability to meet our obligations to our creditors, make distributions and finance our operations could be materially adversely affected.

Although we are not contractually bound by and are not liable for Delek’s debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, under the terms of certain of its credit arrangements, Delek will be in default if we incur indebtedness in excess of the capacity available under our new $175.0 million revolving credit facility except for (i) any indebtedness that we may incur pursuant to the exercise of the accordion feature of the facility or (ii) new debt incurred for financing or acquiring additional or newly constructed assets, working capital or growth capital expenditures. Delek must also comply with certain financial covenants. Please read “Management’s Discussion and Analysis—Capital Resources and Liquidity—Agreements Governing Certain Indebtedness of Delek.” Due to its ownership and control of our general partner, Delek has the ability to prevent us from taking actions that would cause Delek to violate any covenants in its credit arrangements, or otherwise to be in default under any of its credit arrangements. In deciding whether to prevent us from taking any such action, Delek will have no fiduciary duty to us or our unitholders. Delek’s compliance with the covenants in its credit arrangements may restrict our ability to undertake certain actions that might otherwise be considered beneficial, including borrowing under our new credit facility.

Any debt instruments that Delek or any of its affiliates enter into in the future, including any amendments to existing credit facilities, may include additional or more restrictive limitations on Delek that may impact our ability to conduct our business. These additional restrictions could adversely affect our ability to finance our future operations or capital needs or engage in, expand or pursue our business activities.

Delek’s debt is not rated by any credit ratings agencies. If we were to seek a credit rating in the future, our credit rating may be adversely affected by the leverage or any future credit rating of Delek, as credit rating agencies such as Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. may consider the leverage and credit profile of Delek and its affiliates because of their ownership interest in and control of us and because Delek accounts for a substantial majority of our contribution margin. Any adverse effect on our credit rating would increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which would impair our ability to grow our business and make cash distributions to our unitholders.

Our logistics and marketing operations and Delek’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Delek’s facilities and liability for damages. If a significant accident or event occurs that results in business interruption or shutdown, our operations and financial results could be adversely affected.

Our logistics and marketing operations are subject to all of the risks and operational hazards inherent in gathering, transporting and storing crude oil and refined products, including:

 

   

damages to pipelines and facilities, related equipment and surrounding properties caused by earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism;

 

   

the inability of third-party facilities on which our operations are dependent, including Delek’s facilities, to complete capital projects and to restart timely refining operations following a shutdown;

 

   

mechanical or structural failures at our facilities or at third-party facilities on which our operations are dependent, including Delek’s facilities;

 

   

curtailments of operations relative to severe seasonal weather;

 

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inadvertent damage to pipelines from construction, farm and utility equipment;

 

   

constrained pipeline and storage infrastructure; and

 

   

other hazards.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations. In addition, Delek’s refining operations, on which our operations are substantially dependent and over which we have no control, are subject to similar operational hazards and risks inherent in refining crude oil. A significant accident at our facilities or at Delek’s facilities, such as the November 2008 fire at the Tyler refinery, could result in serious injury or death to employees of our general partner or its affiliates or contractors, could expose us to significant liability for personal injury claims and reputational risk and could affect Delek’s ability and/or requirement to satisfy the minimum volume commitments under our commercial agreements.

Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.

We will be insured under the property, liability and business interruption policies of Delek, subject to the deductibles and limits under those policies. To the extent Delek experiences losses under the insurance policies, the limits of our coverage may be decreased. In addition, we are not insured against all potential losses, costs or liabilities. We could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. In addition, because Delek’s business interruption policy does not cover losses for up to the first 45 days of the interruption, a significant part or all of a business interruption loss could be uninsured. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations.

The energy industry is highly capital intensive, and the entire or partial loss of individual facilities or multiple facilities can result in significant costs to both energy industry companies, such as us, and their insurance carriers. In recent years, several large energy industry claims have resulted in significant increases in the level of premium costs and deductible periods for participants in the energy industry. For example, hurricanes in recent years have caused significant damage to several pipelines along the U.S. Gulf Coast. As a result of large energy industry claims, insurance companies that have historically participated in underwriting energy-related facilities may discontinue that practice, may reduce the insurance capacity they are willing to offer or demand significantly higher premiums or deductible periods to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, or if other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate insurance at reasonable cost.

In addition, we cannot assure you that our insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which we suffer significant losses could have a material adverse effect on our business, financial condition and results of operations.

A material decrease in the supply, or increase in the price, of crude oil produced in the southern Arkansas and northern Louisiana area could materially reduce the volume of crude oil gathered and transported by our SALA Gathering System, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

All southern Arkansas and northern Louisiana area crude oil supplied to the El Dorado refinery is gathered and transported by our SALA Gathering System. In order to maintain or increase refined product

 

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production levels at the El Dorado refinery, Delek must continually contract for new crude oil supplies in the southern Arkansas and northern Louisiana area or consider connecting to alternative sources of crude oil, such as crude oil supplied from Texas through third-party pipelines. Adverse developments in the southern Arkansas and northern Louisiana area, including reduced availability of production surrounding our SALA Gathering System or an increase in the price of crude oil supplied in this area, could result in decreased throughput on our SALA Gathering System, because this area is the sole source of crude oil for our SALA Gathering System. Reserves in this area could be lower than we currently anticipate, and production may decline faster than we currently project. Accordingly, in addition to general industry risks related to gathering and transporting crude oil, we are disproportionately exposed to risks in the southern Arkansas and northern Louisiana area, including:

 

   

reduced development and production associated with depressed commodity prices;

 

   

volatility and uncertainty of regional pricing differentials;

 

   

lack of drilling activity;

 

   

the availability of drilling rigs for producers;

 

   

weather-related curtailment of operations by producers and disruptions to gathering and transportation operations;

 

   

the nature and extent of governmental regulation and taxation; and

 

   

the anticipated future prices of crude oil and of refined products in markets that the El Dorado refinery serves.

Furthermore, the development of third-party crude oil gathering systems in the southern Arkansas and northern Louisiana area could disproportionately impact our SALA Gathering System, should producers ship on competing systems or using alternative methods, thereby impacting the price and availability of crude oil to be transported to the El Dorado refinery by our SALA Gathering System. If, as a result of any of these or other factors, the volume of attractively priced crude oil available to the El Dorado refinery is materially reduced for a prolonged period of time, the volume of crude oil gathered and transported by our SALA Gathering System and the related fees could be materially reduced, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

Any reduction in the capacity of, or the allocations to, our shippers in interconnecting, third-party pipelines could cause a reduction of volumes distributed through our terminals and through our crude oil pipelines.

We depend upon connections to third-party pipelines to transport refined products to our terminals and to ship crude oil on our pipelines. Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures, retirement or abandonment of facilities, or other causes could result in reduced volumes of refined products distributed through our terminals and shipments of crude oil through our pipelines. For example, the temporary suspension of crude oil shipments on a damaged pipeline by a third-party operator that began in May 2012 continues to cause volumes on our Lion Pipeline System to be below historical volumes. Similarly, if additional shippers begin transporting volumes of refined products or crude oil over interconnecting pipelines, the allocations to us and other existing shippers on these interconnecting pipelines could be reduced, which could also reduce volumes distributed through our terminals or transported through our crude oil pipelines. Allocation reductions of this nature are not infrequent and are beyond our control. Any significant reduction in volumes would adversely affect our revenues and cash flow and our ability to make distributions to our unitholders.

 

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An interruption or termination of supply and delivery of refined products to our wholesale marketing business could result in a decline in our sales and profitability.

In our west Texas wholesale marketing business, we sell refined products produced by refineries owned by unaffiliated third parties. In 2011, we received substantially all of our supply of refined products for our west Texas wholesale business from two suppliers, Noble Petro and Magellan. We could experience an interruption or termination of supply or delivery of refined products if our suppliers partially or completely ceased operations, temporarily or permanently, or ceased to supply us with refined products for any reason. The ability of these refineries and our suppliers to supply refined products to us could be disrupted by anticipated events such as scheduled upgrades or maintenance, as well as events beyond their control, such as unscheduled maintenance, fires, floods, storms, explosions, power outages, accidents, acts of terrorism or other catastrophic events, labor difficulties and work stoppages, governmental or private party litigation, or legislation or regulation that adversely impacts refinery operations. A reduction in the volume of refined products supplied to our wholesale business would adversely affect our sales and profitability.

Fluctuations in the prices of refined petroleum products that we purchase and sell in our west Texas wholesale marketing business could materially affect our results of operations.

In our west Texas wholesale marketing business, for the year ended December 31, 2011 and the three months ended March 31, 2012, approximately 33.8% and 36.3%, respectively, of the refined products we resold to our customers were purchased under our agreement with Magellan. Significant fluctuations in market prices of these products during the period between our purchase from Magellan and subsequent resale to customers could result in losses or lower profits from these activities, thereby reducing the amount of cash we generate and our ability to pay cash distributions. Additionally, significant fluctuations in market prices of these refined products could result in significant unrealized gains or losses to the extent we enter into transactions to hedge our commodity exposure. To the extent these transactions have not been designated as hedges for accounting purposes, the associated non-cash unrealized gains and losses would directly impact our results of operations.

We are exposed to the credit risks, and certain other risks, of our key customers, including Delek, and any material nonpayment or nonperformance by our key customers could reduce our ability to make distributions to our unitholders.

We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. Any material nonpayment or nonperformance by our key customers, including Delek, could reduce our ability to make distributions to our unitholders.

If any of our key customers default on their obligations to us, our financial results could be adversely affected. Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks. Any loss of our key customers, including Delek, could reduce our ability to make distributions to our unitholders.

Restrictions in our new revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.

We expect to enter into a new revolving credit facility in connection with the closing of this offering. Our new credit facility is likely to limit our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

incur certain liens on assets;

 

   

dispose of assets;

 

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make certain cash distributions unless no default under the credit agreement then exists or would result therefrom and provided that the Total Leverage Ratio covenant is satisfied after giving effect to any such distribution on a pro forma basis;

 

   

redeem or repurchase units;

 

   

change the nature of our business;

 

   

engage in certain mergers or acquisitions and investments; and

 

   

enter into non arms-length transactions with affiliates.

 

Our new credit facility will likely contain covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests.

The provisions of our new credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our new credit facility could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment. The new credit facility will also have cross default provisions that apply to any other indebtedness we may have with an outstanding principal amount in excess of $         million. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—New Revolving Credit Facility.”

Our future debt levels may limit our flexibility to obtain financing and to pursue other business opportunities.

Following this offering, we will have the ability to incur debt, subject to limitations in our new revolving credit facility. Our level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to make payments on our debt;

 

   

we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

   

our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to effect any of these actions on satisfactory terms or at all.

Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors

 

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to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

Significant portions of our pipeline systems have been in service for several decades. There could be service interruptions due to unknown events or conditions or increased maintenance or repair expenses and downtime associated with our pipelines that could have a material adverse effect on our business and results of operations.

Significant portions of our pipeline systems and our SALA Gathering System have been in service for several decades. The age and condition of our systems could result in increased maintenance or repair expenditures, and any downtime associated with increased maintenance and repair activities could materially reduce our revenue. Any significant increase in maintenance and repair expenditures or loss of revenue due to the age or condition of our systems could adversely affect our business and results of operations and our ability to make cash distributions to our unitholders.

Our right of first offer to acquire certain of Delek’s existing logistics assets and certain assets that it may acquire or construct in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.

Our omnibus agreement provides us with a right of first offer for a period of ten years after the closing of this offering on certain of Delek’s existing logistics assets and certain assets that it may acquire or construct in the future, subject to certain exceptions. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, Delek’s willingness to offer subject assets for sale, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and Delek is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by Delek at any time in the event that it no longer controls our general partner. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of First Offer.”

If we are unable to make acquisitions on economically acceptable terms from Delek or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in cash flow. If we are unable to make acquisitions from Delek or third parties, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions to unitholders will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in cash flow. Any acquisition involves potential risks, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

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mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s attention from other business concerns;

 

   

unforeseen difficulties operating in new product areas or new geographic areas; and

 

   

customer or key employee losses at the acquired businesses.

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

We may be unsuccessful in integrating the operations of the assets we have acquired or of any future acquisitions with our existing operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.

From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.

We may incur significant costs and liabilities as a result of pipeline integrity management program testing and related repairs.

Certain of our pipeline facilities are subject to the pipeline safety regulations of the Pipeline and Hazardous Materials Safety Administration (PHMSA) at the U.S. Department of Transportation (DOT). PHMSA regulates the design, construction, testing, operation, maintenance and emergency response of crude oil, petroleum products and other hazardous liquid pipeline facilities under 49 C.F.R. Part 195.

Pursuant to the Pipeline Safety Improvement Act of 2002, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 (PIPES Act), PHMSA has adopted regulations requiring pipeline operators to develop integrity management programs for hazardous liquids pipelines located where a leak or rupture could affect “high consequence areas,” which are populated or environmentally sensitive areas. Pursuant to the PIPES Act, PHMSA issued regulations on May 5, 2011, that would, with limited exceptions, subject all low-stress hazardous liquids pipelines, regardless of location or size, to PHMSA’s pipeline safety regulations and would subject those low-stress hazardous liquids pipelines within one half mile of an environmentally sensitive area to the integrity management requirements. The integrity management regulations require operators, including us, to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

   

maintain processes for data collection, integration and analysis;

 

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repair and remediate pipelines as necessary; and

 

   

implement preventive and mitigating actions.

We may incur significant costs and liabilities associated with compliance with the pipeline safety regulations and any corresponding repair, remediation, preventative or mitigation measures required for our non-exempt pipeline facilities, including lost cash flows resulting from shutting down our pipelines during the pendency of such repairs.

Moreover, changes to pipeline safety laws and regulations that result in more stringent or costly safety standards could have a significant adverse effect on us and similarly situated midstream operators. On January 3, 2012, President Obama signed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, which increases the maximum civil penalties for pipeline safety administrative enforcement actions; requires the Secretary of Transportation to study and report on the expansion of integrity management requirements, the sufficiency of existing gathering line regulations to ensure safety, and the use of leak detection systems by hazardous liquid pipelines; requires pipeline operators to verify their records on maximum allowable operating pressure; and imposes new emergency response and incident notification requirements. The provisions of this Act and other changes to pipeline safety laws and regulations could require us to pursue additional capital projects or conduct maintenance programs on an accelerated basis, any or all of which requirements could result in our incurring increased operating costs that could be significant and have a material adverse effect on our financial position or results of operations.

In addition, many states have adopted regulations similar to existing DOT regulations for hazardous liquids pipelines within their state. These regulations can apply to pipeline facilities exempt from PHMSA jurisdiction as well as intrastate pipeline facilities subject to PHMSA jurisdiction, but for which the state has been certified by PHMSA to inspect, regulate and enforce the regulations for the intrastate facilities.

Should we fail to comply with PHMSA regulations, we could be subject to penalties and fines.

Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.

A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets. We have no material commitments for expansion or construction projects as of the date of this prospectus. The construction of a new pipeline or terminal or the expansion of an existing pipeline or terminal involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these types of projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects. Even if we receive such commitments, we may not realize an increase in revenue for an extended period of time. For instance, if we build a new pipeline, the construction will occur over an extended period of time, and we will not receive any material increases in revenues until after completion of the project. Moreover, we may construct facilities to capture anticipated future growth in production in a region or gain access to crude supplies at lower costs and such growth or access may not materialize. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.

We do not own all of the land on which our pipelines and facilities are located, which could result in disruptions to our operations.

We do not own all of the land on which our pipelines and terminal facilities have been constructed, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land

 

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use if we do not have valid rights-of-way, if such rights-of-way lapse or terminate or if our facilities are not properly located within the boundaries of such rights-of-way. Although many of these rights are perpetual in nature, we occasionally obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. If we are unsuccessful in renegotiating rights-of-way, we may have to relocate our facilities. A loss of rights-of-way or a relocation could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to make distributions to our unitholders.

Whether we have the power of eminent domain for our pipelines varies from state to state, depending upon the type of pipeline (for example, crude oil or refined products) and the laws of the particular state. In either case, we must compensate landowners for the use of their property and, in eminent domain actions, such compensation may be determined by a court. Our inability to exercise the power of eminent domain could negatively affect our business if we were to lose the right to use or occupy the property on which our pipelines are located.

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.

Our industry is subject to extensive laws, regulations and other requirements including, but not limited to, those relating to the environment, safety, pipeline tariffs, employment, labor, immigration, minimum wages and overtime pay, health care and benefits, working conditions, public accessibility and other requirements. These laws and regulations are enforced by federal agencies including the EPA, the DOT, PHMSA, the Federal Motor Carrier Safety Administration, or FMCSA, the Occupational Safety and Health Act, or OSHA, and the Federal Energy Regulatory Commission, or FERC, and state agencies such as the Texas Commission on Environmental Quality, the Railroad Commission of Texas, the Arkansas Department of Environmental Quality and the Tennessee Department of Environment and Conservation as well as numerous other state and federal agencies. Ongoing compliance with, or a violation of, these laws, regulations and other requirements could have a material adverse effect on our business, financial condition and results of operations.

We believe that our operations are in substantial compliance with applicable laws and regulations. However, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing cost to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. Violation of environmental laws, regulations and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions and construction bans or delays.

Under various federal, state and local environmental requirements, as the owner or operator of terminals and pipelines, we may be liable for the costs of removal or remediation of contamination at our existing locations, whether we knew of, or were responsible for, the presence of such contamination. We have incurred such liability in the past and some of our locations are the subject of ongoing remediation and/or monitoring projects. The failure to timely report and properly remediate contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent our property or to borrow money using our property as collateral. Additionally, we may be liable for the costs of remediating third-party sites where hazardous substances from our operations have been transported for treatment or disposal, regardless of whether we own or operate that site. In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not yet been discovered at our current or former locations or locations that we may acquire.

A discharge of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expense, including the cost to comply with applicable laws and regulations, fines and penalties, natural resource damages and claims made by employees, neighboring landowners and other third parties for personal injury and property damage. We may experience future

 

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catastrophic sudden or gradual releases into the environment from our pipelines and terminals or discover historical releases that were previously unidentified or not assessed. Although our inspection and testing programs are designed, to prevent, detect and address these releases promptly, damages and liabilities incurred due to any future environmental releases from our assets, have the potential to substantially affect our business. Such discharges could also subject us to media and public scrutiny that could have a negative effect on the value of our common units.

Environmental regulation is becoming more stringent, and new environmental laws and regulations are continuously being enacted or proposed and interpretations of existing requirements change from time to time. While it is impractical to predict the impact that future environmental, health and safety requirements or changed interpretations of existing requirements may have, such future activity may result in material expenditures to ensure our continued compliance. Such future activity could also adversely affect our ability to expand production, result in damaging publicity about us, or reduce demand for our products.

We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations.

Our operations require numerous permits and authorizations under various laws and regulations. These authorizations and permits are subject to revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions, and/or facility shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or upgrades to our existing pollution control equipment. Any or all of these matters could have a negative effect on our business, results of operations and cash flows.

Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating and capital costs and reduced demand for our products and the services we provide.

In December 2009, the EPA published its findings that emissions of greenhouse gases, or GHGs, present a danger to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the Earth’s atmosphere and other climatic conditions. Based on these findings, the EPA adopted two sets of regulations that restrict emissions of GHGs under existing provisions of the federal Clean Air Act, including one that requires a reduction in emissions of GHGs from motor vehicles and another that regulates GHG emissions from certain large stationary sources under the Clean Air Act Prevention of Significant Deterioration (“PSD”) and Title V permitting programs. In addition, EPA expanded its existing GHG emissions reporting rule to include onshore oil and natural gas processing, transmission, storage, and distribution activities, beginning in 2012 for emissions occurring in 2011. Congress has also from time to time considered legislation to reduce emissions of GHGs. Although it is not possible to predict the requirements of any GHG legislation that may be enacted, any laws or regulations that may be adopted to restrict or reduce GHG emissions may require us to incur increased operating costs. If we are unable to maintain sales of our refined products at a price that reflects such increased costs, there could be a material adverse effect on our business, financial condition and results of operations. Further, any increase in the prices of refined products resulting from such increased costs could have a material adverse effect on our business, financial condition or results of operations. Moreover, GHG regulation could also impact the consumption of refined products, thereby affecting the demand for our services.

In 2010, the EPA and the National Highway Transportation Safety Administration (NHTSA) finalized new standards, raising the required Corporate Average Fuel Economy, or CAFE, standard of the nation’s passenger fleet by 40% to approximately 35 miles per gallon by 2016 and imposing the first-ever federal GHG emissions standards on cars and light trucks. In September 2011, the EPA and the Department of Transportation finalized first-time standards for fuel economy of medium and heavy duty trucks. In December 2011, the EPA

 

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and NHTSA proposed further mandated decreases in passenger vehicle GHG emissions and increases in fuel economy beginning with 2017 model year vehicles and increasing to the equivalent of 54.5 miles per gallon by 2025. Such increases in fuel economy standards and potential electrification of the vehicle fleet, along with mandated increases in use of renewable fuels discussed above, could result in decreasing demand for petroleum fuels. Decreasing demand for petroleum fuels could materially affect profitability at Delek’s refineries and convenience stores, which could adversely impact our business, results of operations and cash flows.

Our operations are subject to federal and state laws and regulations relating to product quality specifications, and we could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of products we distribute to meet certain quality specifications.

Various federal and state agencies prescribe specific product quality specifications for refined products, including vapor pressure, sulfur content, ethanol content and biodiesel content. Changes in product quality specifications or blending requirements could reduce our throughput volume, require us to incur additional handling costs or require capital expenditures. For example, mandated increases in use of renewable fuels could require the construction of additional storage and blending equipment. If we are unable to recover these costs through increased revenues, our cash flows and ability to pay cash distributions to our unitholders could be adversely affected. Violations of product quality laws attributable to our operations could subject us to significant fines and penalties as well as negative publicity. In addition, changes in the product quality of the products we receive on our pipeline system could reduce or eliminate our ability to blend products.

We have a responsibility to ensure the quality and purity of the products loaded at our loading racks. Off specification product distributed for public use, even if not a violation of specific product quality laws, could result in poor engine performance or even engine damage. This type of incident could result in liability claims regarding damages caused by the off specification fuel or could result in negative publicity, impacting our ability to retain existing customers or to acquire new customers, any of which could have a material adverse impact on our results of operations and cash flows.

If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted.

Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel. We do not currently maintain key person life insurance policies for any of our senior management team. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members of our senior management team and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our business and to develop our products and technology.

We cannot assure you that we would be able to locate or employ such qualified personnel on acceptable terms or at all.

A terrorist attack on our assets, or threats of war or actual war, may hinder or prevent us from conducting our business.

Terrorist attacks in the United States, as well as events occurring in response or similar to or in connection with them, including political instability in various Middle Eastern countries, may harm our business. Energy-related assets (which could include pipelines and terminals such as ours) may be at greater risk of future terrorist attacks than other possible targets in the United States. In addition, the State of Israel, where Delek Group is based, has suffered armed conflicts and political instability in recent years. We may be more susceptible to terrorist attack as a result of our connection to an Israeli owner. In the future, certain of the directors of our general partner may reside in Israel.

 

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A direct attack on our assets, Delek’s assets or the assets of others used by us could have a material adverse effect on our business, financial condition and results of operations. In addition, any terrorist attack or continued political instability in the Middle East could have an adverse impact on energy prices, including prices for the crude oil and other feedstocks we transport and refined petroleum products, and an adverse impact on the margins from our operations. Disruption or significant increases in energy prices could also result in government-imposed price controls.

Further, changes in the insurance markets attributable to terrorist attacks could make certain types of insurance more difficult for us to obtain. Moreover, the insurance that may be available to us may be significantly more expensive than our existing insurance coverage. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital including our ability to repay or refinance debt.

Our customers’ operating results are seasonal and generally lower in the first and fourth quarters of the year. Our customers depend on favorable weather conditions in the spring and summer months.

Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. As a result, our customers’ operating results are generally lower for the first and fourth quarters of each year. Unfavorable weather conditions during the spring and summer months and a resulting lack of the expected seasonal upswings in traffic and sales could adversely affect our customers’ business, financial condition and results of operations, which may adversely affect our business, financial conditions and results of operations.

Our exposure to direct commodity price risk may increase in the future. We may incur losses as a result of our forward contract activities and derivative transactions.

Although we intend to enter into fixed-fee contracts with new transportation and terminalling customers in the future, our efforts to obtain such contractual terms may not be successful. In addition, we may acquire or develop additional midstream assets in the future that do not provide services primarily based on capacity reservation charges or other fixed-fee arrangements and therefore have a greater exposure to fluctuations in commodity price risk than our current operations. Increased future exposure to the volatility of commodity prices could have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.

As a result of any future increased exposure to the volatility of commodity prices, we may use derivative financial instruments, such as fuel-related derivative transactions, interest rate swaps and interest rate cap agreements, to partially mitigate the risk of various financial exposures inherent in our business. In connection with such derivative transactions, we may be required to make payments to maintain margin accounts and to settle the contracts at their value upon termination. The maintenance of required margin accounts and the settlement of derivative contracts at termination could cause us to suffer losses or limited gains. In particular, derivative transactions could expose us to the risk of financial loss upon unexpected or unusual variations in the sales price of wholesale gasoline. We cannot assure you that the strategies underlying these transactions will be successful. If any of the instruments we utilize to manage our exposure to various types of risk is not effective, we may incur losses.

The recent adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, could have an adverse effect on our ability to use derivatives to reduce the effect of commodity price risk, interest rate and other risks associated with our business.

The U.S. Congress recently adopted comprehensive financial reform legislation that, among other things, establishes comprehensive federal oversight and regulation of over-the-counter derivatives and many of the entities that participate in that market. Although the Dodd-Frank Act was enacted on July 21, 2010, the Commodity Futures Trading Commission, or CFTC, and the SEC, along with certain other regulators, must

 

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promulgate final rules and regulations to implement many of its provisions relating to over-the-counter derivatives. While some of these rules have been finalized, many have not and, as a result, the final form and timing of the implementation of the new regulatory regime affecting commodity derivatives remains uncertain.

In particular, on October 18, 2011, the CFTC adopted final rules under the Dodd-Frank Act establishing position limits for certain energy commodity futures and options contracts and economically equivalent swaps, futures and options. The position limit levels set the maximum amount of covered contracts that a trader may own or control separately or in combination, net long or short. The final rules also contain limited exemptions from position limits which will be phased in over time for certain bona fide hedging transactions and positions that were established in good faith before the initial limits become effective. On December 2, 2011, the International Swaps and Derivatives Association, Inc. and the Securities Industry and Financial Markets Association filed a legal challenge to the final rules, claiming, among other things, that the rules may adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.

While the timing of implementation of the final rules on position limits, their applicability to, and impact on, us and the success of any legal challenge to their validity remain uncertain, there can be no assurance that they will not have a material adverse impact on us by affecting the prices of or market for commodities relevant to our operations and/or by reducing the availability to us of commodity derivatives.

The Dodd-Frank Act will also impose a number of other new requirements on certain over-the-counter derivatives and subject certain swap dealers and major swap participants to significant new regulatory requirements, which in certain cases may cause them to conduct their activities through new entities that may not be as creditworthy as our current counterparties, all of which may have a material adverse effect on us. The impact of this new regulatory regime on the availability, pricing and terms and conditions of commodity derivatives remains uncertain, but there can be no assurance that it will not have a materially adverse effect on our ability to hedge our exposure to commodity prices.

In addition, under Dodd-Frank swap dealers and major swap participants will be required to collect initial and variation margin from certain end-users of over-the-counter derivatives. The rules implementing many of these requirements have not all been finalized and therefore the timing of their implementation and their applicability to us remains uncertain. Depending on the final rules and definitions ultimately adopted, we might in the future be required to post collateral for some or all of our derivative transactions, which could reduce our ability to use our cash or other assets for capital expenditures or other partnership purposes and reduce our ability to execute strategic hedges to reduce commodity price uncertainty and protect cash flows.

We rely on information technology in our operations, and any material failure, inadequacy or interruption of that technology could harm our business.

We inherited information technology systems and controls that monitor the movement of petroleum products through our pipeline systems. Information technology system failures, network disruptions (whether intentional by a third party or due to natural disaster), breaches of network or data security, or disruption or failure of the network system used to monitor and control pipeline operations could result in environmental damage, operational disruptions, regulatory enforcement or private litigation. Our computer systems, including our back-up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, events such as fires, earthquakes, floods, tornadoes and hurricanes, or errors by our employees. Further, the failure of any of our systems to operate effectively, or problems we may experience with transitioning to upgraded or replacement systems, could significantly harm our business and operations and cause us to incur significant costs to remediate such problems. There can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and results of operations.

 

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Transportation on certain of our pipelines is subject to federal or state rate and service regulation, and the imposition and/or cost of compliance with such regulation could adversely affect our operations and cash flows available for distribution to our unitholders.

The rates and terms and conditions of service on certain of our pipelines are subject to regulation by the FERC under the Interstate Commerce Act, or ICA, or by the state regulatory commissions in the states in which we transport crude oil and refined products, including the Railroad Commission of Texas, the Louisiana Public Service Commission, and the Arkansas Public Service Commission.

The FERC regulates interstate transportation under the ICA, the Energy Policy Act of 1992, or EP Act 1992, and the rules and regulations promulgated under those laws. The ICA and its implementing regulations require that tariff rates and terms and conditions of service for interstate service on oil pipelines, including pipelines that transport crude oil and refined products in interstate commerce (collectively referred to as “petroleum pipelines”), be just and reasonable and not unduly discriminatory or preferential. The ICA also requires that such rates and terms and conditions of service be filed with the FERC. Under the ICA, shippers may challenge new or existing rates or services. The FERC is authorized to suspend the effectiveness of a challenged rate that has not yet become effective for up to seven months, though rates are typically not suspended for the maximum allowable period. If the FERC determines that a protested rate is unjust and unreasonable, the FERC will order refunds of amounts charged in excess of the just and reasonable rate. If the FERC determines that a rate challenged by complaint is unjust and unreasonable, reparations may be due for two years prior to the date of the complaint.

We have filed requests with the FERC for waiver of the tariff filing and reporting requirements imposed by the FERC under the ICA for the SALA Gathering System, the Lion Pipeline System and the East Texas Crude Logistics System. If those waivers are granted, we will still be subject to the FERC’s jurisdiction under the ICA and will still be subject to the requirement to maintain our books and records in accordance with FERC accounting requirements with respect to the assets for which we receive a waiver; we intend to comply with that requirement. Assuming the FERC grants the requested waivers, if the facts upon which a waiver is based change materially (for example, if an unaffiliated shipper seeks access to our pipelines), the FERC typically requires that the pipelines inform the FERC, which may result in revocation of the waiver. If the FERC denies our requests for waiver, or if the FERC in the future revokes any waivers we might be granted, we will be required, among other things, to file tariffs for service on certain of our FERC-jurisdictional pipelines. If we file tariffs, we may be required to provide a cost justification for the transportation charge. We would also be required to provide service to all prospective shippers making reasonable requests for service without undue discrimination and to operate in a manner that does not provide any undue preference to shippers. The rates under such tariffs may be insufficient to allow us to recover fully our cost of providing service on the affected pipelines, which could adversely affect our business, financial condition and results of operations. In addition, regulation by the FERC may subject us to potentially burdensome and expensive operational, reporting and other requirements.

The Federal Trade Commission, the FERC and the CFTC hold statutory authority to monitor certain segments of the physical and futures energy commodities markets. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets. With regard to our physical sales of oil or other energy commodities, and any related hedging activities that we undertake, we are required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement authority. Failure to comply with such regulations, as interpreted and enforced, could have a material adverse effect on our business, results of operations, and financial condition.

While the FERC regulates rates and terms and conditions of service for transportation of crude oil or refined products in interstate commerce by pipeline, state agencies may regulate rates terms and conditions of service for liquids pipeline transportation in intrastate commerce. There is not a clear boundary between transportation service provided in interstate commerce, which is regulated by the FERC, and transportation service provided in intrastate commerce, which is not regulated by the FERC. Such determinations are highly fact-dependent and are made on a case-by-case basis. We cannot provide assurance that the FERC will not at

 

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some point assert that some or all of the transportation service we provide is within its jurisdiction. If the FERC were successful with any such assertion, the FERC’s ratemaking methodologies may subject us to potentially burdensome and expensive operational, reporting and other requirements. We own pipeline assets in Texas, Arkansas, and Louisiana. In Texas, a pipeline, with some exceptions, is required to operate as a common carrier by publishing tariffs and providing transportation without discrimination. Arkansas provides that all intrastate oil pipelines are common carriers, but it exercises light-handed regulation over crude oil and refined products pipelines. In Louisiana, all pipelines conveying petroleum from a point of origin within the state to a destination within the state are declared common carriers. The Louisiana Public Service Commission is empowered with the authority to establish reasonable rates and regulations for the transport of petroleum by a common carrier, mandating public tariffs and providing of transportation without discrimination. State commissions have generally not been aggressive in regulating common carrier pipelines, have generally not investigated the rates or practices of petroleum pipelines in the absence of shipper complaints, and generally resolve complaints informally. If the regulatory commissions in the states in which we operate change their policies and aggressively regulate the rates or terms of service of pipelines operating in those states, it could adversely affect our business, financial condition and results of operations.

Risks Inherent in an Investment in Us

Our general partner and its affiliates, including Delek, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

Following this offering, Delek will own and control our general partner and will appoint all of the officers and directors of our general partner. All of the initial officers and a majority of the initial directors of our general partner are also officers and/or directors of Delek. Although our general partner has a duty to manage us in a manner that is beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner that is beneficial to Delek. Conflicts of interest will arise between Delek and our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of Delek over our interests and the interests of our unitholders. These conflicts include the following situations, among others:

 

   

Neither our partnership agreement nor any other agreement requires Delek to pursue a business strategy that favors us or utilizes our assets, including whether to increase or decrease refinery production, whether to shut down or reconfigure a refinery or what markets to pursue or grow. The directors and officers of Delek have a fiduciary duty to make these decisions in the best interests of the stockholders of Delek, which may be contrary to our interests. Delek may choose to shift the focus of its investment and growth to areas not served by our assets.

 

   

Delek, as our primary customer, has an economic incentive to cause us not to seek higher service fees, even if such higher fees could be obtained in arm’s-length, third-party transactions. Furthermore, under our commercial agreements, Delek’s consent is required before we may enter into an agreement with any third party with respect to our assets that serve the El Dorado and Tyler refineries, and Delek has an incentive to cause us not to pursue such third-party contracts in certain circumstances.

 

   

Our general partner is allowed to take into account the interests of parties other than us, such as Delek, in resolving conflicts of interest.

 

   

All of the initial officers and a majority of the initial directors of our general partner are also officers and/or directors of Delek and will owe fiduciary duties to Delek. These officers will also devote significant time to the business of Delek and will be compensated by Delek accordingly.

 

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Delek may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests.

 

   

Our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty.

 

   

Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.

 

   

Disputes may arise under our commercial agreements with Delek.

 

   

Our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership units and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash available for distribution to our unitholders.

 

   

Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion or investment capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and the ability of the subordinated units to convert to common units. In addition, the inability of Delek to suspend or reduce its obligations under its commercial agreements with us or to claim a force majeure event during the three-year period following the closing of this offering increases the likelihood of the conversion of the subordinated units.

 

   

Our general partner determines which costs incurred by it are reimbursable by us.

 

   

Our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period.

 

   

Our partnership agreement permits us to classify up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated or general partner units or to our general partner in respect of the incentive distribution rights.

 

   

Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.

 

   

Our general partner intends to limit its liability regarding our contractual and other obligations.

 

   

Our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if they own more than 80% of the common units.

 

   

Our general partner controls the enforcement of the obligations that it and its affiliates owe to us, including Delek’s obligations under the omnibus agreement and its commercial agreements with us.

 

   

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

 

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Our general partner may transfer its incentive distribution rights without unitholder approval.

 

   

Our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Please read “Conflicts of Interest and Duties.”

Delek may compete with us.

Delek may compete with us. Under our omnibus agreement, Delek and its affiliates will agree not to engage in, whether by acquisition or otherwise, the business of owning or operating crude oil or refined products pipelines, terminals or storage facilities in the United States that are not within, directly connected to, substantially dedicated to, or otherwise an integral part of, any refinery owned, acquired or constructed by Delek. This restriction, however, does not apply to:

 

   

any assets owned by Delek at the closing of this offering (including replacements or expansions of those assets);

 

   

any asset or business that Delek acquires or constructs that has a fair market value of less than $5.0 million; and

 

   

any asset or business that Delek acquires or constructs that has a fair market value of $5.0 million or more if we have been offered the opportunity to purchase the asset or business for fair market value not later than six months after completion of such acquisition or construction, and we decline to do so.

As a result, Delek has the ability to construct assets which directly compete with our assets. The limitations on the ability of Delek to compete with us are terminable by either party if Delek ceases to control our general partner.

Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and Delek. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our common unitholders. Please read “Conflicts of Interest and Duties.”

If you are not an Eligible Holder, your common units may be subject to redemption.

We have adopted certain requirements regarding those investors who may own our common and subordinated units. Eligible Holders are limited partners whose (a) federal income tax status is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that are subject to regulation by the FERC or an analogous regulatory body and (b) nationality, citizenship or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as determined by our general partner with the advice of counsel. If you are not an Eligible Holder, in certain circumstances as set forth in our partnership agreement, your units may be redeemed by us at the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “The Partnership Agreement—Ineligible Holders; Redemption.”

 

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Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

We expect that we will distribute all of our available cash to our unitholders and will rely primarily upon external financing sources, including commercial borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement, and we do not anticipate there being limitations in our new credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.

It may be difficult to serve process on or enforce a United States judgment against those members of the board of directors of our general partner who may reside in Israel.

Certain of the directors of our general partner are able to and may in the future reside in the State of Israel. As a result, it may be difficult to serve legal process within the United States upon any of these persons. It also may be difficult to enforce, both in and outside the United States, judgments obtained in United States courts against these persons in any action, including actions based upon the civil liability provisions of United States federal or state securities laws, because a substantial portion of the assets of these directors is located outside of the United States. Furthermore, there is substantial doubt that the courts of the State of Israel would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws.

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. Following this offering, the market price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common units. After this offering, there will be only             publicly traded common units, assuming no exercise of the underwriters’ over-allotment option. In addition, Delek will own             common units and             subordinated units, representing an aggregate of approximately     % limited partner interest in us. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

the level of our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

the loss of a large customer;

 

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announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic conditions;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

other factors described in these “Risk Factors.”

You will experience immediate and substantial dilution in net tangible book value of $        per common unit.

The estimated initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus) exceeds our pro forma net tangible book value of $         per unit. Based on the estimated initial public offering price of $         per common unit, you will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed by Delek are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replace those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

how to allocate corporate opportunities among us and its other affiliates;

 

   

whether to exercise its limited call right;

 

   

whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner;

 

   

how to exercise its voting rights with respect to the units it owns;

 

   

whether to exercise its registration rights;

 

   

whether to elect to reset target distribution levels;

 

   

whether to transfer the incentive distribution rights to a third party; and

 

   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

 

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By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of the General Partner.”

Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:

 

   

whenever our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) makes a determination or takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was in the best interests of our partnership, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;

 

   

our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

our general partner will not be in breach of its obligations under the partnership agreement (including any duties to us or our unitholders) if a transaction with an affiliate or the resolution of a conflict of interest is:

 

   

approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;

 

   

approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;

 

   

determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

   

determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or the conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the

 

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third and fourth subbullets above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

The administrative services fee and reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce our cash available for distribution to our common unitholders. The amount and timing of such reimbursements will be determined by our general partner.

Prior to making any distribution on our common units, we will reimburse our general partner and its affiliates, including Delek, for costs and expenses they incur and payments they make on our behalf. Under the omnibus agreement, we will pay Delek an annual fee of $2.7 million and reimburse Delek and its subsidiaries for Delek’s provision of various centralized corporate services. Additionally, we will reimburse Delek for direct or allocated costs and expenses incurred on our behalf, including administrative costs, such as compensation expense for those persons who provide services necessary to run our business, and insurance expenses. We also expect to incur $2.0 million of incremental annual general and administrative expense as a result of being a publicly traded partnership. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” and “—Operation and Management Services Agreement.” Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our common unitholders. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. Rather, the board of directors of our general partner will be appointed by Delek. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates, including Delek, will own sufficient units upon the closing of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, Delek will indirectly own    % of our outstanding common and subordinated units. Also, if our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on our common units will be extinguished. A removal of our general partner under these circumstances would adversely affect our common units by prematurely eliminating their distribution and liquidation preference over our subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Cause is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general

 

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partner liable to us or any limited partner for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of unitholder dissatisfaction with the performance of our general partner in managing our partnership will most likely result in the termination of the subordination period and conversion of all subordinated units to common units.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Unitholders’ voting rights are further restricted by a provision of our partnership agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.

Our partnership agreement does not restrict the ability of Delek to transfer all or a portion of its general partner interest or its ownership interest in our general partner to a third party. Our general partner, or the new owner of our general partner, would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers of our general partner.

The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of Delek selling or contributing additional assets to us, as Delek would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

We may issue additional units without unitholder approval, which would dilute unitholder interests.

Our partnership agreement does not limit the number of additional limited partner interests, including limited partner interests that rank senior to the common units, that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our existing unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

because the amount payable to holders of incentive distribution rights is based on a percentage of the total cash available for distribution, the distributions to holders of incentive distribution rights will increase even if the per unit distribution on common units remains the same;

 

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the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline.

Delek may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the sale of the common units offered by this prospectus, assuming that the underwriters do not exercise their option to purchase additional common units, Delek will indirectly hold an aggregate of            common units and            subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. In addition, we have agreed to provide Delek with certain registration rights. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement permits our general partner to limit its liability, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of our common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the closing of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, Delek will indirectly own approximately    % of our outstanding common units. At the end of the subordination period, assuming no additional issuances of common units (other than upon the conversion of the subordinated units), Delek will indirectly own approximately    % of our outstanding common units. For additional information about this right, please read “The Partnership Agreement—Limited Call Right.”

Our general partner, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the minimum quarterly distribution and the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

The holder or holders of a majority of the incentive distribution rights, which will initially be our general partner, have the right, at any time when there are no subordinated units outstanding and such holders have received incentive distributions at the highest level to which they are entitled (48.0%) for each of the prior four consecutive fiscal quarters (and the amount of each such distribution did not exceed adjusted operating surplus for each such

 

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quarter), to reset the minimum quarterly distribution and the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Our general partner has the right to transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as our general partner with respect to resetting target distributions.

In the event of a reset of the minimum quarterly distribution and the target distribution levels, the holders of the incentive distribution rights will be entitled to receive, in the aggregate, the number of common units equal to that number of common units which would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain its general partner interest in us that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not otherwise be sufficiently accretive to cash distributions per common unit. It is possible, however, that our general partner or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued common units rather than retain the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then-current business environment. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued common units to our general partner in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. You could be liable for any and all of our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

   

your right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement—Limited Liability.”

Unitholders may have liability to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware

 

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law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable both for the obligations of the transferor to make contributions to the partnership that were known to the transferee at the time of transfer and for those obligations that were unknown if the liabilities could have been determined from the partnership agreement. Neither liabilities to partners on account of their partnership interest nor liabilities that are non-recourse to the partnership are counted for purposes of determining whether a distribution is permitted.

The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

We intend to apply to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have, and we do not intend to have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management.”

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and the NYSE have required changes in the corporate governance practices of publicly traded companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our publicly traded partnership reporting requirements, and our general partner will maintain director and officer liability insurance under a separate policy from Delek’s corporate director and officer insurance. We have included $2.0 million of estimated annual incremental costs associated with being a publicly traded partnership in our financial forecast included elsewhere in this prospectus. However, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

Pursuant to the recently enacted JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company.

We will be required to disclose changes made in our internal control over financial reporting on a quarterly basis, and we will be required to assess the effectiveness of our controls annually. However, for as long as we are an “emerging growth company” under the recently enacted JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, and reduced disclosure obligations regarding executive compensation in our periodic reports. We will remain an emerging growth company for up to five years. See “Prospectus Summary—Implications of Being an Emerging Growth Company.” Effective internal controls are necessary for us to provide reliable and timely financial reports, prevent fraud and to operate successfully as a publicly traded partnership. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404. For example, Section 404 will require us, among other things, to annually review and report on the

 

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effectiveness of our internal control over financial reporting. We must comply with Section 404 (except for the requirement for an auditor’s attestation report) beginning with our fiscal year ending December 31, 2013. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Even if we conclude that our internal controls over financial reporting are effective, our independent registered public accounting firm may still decline to attest to our assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which the our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.

Given the difficulties inherent in the design and operation of internal controls over financial reporting, in addition to our limited accounting personnel and management resources, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to implement and maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

We may take advantage of these exemptions until we are no longer an “emerging growth company.” We cannot predict if investors will find our units less attractive because we will rely on these exemptions. If some investors find our units less attractive as a result, there may be a less active trading market for our units and our trading price may be more volatile.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service, or IRS, on this or any other tax matter affecting us.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35.0%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, if we were treated as a corporation for federal income tax purposes there would be material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

 

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If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.

Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of such additional tax on us by a state will reduce the cash available for distribution to you. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. Please read “Material Federal Income Tax Consequences—Partnership Status.” We are unable to predict whether any of these changes or any other proposals will ultimately be enacted, but it is possible that a change in law could affect us and may, if enacted, be applied retroactively. Any such changes could negatively impact the value of an investment in our common units.

Our unitholders’ share of our income will be taxable to them for U.S. federal income tax purposes even if they do not receive any cash distributions from us.

Because a unitholder will be treated as a partner to whom we will allocate taxable income which could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and your tax basis in those common units. Because distributions in

 

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excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the common units you sell will, in effect, become taxable income to you if you sell such common units at a price greater than your tax basis in those common units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized on any sale or other disposition of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your common units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Our counsel is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

We prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, however, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Our counsel has not rendered an opinion with respect to whether our monthly convention for

 

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allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to cover a short sale of common units; therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

We will adopt certain valuation methodologies and monthly conventions for U.S. federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, Delek will indirectly own more than 50% of the total interests in our capital and profits. Therefore, a transfer by Delek of all or a portion of its interests in us could result in a termination of our partnership for federal income tax purposes. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as

 

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described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We will initially own property or conduct business in Arkansas, Louisiana, Tennessee and Texas. Arkansas and Louisiana impose a personal income tax on individuals, and each of the four states imposes an income or similar tax on corporations and certain other entities. As we make acquisitions or expand our business, we may own property or conduct business in additional states that impose a personal income tax. It is your responsibility to file all U.S. federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

Compliance with and changes in tax laws could adversely affect our performance.

We are subject to extensive tax laws and regulations, including federal, state and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future. Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes as well as interest and penalties.

 

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USE OF PROCEEDS

We expect the net proceeds from this offering, after deducting underwriting discounts, the structuring fee and offering expenses, to be approximately $        million. We intend to use the net proceeds of this offering:

 

   

to fund an approximately $        million cash distribution to Delek;

 

   

to retire the approximately $        million of outstanding indebtedness under our predecessor’s revolving credit facility that we are assuming in the formation transactions in connection with our refinancing of the facility at the closing of this offering;

 

   

to provide $         million in working capital to replenish amounts distributed by us to Delek, in the form of trade and other accounts receivable, in connection with the closing of this offering; and

 

   

for other general partnership purposes.

As of March 31, 2012, $49.1 million was outstanding under our predecessor’s revolving credit facility, with a weighted-average interest rate of 3.9%. Immediately prior to the closing of this offering, we expect outstanding indebtedness under such revolving credit facility to be between $         million and $         million. Indebtedness under such credit facility matures on December 19, 2012.

At the closing of this offering, we will enter into a new $175 million revolving credit facility, which will replace our predecessor’s revolving credit facility. We will borrow $90 million under the new revolving credit facility to fund an additional $90 million cash distribution to Delek. The cash distributions to Delek from the proceeds of this offering and the borrowing under our revolving credit facility will be made in consideration of its contribution of assets to us. We are funding these distributions through a combination of net proceeds from this offering and borrowings under our revolving credit facility in order to optimize our capital structure.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder of the            additional common units, if any, will be issued to Delek. Any such units issued to Delek will be issued for no additional consideration. If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds would be approximately $        million. The net proceeds from any exercise of the underwriters’ option to purchase additional common units will be distributed to Delek.

A $1.00 increase or decrease in the assumed initial public offering price of $        per common unit would cause the net proceeds from this offering, after deducting the underwriting discounts, the structuring fee and offering expenses, to increase or decrease, respectively, by approximately $        million. If the proceeds increase due to a higher initial public offering price or decrease due to a lower initial public offering price, then the cash distribution to Delek from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.

 

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CAPITALIZATION

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our predecessor as of March 31, 2012; and

 

   

our pro forma cash and cash equivalents and capitalization as of March 31, 2012, after giving effect to the pro forma adjustments described in our unaudited pro forma financial statements included elsewhere in this prospectus, including this offering and the application of the net proceeds therefrom as described under “Use of Proceeds,” borrowings under our revolving credit facility and the other formation transactions described under “Prospectus Summary—Formation Transactions and Partnership Structure.”

This table is derived from, should be read in conjunction with and is qualified in its entirety by reference to, our historical and unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2012  
     Predecessor
Historical
     Partnership
Pro  Forma(1)
 
     (In thousands)  

Cash and cash equivalents (2)

   $ 26       $                
  

 

 

    

 

 

 

Debt:

     

Predecessor revolving credit facility (3)

   $ 49,100       $   

New revolving credit facility

          

Partners’ capital/partner net investment:

     

Net parent equity

   $ 109,188       $     

Common units—public (4)

     

Common units—Delek (4)

     

Subordinated units—Delek

     

General partner units—Delek

     
  

 

 

    

 

 

 

Total partners’ capital/partner net investment

     109,188      
  

 

 

    

 

 

 

Total capitalization

   $ 158,288       $     
  

 

 

    

 

 

 

 

(1) On a pro forma basis, as of March 31, 2012, the public would have held              common units, Delek would have held an aggregate of              common units and              subordinated unites, and our general partner would have held              general partner units.

 

(2) As of                     , 2012, total cash and cash equivalents were $             million.

 

(3) As of                     , 2012, total borrowings under our predecessor revolving credit facility were $         million and $         million of letters of credit were outstanding.

 

(4) An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from this offering, after deducting underwriting discounts, the structuring fee and offering expenses, to increase or decrease by $        million. If the proceeds increase due to a higher initial public offering price or decrease due to a lower initial public offering price, then the cash distribution to Delek from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after this offering. On a pro forma basis as of March 31, 2012, our net tangible book value was $        million, or $        per unit. Purchasers of common units in this offering will experience immediate and substantial dilution in pro forma net tangible book value per unit for financial accounting purposes, as illustrated in the following table:

 

Assumed initial public offering price per common unit

      $               

Pro forma net tangible book value per unit before the offering (1)

   $                  

Decrease in pro forma net tangible book value per unit attributable to purchasers in the offering

     
  

 

 

    

Less: Pro forma net tangible book value per unit after the offering (2)

     
     

 

 

 

Immediate dilution in pro forma net tangible book value per unit attributable to purchasers in the offering (3)(4)

      $    
     

 

 

 

 

(1) Determined by dividing the number of units (            common units,            subordinated units and            general partner units) to be issued to our general partner and its affiliates, including Delek, for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.

 

(2) Determined by dividing the total number of units to be outstanding after the offering (            common units,            subordinated units and            general partner units) into our pro forma net tangible book value, after giving effect to the application of the net proceeds of the offering.

 

(3) If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $        and $        , respectively.

 

(4) Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any such exercise of the option.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of common units in this offering upon completion of the transactions contemplated by this prospectus:

 

     Units Acquired     Total Consideration  
     Number    Percent     Amount      Percent  
                (In thousands)         

General partner and its affiliates (1)(2)

               $              

Purchasers in this offering

               $              
  

 

  

 

 

   

 

 

    

 

 

 

Total

        100.0   $                     100.0
  

 

  

 

 

   

 

 

    

 

 

 

 

(1) The units acquired by our general partner and its affiliates consist of            common units,             subordinated units and            general partner units.

 

(2) The assets contributed by our general partner and its affiliates were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of March 31, 2012, after giving effect to the application of the net proceeds of the offering, is as follows:

 

     (In thousands)  

Book value of net assets contributed

   $                

Less:         Distribution to Delek from net proceeds of this offering

  

Distribution to Delek from borrowings under our revolving credit facility

  
  

 

 

 

Total consideration

   $     
  

 

 

 

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the factors and assumptions upon which our cash distribution policy is based, which are included under the heading “—Assumptions and Considerations” below. In addition, please read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business. For additional information regarding our historical and pro forma operating results, you should refer to our historical and pro forma financial statements and related notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. Our cash distribution policy reflects our belief that our unitholders will be better served if we distribute rather than retain available cash, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Generally, our available cash is the sum of our (a) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (b) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we have more cash to distribute to our unitholders than would be the case if we were subject to federal income tax.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that our unitholders will receive quarterly distributions from us. We do not have a legal obligation to pay the minimum quarterly distribution or any other distribution except as provided in our partnership agreement. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

   

Our ability to make cash distributions may be limited by certain covenants in our new revolving credit facility. Should we be unable to satisfy these covenants, we will be unable to make cash distributions notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—New Revolving Credit Facility.”

 

   

Our general partner will have the authority to establish reserves for the proper conduct of our business and for future cash distributions to our unitholders, and the establishment or increase of those reserves could result in a reduction in cash distributions to our unitholders from the levels we currently anticipate pursuant to our stated cash distribution policy. Any determination to establish cash reserves made by our general partner in good faith will be binding on our unitholders. Our partnership agreement provides that in order for a determination by our general partner to be considered to have been made in good faith, our general partner must subjectively believe that the determination is in our best interests.

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our public common unitholders other than in certain circumstances where no unitholder approval is required. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by our general partner and its affiliates) after the subordination period has ended. At the closing of this offering, assuming no exercise of the underwriters’ over-

 

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allotment option, Delek will own our general partner as well as approximately     % of our outstanding common units and all of our outstanding subordinated units, representing an aggregate     % limited partner interest in us. Please read “The Partnership Agreement—Amendment of the Partnership Agreement.”

 

   

Even if our cash distribution policy is not modified or revoked, the amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors, as well as increases in our operating or general and administrative expense, principal and interest payments on our debt, working capital requirements and anticipated cash needs. Our cash available for distribution to common unitholders is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase.

 

   

Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

   

If and to the extent our cash available for distribution materially declines, we may elect to reduce our quarterly cash distributions in order to service or repay our debt or fund expansion capital expenditures.

All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. We anticipate that distributions from operating surplus will generally not represent a return of capital. However, operating surplus, as defined in our partnership agreement, includes certain components, including a $        million cash basket, that represent non-operating sources of cash. Accordingly, it is possible that return of capital distributions could be made from operating surplus. Any cash distributed by us in excess of operating surplus will be deemed to be capital surplus under our partnership agreement. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. We do not anticipate that we will make any distributions from capital surplus.

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

Because we will distribute all of our available cash to our unitholders, we expect that we will rely primarily upon external financing sources, including commercial borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. We do not have any commitment from our general partner or other affiliates, including Delek, to provide any direct or indirect financial assistance to us following the closing of this offering. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units and the incremental distributions on the incentive distribution rights may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement, and we do not

 

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anticipate that there will be limitations in our new credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.

Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $        per unit for each complete quarter, or $        per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each quarter, on or about the 15th day of each February, May, August and November to holders of record on or about the first day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately following the indicated distribution date. We will not make distributions for the period that begins on July 1, 2012, and ends on the day prior to the closing of this offering other than the distribution to be made to Delek in connection with the closing of this offering as described in “Prospectus Summary—Formation Transactions and Partnership Structure” and “Use of Proceeds.” We will adjust the amount of our distribution for the period from the completion of this offering through September 30, 2012 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, subordinated units and general partner units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

     Number of Units    Minimum Quarterly Distributions  
        One Quarter      Annualized  
          (in millions)  

Publicly held common units (1)

      $                    $                

Common units held by Delek (1)

      $         $     

Subordinated units held by Delek

      $         $     

General partner units

      $         $     

Total

      $         $     

 

(1) Assumes that the underwriters’ option to purchase additional common units is not exercised. Please read “Prospectus Summary—Formation Transactions and Partnership Structure” for a description of the impact of an exercise of the option on the common unit ownership percentages.

As of the date of this offering, our general partner will own general partner units entitling it to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 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 in order to maintain its initial 2.0% general partner interest. Our general partner will also be the initial holder of the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $        per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions—Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general

 

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partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must subjectively believe that the determination is in our best interests. Please read “Conflicts of Interest and Duties.”

Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement; however, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of cash reserves our general partner establishes in accordance with our partnership agreement as described above.

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $         per unit for the twelve-month period ending September 30, 2013. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Cash Available for Distribution,” in which we present the amount of cash we would have had available for distribution on a pro forma basis for the year ended December 31, 2011 and the twelve-month period ended March 31, 2012, derived from our unaudited pro forma financial data that are included elsewhere in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2013,” in which we explain our belief that we will be able to generate sufficient cash available for distribution for us to pay the minimum quarterly distribution on all units for the twelve-month period ending September 30, 2013.

Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2011 and the Twelve-Month Period Ended March 31, 2012

If we had completed this offering and related transactions on January 1, 2011, our unaudited pro forma cash available for distribution for the year ended December 31, 2011 would have been approximately $40.7 million. This amount would have been sufficient to pay the full minimum quarterly distribution of $        per unit per quarter ($        per unit on an annualized basis) on all of our common units but only $        per unit per quarter ($        per unit on an annualized basis), or approximately    % of the minimum quarterly distribution, on all of our subordinated units for such period.

If we had completed this offering and related transactions on April 1, 2011, our unaudited pro forma cash available for distribution for the twelve-month period ended March 31, 2012 would have been approximately $41.1 million. This amount would have been sufficient to pay the full minimum quarterly distribution of $             per unit per quarter ($             per unit on an annualized basis) on all of our common units but only $             per unit per quarter ($             per unit on an annualized basis), or approximately     % of the minimum quarterly distribution, on all of our subordinated units for such period.

Our unaudited pro forma available cash for the year ended December 31, 2011 and the twelve-month period ended March 31, 2012 includes $2.0 million of estimated incremental general and administrative expenses that we expect to incur as a result of becoming a publicly traded partnership. Incremental general and administrative expenses related to being a publicly traded partnership include expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer liability insurance expenses; and director compensation. These expenses are not reflected in historical financial statements of our predecessor or our unaudited pro forma financial statements included elsewhere in the prospectus.

 

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Unaudited Pro Forma Cash Available for Distribution

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had this offering and related formation transactions been completed as of the date indicated. In addition, cash available for distribution is primarily a cash accounting concept, while the historical financial statements of our predecessor

and our unaudited pro forma financial statements included elsewhere in the prospectus have been prepared on an accrual basis. As a result, you should view the amount of pro forma cash available for distribution only as a general indication of the amount of cash available for distributions that we might have generated had we completed this offering on the dates indicated. The pro forma amounts below are presented on a twelve-month basis, and there is no guarantee that we would have had available cash sufficient to pay the full minimum quarterly distribution on all of our outstanding common units and subordinated units for each quarter within the twelve-month periods presented.

The following table illustrates, on a pro forma basis, for the year ended December 31, 2011 and the twelve-month period ended March 31, 2012, the amount of cash that would have been available for distribution to our unitholders, assuming that this offering and the related formation transactions had been completed on January 1, 2011 and April 1, 2011, respectively. Each of the adjustments reflected or presented below is explained in the footnotes to such adjustments.

Delek Logistics Partners, LP

Unaudited Pro Forma Cash Available for Distribution

 

    Year Ended
December 31, 2011
    Twelve Months Ended
March  31, 2012
 
    (In millions, except per unit data)  

Pro Forma Net Income:

  $ 32.6      $ 33.5   

Add:

   

Depreciation and amortization

    9.3        9.3   

Interest expense, net (1)

    3.6        3.6   

Income tax expense

             
 

 

 

   

 

 

 

Pro Forma EBITDA (2)

  $ 45.5      $ 46.4   
 

 

 

   

 

 

 

Less:

   

Cash interest, net (1)

    2.8        2.8   

Expansion capital expenditures (3)

    0.9        0.5   

Maintenance capital expenditures (4)

           0.5   

Incremental general and administrative expense of being a public partnership (5)

    2.0        2.0   

Add:

   

Borrowings to fund expansion capital expenditures

    0.9        0.5   
 

 

 

   

 

 

 

Pro Forma Cash Available for Distribution

  $ 40.7      $ 41.1   
 

 

 

   

 

 

 

Pro Forma Cash Distributions

   

Distribution per unit (based on a minimum quarterly distribution rate of $         per unit)

  $        $     

Annual distributions to:

   

Public common unitholders

  $        $     

Delek:

   

Common units (6)

   

Subordinated units (6)

   

General partner units (6)

   
 

 

 

   

 

 

 

Total distributions to Delek

   
 

 

 

   

 

 

 

Total Distributions

  $        $     
 

 

 

   

 

 

 

Excess (Shortfall)

  $        $     
 

 

 

   

 

 

 

Percent of minimum quarterly distribution payable to common unitholders

    100     100
 

 

 

   

 

 

 

Percent of minimum quarterly distribution payable to subordinated unitholders

             
 

 

 

   

 

 

 

 

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(1) Interest expense and cash interest both include commitment fees and interest expense that would have been paid by our predecessor had our revolving credit facility been in place during the period presented and we had borrowed $         million under the facility at the beginning of the period. Interest expense also includes the amortization of debt issuance costs incurred in connection with our new revolving credit facility.

 

(2) We define EBITDA and provide a reconciliation to its most directly comparable financial measures calculated and presented in accordance with GAAP in “Prospectus Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”

 

(3) Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term.

 

(4) Maintenance capital expenditures are 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 and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

 

(5) Reflects an adjustment for estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; and director and officer insurance expenses.

 

(6) Based on the number of common units, subordinated units and general partner units expected to be outstanding upon the completion of this offering, assuming that the underwriters’ option to purchase additional common units is not exercised.

Estimated Cash Available for Distribution for the Twelve-Month Period Ending September 30, 2013

We forecast that our estimated cash available for distribution during the twelve-month period ending September 30, 2013 will be approximately $        million. This amount would exceed by $        million the amount needed to pay the minimum quarterly distribution of $        per unit on all of our units for the twelve-month period ending September 30, 2013.

We are providing the forecast of estimated cash available for distribution to supplement the historical financial statements of Delek Logistics Partners, LP Predecessor and our unaudited pro forma financial statements included elsewhere in the prospectus in support of our belief that we will have sufficient cash available to allow us to pay cash distributions at the minimum quarterly distribution rate on all of our units for the twelve-month period ending September 30, 2013. Please read “—Assumptions and Considerations” for further information as to the assumptions we have made for the forecast. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” for information as to the accounting policies we have followed for the financial forecast.

Our forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve-month period ending September 30, 2013. We believe that our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. If our estimates are not achieved, we may not be able to pay the minimum quarterly distribution or any other distribution on our common units. The assumptions and estimates underlying the forecast are inherently uncertain and, though we consider them reasonable as of the date of this prospectus, are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the forecast, including, among others,

 

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risks and uncertainties contained in “Risk Factors.” Accordingly, there can be no assurance that the forecast is indicative of our future performance or that actual results will not differ materially from those presented in the forecast. Inclusion of the forecast in this prospectus should not be regarded as a representation by any person that the results contained in the forecast will be achieved.

We have prepared the following forecast to present the estimated cash available for distribution to our common unitholders during the forecasted period. The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in our view, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the expected course of action and our expected future financial performance. However, this information is not necessarily indicative of future results.

Neither our independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information. The independent registered public accounting firm’s report included in this prospectus relates to historical financial information. It does not extend to prospective financial information and should not be read to do so.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the completion of this offering. In light of this, the statement that we believe that we will have sufficient cash available for distribution to allow us to make the full minimum quarterly distribution on all of our outstanding units for each quarter through June 30, 2013, should not be regarded as a representation by us, the underwriters or any other person that we will make such distribution. Therefore, you are cautioned not to place undue reliance on this information.

 

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Delek Logistics Partners, LP

Estimated Cash Available for Distribution

 

    Twelve Months Ending
September 30, 2013
 
    (in thousands, except
per unit data)
 

Net sales:

 

Pipelines and transportation

  $     

Wholesale marketing and terminalling

 
 

 

 

 

Total net sales

 
 

 

 

 

Cost of goods sold

 

Operating expenses

 

Contribution margin

 

Depreciation and amortization

 

General and administrative expense (1)

 
 

 

 

 

Total operating costs and expenses

 
 

 

 

 

Operating income

 

Interest expense, net(2)

 
 

 

 

 

Income before income tax expense

 

Income tax expense

 
 

 

 

 

Net income

 

Adjustments to reconcile net income to estimated EBITDA

 

Add:

 

Depreciation and amortization

 

Interest expense, net

 

Income tax expense

 
 

 

 

 

Estimated EBITDA (3)

 

Adjustments to reconcile estimated EBITDA to estimated cash available for distribution

 

Less:

 

Cash interest paid(2)

 

Expansion capital expenditures (4)

 

Maintenance capital expenditures (5)

 

Add:

 

Borrowings to fund expansion capital expenditures (2)

 
 

 

 

 

Estimated cash available for distribution

  $     
 

 

 

 

Distribution per unit (based on a minimum quarterly distribution rate of $        per unit)

  $     

Annual distributions to:

 

Public common unitholders

  $     

Delek:

 

Common units (6)

 

Subordinated units (6)

 

General partner units (6)

 
 

 

 

 

Total distributions to Delek

 
 

 

 

 

Total distributions at minimum quarterly distribution rate

 

Excess (Shortfall)

  $     
 

 

 

 

 

(1) Includes approximately $2.0 million of estimated annual incremental general and administrative expenses that we expect to incur as a result of being a separate publicly traded partnership.

 

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(2) Interest expense and cash interest both include commitment fees and interest expense that would have been paid by our predecessor had our revolving credit facility been in place during the period presented and we had borrowed $         million under the facility at the beginning of the period. Interest expense also includes the amortization of debt issuance costs incurred in connection with our new revolving credit facility.

 

(3) We define EBITDA and provide a reconciliation to its most directly comparable financial measures calculated and presented in accordance with GAAP in “Prospectus Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”

 

(4) Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term.

 

(5) Maintenance capital expenditures are 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 and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

 

(6) Based on the number of common units, subordinated units and general partner units expected to be outstanding upon the completion of this offering and assumes that the underwriters’ option to purchase additional common units is not exercised.

Assumptions and Considerations

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending September 30, 2012, we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the amount of our distribution for the period from the closing of this offering through September 30, 2012 based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business (including cash reserves for our future capital expenditures and anticipated future debt service requirements subsequent to that quarter);

 

   

comply with applicable law, any of our debt instruments or other agreements; or

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the effect of the establishment of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

   

plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners, and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

Intent to Distribute the Minimum Quarterly Distribution

We intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Please read

 

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—New Revolving Credit Facility” for a discussion of the restrictions to be included in our new credit facility that may restrict our ability to make distributions.

General Partner Interest and Incentive Distribution Rights

Initially, our general partner will be entitled to 2.0% of all quarterly distributions since our inception that we make prior to our liquidation. This general partner interest will be represented by             general partner units. 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 initial 2.0% interest in these distributions will 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 incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48.0%, of the cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 48.0% does not include any distributions that our general partner or its affiliates may receive on common, subordinated or general partner units that they own. Please read “—General Partner Interest and Incentive Distribution Rights” for additional information.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating Surplus

We define operating surplus as:

 

   

$         million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below), provided that cash receipts from the termination of a commodity hedge or interest rate hedge prior to its specified termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge; plus

 

   

working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement, or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance the expansion capital expenditures referred to in the prior bullet; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

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the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less

 

   

any cash loss realized on disposition of an investment capital expenditure.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures (as described below) and thus reduce operating surplus when repayments are made. However, if working capital borrowings, which increase operating surplus, are not repaid during the twelve-month period following the borrowing, they will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (ii) sales of equity securities and (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements.

We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses of our general partner and its affiliates, director and employee compensation, debt service payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its settlement or termination date specified therein will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of a rate hedge contract or a commodity hedge contract will be amortized at the life of such rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings; provided, however, that operating expenditures will not include:

 

   

repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

   

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

investment capital expenditures;

 

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payment of transaction expenses (including taxes) relating to interim capital transactions;

 

   

distributions to our partners;

 

   

repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans); or

 

   

any other expenditures or payments made using the proceeds of this offering that are described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities; and

 

   

sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets.

Characterization of Cash Distributions

Our partnership agreement requires that we treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of equipment and the construction, development or acquisition of additional pipeline, storage, gathering or terminalling capacity to the extent such capital expenditures are expected to expand our operating capacity or our operating income. Expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date that such capital improvement commences commercial service and the date that such capital improvement is abandoned or disposed of.

Maintenance capital expenditures are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long-term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Maintenance capital expenditures are included in operating expenditures and thus will reduce operating surplus.

Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional

 

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capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but that are not expected to expand our operating capacity or operating income over the long term.

Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes and/or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditure by our general partner.

Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions until the common units have received the minimum quarterly distribution plus any arrearages from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units.

Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and will extend until the first business day following the distribution of available cash in respect of any quarter beginning with the quarter ending September 30, 2015, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $         per unit (the annualized minimum quarterly distribution), for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the outstanding common units, subordinated units and general partner units during those periods on a fully diluted basis; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

In addition to the tests outlined above, the subordination period will end only in the event that our conflicts committee, or the board of directors of our general partner based on the recommendation of our conflicts committee, reasonably expects to satisfy the tests set forth under the first and second bullet points above for the succeeding four-quarter period without treating as earned any shortfall payments that would be paid under our existing commercial agreements with Delek (or similar fees to be paid by Delek under future contracts) expected to be received during such period. For a more detailed discussion of shortfall payments that would be paid by Delek under our existing commercial agreements, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Commercial Agreements with Delek.”

 

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Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter beginning with the quarter ending September 30, 2013, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $         (150% of the annualized minimum quarterly distribution), for the four-consecutive-quarter period immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (i) $         per unit (150% of the annualized minimum quarterly distribution) on all of the outstanding common units, subordinated units and general partner units during that period on a fully diluted basis and (ii) the corresponding distributions on the incentive distribution rights; and

 

   

there are no arrearages in payment of the minimum quarterly distributions on the common units.

In addition to the tests outlined above, the subordination period will end only in the event that our conflicts committee, or the board of directors of our general partner based on the recommendation of our conflicts committee, reasonably expects to satisfy the tests set forth under the first and second bullet points above for the succeeding four-quarter period without treating as earned any shortfall payments that would be paid under our existing commercial agreements with Delek (or similar fees to be paid by Delek under future contracts) expected to be received during such period.

Expiration Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause:

 

   

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an affiliate of the successor general partner;

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end; and

 

   

our general partner will have the right to convert its general partner interest and its incentive distribution rights into common units or to receive cash in exchange for those interests.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:

 

   

operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the first bullet point under the caption “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

 

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any net increase in working capital borrowings with respect to that period; less

 

   

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

   

any net decrease in working capital borrowings with respect to that period; plus

 

   

any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods; plus

 

   

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Distributions of Available Cash from Operating Surplus During the Subordination Period

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

   

first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

Distributions of Available Cash from Operating Surplus After the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

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General Partner Interest and Incentive Distribution Rights

Our partnership agreement provides that our general partner initially will be entitled to 2.0% of all 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 in order to maintain its 2.0% general partner interest if we issue additional units. Our general partner’s 2.0% interest, and the percentage of our cash distributions to which it is entitled from such 2.0% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon exercise by the underwriters of their over-allotment option in this offering or upon the expiration of such option, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash. It may instead fund its capital contribution by the contribution to us of common units or other property.

Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in our partnership agreement.

The following discussion assumes that our general partner maintains its 2.0% general partner interest and that our general partner continues to own the incentive distribution rights.

If for any quarter:

 

   

we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.

 

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Percentage Allocations of Available Cash from Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest, our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.

 

     Total Quarterly
Distribution per Unit
Target Amount
     Marginal Percentage
Interest in Distributions
 
        Unitholders     General Partner  

Minimum Quarterly Distribution

   $                     98.0     2.0

First Target Distribution

   above $                     98.0     2.0
   up to $                    

Second Target Distribution

   above $                     85.0     15.0
   up to $                    

Third Target Distribution

   above $                     75.0     25.0
   up to $                    

Thereafter

   above $                     50.0     50.0

General Partner’s Right to Reset Incentive Distribution Levels

Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to our general partner would be set. If our general partner transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee, at any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four consecutive fiscal quarters immediately preceding such time and the amount of each such distribution did not exceed adjusted operating surplus for such quarter, respectively. If our general partner and its affiliates are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of the general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that our general partner will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.

 

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In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period. In addition, our general partner will be issued the number of general partner units necessary to maintain our general partner’s interest in us immediately prior to the reset election.

The number of common units that our general partner would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (i) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (ii) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $        .

 

   

Quarterly
Distribution per Unit Prior to
Reset

  Marginal Percentage
Interest in Distribution
   

Quarterly
Distribution
per Unit following
Hypothetical Reset

    Unitholders     General
Partner
   

Minimum Quarterly Distribution

  $                 98.0     2.0   $        

First Target Distribution

  above $         up to $             98.0     2.0   above $         up to $        (1)

Second Target Distribution

  above $         up to $             85.0     15.0   above $         up to $        (2)

Third Target Distribution

  above $         up to $             75.0     25.0   above $         up to $        (3)

Thereafter

  above $             50.0     50.0   above $        

 

(1) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.

 

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(2) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.

 

(3) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, or IDRs, based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be              common units outstanding, our general partner’s 2.0% interest has been maintained, and the average distribution to each common unit would be $         per quarter for the two consecutive non-overlapping quarters prior to the reset.

 

   

Prior to Reset

 
   

Quarterly
Distribution

per Unit

  Common
Unitholders Cash
Distribution
    General Partner Cash Distributions  
        Common
Units
    2.0%
General
Partner

Interest
    IDRs     Total     Total
Distribution
 

Minimum Quarterly Distribution

  $               $               $               $               $      $               $            

First Target Distribution

  above $         up to $                              

Second Target Distribution

  above $         up to $                         

Third Target Distribution

  above $         up to $                         

Thereafter

  above $           $               $      $               $               $               $            

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the general partner, including in respect of IDRs, with respect to the quarter after the reset occurs. The table reflects that as a result of the reset there would be              common units outstanding, our general partner has maintained its 2.0% general partner interest, and that the average distribution to each common unit would be $            . The number of common units issued as a result of the reset was calculated by dividing (x) $             as the average of the amounts received by the general partner in respect of its IDRs for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, by (y) the average of the cash distributions made on each common unit per quarter for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $            .

 

   

After Reset

 
   

Quarterly
Distribution

per Unit

  Common
Unitholders  Cash

Distribution
    General Partner Cash Distributions  
        Common
Units Issued
As a Result of
the Reset
    2.0%
General
Partner
Interest
    IDRs     Total     Total
Distribution
 

Minimum Quarterly Distribution

  $               $               $               $               $      $               $            

First Target Distribution

  above $         up to $                              

Second Target Distribution

  above $         up to $                         

Third Target Distribution

  above $         up to $                         
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Thereafter

  above $           $               $      $               $               $               $            
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

 

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Distributions from Capital Surplus

How Distributions from Capital Surplus Will Be Made

We will make distributions of available cash from capital surplus, if any, in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until the minimum quarterly distribution is reduced to zero, as described below under “—Effect of a Distribution from Capital Surplus”;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

thereafter, as if such distributions were from operating surplus.

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

Effect of a Distribution from Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution after any of these distributions are made, it may be easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, we will reduce the minimum quarterly distribution and the target distribution levels to zero. We will then make all future distributions from operating surplus, with 50.0% being paid to the unitholders, pro rata, and 2.0% to our general partner and 48.0% to the holder of our incentive distribution rights.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

the minimum quarterly distribution;

 

   

target distribution levels;

 

   

the unrecovered initial unit price;

 

   

the number of general partner units comprising the general partner interest; and

 

   

the arrearages in payment of the minimum quarterly distribution on the common units.

 

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For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50.0% of its initial level, and each subordinated unit would be split into two subordinated units. We will not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if legislation is enacted or if the official interpretation of existing law is modified by a governmental authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) and the denominator of which is the sum of available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) plus our general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference may be accounted for in subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our general partner.

Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to our partners in the following manner:

 

   

first, to our general partner to the extent of any negative balance in its capital account;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until the capital account for each common unit is equal to the sum of: (1) the unrecovered initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until the capital account for each subordinated unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

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fourth, 98.0% to all common and subordinated unitholders, pro rata, and 2.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98.0% to the common and subordinated unitholders, pro rata, and 2.0% to our general partner, for each quarter of our existence;

 

   

fifth, 85.0% to all common and subordinated unitholders, pro rata, and 15.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the common and subordinated unitholders, pro rata, and 15.0% to our general partner for each quarter of our existence;

 

   

sixth, 75.0% to all common and subordinated unitholders, pro rata, and 25.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the common and subordinated unitholders, pro rata, and 25.0% to our general partner for each quarter of our existence;

 

   

thereafter, 50.0% to all common and subordinated unitholders, pro rata, and 50.0% to our general partner.

The percentages set forth above are based on the assumption that our general partner has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the fourth bullet point above will no longer be applicable.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, after making allocations of loss to the general partner and the unitholders in a manner intended to offset in reverse order the allocations of gains that have previously been allocated, we will generally allocate any loss to our general partner and unitholders in the following manner:

 

   

first, 98.0% to the holders of subordinated units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;

 

   

second, 98.0% to the holders of common units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the common unitholders have been reduced to zero; and

 

   

thereafter, 100.0% to our general partner.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

 

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Adjustments to Capital Accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner which results, to the extent possible, in the partners’ capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

The following table shows selected historical combined financial and operating data of Delek Logistics Partners, LP Predecessor, our predecessor for accounting purposes, and selected pro forma combined financial data of Delek Logistics Partners, LP for the periods and as of the dates indicated. Our selected historical combined financial data as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 are derived from the audited combined financial statements of our predecessor appearing elsewhere in this prospectus. Our selected historical combined financial data as of and for the three months ended March 31, 2012 and for the three months ended March 31, 2011 are derived from the unaudited combined financial statements of our predecessor appearing elsewhere in this prospectus. Our selected historical combined financial data as of December 31, 2009, 2008 and 2007 and for the years ended December 31, 2008 and 2007 are derived from our unaudited historical combined financial statements that are not included in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical and unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Delek Logistics Partners, LP Predecessor consists of the assets, liabilities and results of operations of certain crude oil and refined product pipeline, storage, wholesale marketing and terminalling assets of Delek, operated and held by Delek Marketing & Supply, Inc., Paline and Lion Oil, each a wholly owned subsidiary of Delek, to be contributed to us in connection with this offering. The historical financial data include the assets, liabilities and results of operations of the assets to be contributed by Lion Oil to us in connection with this offering, other than Paline, for all periods after April 29, 2011. The assets, liabilities and results of operations of Paline are included in the accompanying financial statements for all periods after December 19, 2011 and, for all periods through April 28, 2011, are included in the assets, liabilities and results of operations of the assets to be contributed by Lion Oil to us in connection with this offering.

The selected pro forma combined financial data presented in the following table for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related formation transactions occurred as of March 31, 2012 and the pro forma statements of operations for the year ended December 31, 2011 and the three months ended March 31, 2012 assume that the offering and the related transactions occurred as of January 1, 2011. These transactions include, and the pro forma financial data give effect to, the following:

 

   

Delek’s contribution of all of our initial assets and operations, including certain subsidiaries, to us (excluding working capital and other noncurrent liabilities);

 

   

our execution of multiple long-term commercial agreements with Delek and recognition of incremental revenues under those agreements as discussed in “Certain Relationships and Related Party Transactions—Commercial Agreements with Delek”;

 

   

our execution of an omnibus agreement, and our general partner’s execution of an operation and management services agreement, with Delek;

 

   

the consummation of this offering and our issuance of common units to the public, general partner units and the incentive distribution rights to our general partner and common units and subordinated units to Delek; and

 

   

the application of the net proceeds of this offering, together with the proceeds from borrowings under our revolving credit facility, as described in “Use of Proceeds.”

 

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The pro forma combined financial data do not give effect to the estimated $2.0 million in incremental annual general and administrative expense we expect to incur as a result of being a separate publicly traded partnership.

The following table presents the non-GAAP measure of EBITDA, which we use in our business as a measure of performance and liquidity. For a definition of EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measure.”

 

    Delek Logistics Partners, LP Predecessor Historical     Delek Logistics Partners,
LP Pro Forma(4)
 
    Year Ended December 31,     Three Months
Ended March 31,
    Year Ended
December 31,
2011
    Three
Months
Ended
March 31,
2012
 
    2007     2008(1)     2009(1)(2)     2010     2011(3)     2011     2012      
                                  (unaudited)     (unaudited)  
    (In thousands, except per unit data and operating information)        

Statement of Operations Data:

                 

Net sales:

                 

Pipelines and transportation

  $      $      $ 6,633      $ 9,451      $ 21,878      $ 2,440      $ 6,680      $ 47,106      $ 11,573   

Wholesale marketing and terminalling(5)

    626,571        745,520        367,787        494,957        722,201        156,656        232,403        718,736        187,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

    626,571        745,520        374,420        504,408        744,079        159,096        239,083        765,842        199,211   

Cost of goods sold

    596,863        721,189        349,493