We expect the net proceeds from this offering, after deducting underwriting
discounts, the structuring fee and offering expenses, to be approximately
$152.7 million. We intend to use the net proceeds of this offering:
. to fund an approximately $53.1 million cash distribution to Delek;
. to retire the approximately $63.0 million of outstanding indebtedness under
our predecessor’s revolving credit facility;
. to provide $35.0 million in working capital to replenish certain 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 October 31, 2012, $63.0 million was outstanding under our predecessor’s
revolving credit facility, with a weighted-average interest rate of 4.0%.
Immediately prior to the closing of this offering, we expect outstanding
indebtedness under such revolving credit facility to be approximately $63.0
million. Indebtedness under such credit facility matures on December 19, 2013.
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 will be made in
consideration of its contribution of assets to us and in part for
reimbursement of capital expenditures associated with our assets. 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 1,200,000 additional common units, if any, will be issued to
Delek at the expiration of the option period. Any such units issued to Delek
will be issued for no additional consideration from Delek. If the underwriters
exercise their option to purchase additional common units in full, the
additional net proceeds would be approximately $23.4 million. The net proceeds
from any exercise of the underwriters’ option to purchase additional common
units will be distributed to Delek. The issuance of the common units,
subordinated units and general partner units, incentive distribution rights
and the cash distributions to Delek and our general partner are being made in
consideration of Delek’s contribution to us of our initial assets and
operations and in part for reimbursement of capital expenditures associated
with our assets.
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.
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Our Abilene terminal handles unbranded products and competes with a nearby
terminal that handles exclusively branded products supplied by Alon USA’s Big
Spring refinery.
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Our partnership agreement provides that our general partner is restricted from
engaging in any business activities other than those incidental to its
ownership of interests in us. However, except as provided in the omnibus
agreement, certain affiliates of our general partner, including Delek, are not
prohibited from engaging in other businesses or activities, including those
that might directly compete with us. In addition, under our partnership
agreement, the doctrine of corporate opportunity, or any analogous doctrine,
will not apply to the general partner and its affiliates. As a result, neither
the general partner nor any of its affiliates have any obligation to present
business opportunities to us.
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Our Abilene terminal handles unbranded products and competes with a nearby
terminal that handles exclusively branded products supplied by Alon USA’s Big
Spring refinery.
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The San Angelo terminal is the only refined products terminal within a 90-mile
radius.
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The Memphis terminal competes with other terminals in the greater-Memphis
area.
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Nashville terminal competes with other terminals in the greater Nashville
area, including terminals supplied by the Colonial pipeline.
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The Big Sandy terminal will compete with Delek’s terminal at the Tyler
refinery and third-party terminals in Waskom and Mt. Pleasant, Texas.
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The refining industry is highly competitive and includes fully integrated
national and multinational oil companies engaged in many segments of the
petroleum business, including exploration, production, transportation,
refining, marketing and retail fuel and convenience stores. Delek’s principal
competitors are petroleum refiners in the Mid-Continent and Gulf Coast
regions, in addition to wholesale distributors operating in these markets. The
principal competitive factors affecting Delek’s refinery operations are crude
oil and other feedstock costs, the differential in price between various
grades of crude oil, refinery product margins, refinery efficiency, refinery
product mix, and distribution and transportation costs.
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The Tyler refinery’s principal competitors are regional product terminals
supplied via pipeline from the Gulf Coast. We believe the Tyler refinery’s
location gives it an advantage over more remote suppliers as it is the only
full range product supplier within 100 miles.
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The El Dorado refinery’s principal competitors are regional product terminals
supplied via pipeline from the Gulf Coast.
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.
Following the completion of this offering, we intend to expand our business by
acquiring additional 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.
For the year ended December 31, 2011, we had pro forma EBITDA of approximately
$47.2 million and pro forma net income of approximately $34.6 million. For the
six months ended June 30, 2012, we had pro forma EBITDA of approximately $23.6
million and pro forma net income of approximately $17.5 million. Delek
accounted for 85.7% of our pro forma contribution margin for the year ended
December 31, 2011 and 81.9% of our pro forma contribution margin for the six
months ended June 30, 2012.
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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 six months ended June 30, 2012, our
Pipelines and Transportation segment accounted for approximately 63.1% and
58.6%, respectively, of our contribution margin, and our Wholesale Marketing
and Terminalling segment accounted for approximately 36.9% and 41.4%,
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.
Beginning in the first half of 2013, we expect a reconfigured pipeline system
that is owned and operated by third parties to also begin supplying crude oil
to the Tyler refinery from west Texas. Delek has a 10-year agreement with
third parties to transport a substantial majority of the Tyler refinery’s
crude oil requirements on this reconfigured system.
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. One of these terminals,
located in Memphis, Tennessee, supports the El Dorado refinery. Another of
these terminals, located in Big Sandy, Texas, while currently idle, is
expected to be operational by the end of 2012 and will support the Tyler
refinery. 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.
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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.deleklogistics.com.