Delek Logistics Partners, LP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on March 1, 2021 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Logistics Partners, LP," the "Partnership," "we," "us," "our," or like terms, may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Holdings" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than the Partnership and its subsidiaries and its general partner. Effective August 13, 2020, the Partnership closed the transaction contemplated by a definitive exchange agreement with the general partner to eliminate all of the incentive distribution rights ("IDRs") held by the general partner and convert the 2% general partner interest into a non-economic general partner interest, such transaction the "IDR Restructuring Transaction." See Note 3 to the accompanying condensed consolidated financial statements for further information. Effective May 1, 2020, the Partnership, through its wholly-owned subsidiary DKL Transportation, LLC, acquired Delek Trucking, LLC, consisting of certain leased and owned tractors and trailers and related assets (the "Trucking Assets") from Delek Holdings, such transaction the "Trucking Assets Acquisition." See Note 2 to the accompanying condensed consolidated financial statements for further information. Effective March 31, 2020, the Partnership, through its wholly-owned subsidiary DKL Permian Gathering, LLC, acquired from Delek Holdings a crude oil gathering system located in Howard, Borden and Martin Counties, Texas (the "Big Spring Gathering Assets"), and certain related assets, such transaction the "Big Spring Gathering Assets Acquisition." See Note 2 to the accompanying condensed consolidated financial statements for further information. The Partnership announces material information to the public about the Partnership, its products and services and other matters through a variety of means, including filings with the Securities and Exchange Commission, press releases, public conference calls, the Partnership's website (www.deleklogistics.com), the investor relations section of the website (ir.deleklogistics.com), the news section of its website (www.deleklogistics.com/news), and/or social media, including its Twitter account (@DelekUSLogistics). The Partnership encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time. Forward-Looking Statements This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, statements regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the COVID-19 Pandemic and the actions of members of the Organization of Petroleum Exporting Countries ("OPEC") and other leading oil producing countries (together with OPEC, "OPEC+") with respect to oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to: 24 | Management's Discussion and Analysis • our substantial dependence on Delek Holdings or its assignees and their support of and respective ability to pay us under our commercial agreements; • our future coverage, leverage, financial flexibility and growth, and our ability to improve performance and achieve distribution growth at any level or at all; • Delek Holdings' future growth, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution; • industry dynamics, including Permian Basin growth, ownership concentration, efficiencies and takeaway capacity; • the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or legal actions and other effects related to spills, releases and tank failures; • changes in insurance markets impacting costs and the level and types of coverage available; • the timing and extent of changes in commodity prices and demand for refined products and the impact of the COVID-19 Pandemic on such demand; • the wholesale marketing margins we are able to obtain and the number of barrels of product we are able to purchase and sell in our West Texas wholesale business; • the suspension, reduction or termination of Delek Holdings' or its assignees' or third-party's obligations under our commercial agreements including the duration, fees or terms thereof; • the results of our investments in joint ventures; • the ability to secure commercial agreements with Delek Holdings or third parties upon expiration of existing agreements; • the possibility of inefficiencies, curtailments, or shutdowns in refinery operations or pipelines, whether due to infection in the workforce or in response to reductions in demand as a result of the COVID-19 Pandemic; • disruptions due to equipment interruption or failure, or other events, including terrorism, sabotage or cyber attacks, at our facilities, Delek Holdings’ facilities or third-party facilities on which our business is dependent; • changes in the availability and cost of capital of debt and equity financing; • our reliance on information technology systems in our day-to-day operations; • changes in general economic conditions, including uncertainty regarding the timing, pace and extent of economic recovery in the United States due to the COVID-19 Pandemic or future pandemics; • the effects of existing and future laws and governmental regulations, including, but not limited to, the rules and regulations promulgated by the Federal Energy Regulatory Commission ("FERC") and state commissions and those relating to environmental protection, pipeline integrity and safety as well as current and future restrictions on commercial and economic activities in response to the COVID-19 Pandemic; • competitive conditions in our industry including capacity overbuild in areas where we operate; • actions taken by our customers and competitors; • the demand for crude oil, refined products and transportation and storage services; • our ability to successfully implement our business plan; • inability to complete growth projects on time and on budget; • our ability to successfully integrate acquired businesses; • disruptions due to acts of God, natural disasters, casualty losses, severe weather patterns, such as freezing conditions, cyber or other attacks on our electronic systems, and other matters beyond our control which might cause damage to our pipelines, terminal facilities and other assets and could impact our operating results through increased costs and/or loss of revenue; • changes in the price of RINs could affect our results of operations; • future decisions by OPEC+ regarding production and pricing and disputes between OPEC+ regarding such; • changes or volatility in interest and inflation rates; • labor relations; • large customer defaults; • changes in tax status and regulations; 25 | Management's Discussion and Analysis • the effects of future litigation or environmental liabilities that are not covered by insurance; and • other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 Pandemic and any worsening of the global business and economic environment. In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise. Business Overview The Partnership primarily owns and operates crude oil, intermediate and refined products logistics and marketing assets. We gather, transport, offload and store crude oil and intermediate products and market, distribute, transport and store refined products primarily in select regions of the southeastern United States and Texas for Delek Holdings and third parties. A substantial majority of our existing assets are both integral to and dependent upon the success of Delek Holdings' refining operations, as many of our assets are contracted exclusively to Delek Holdings in support of its Tyler, El Dorado and Big Spring refineries. The Partnership is not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. Instead, for purposes of such income taxes, each partner of the Partnership is required to take into account its share of items of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and the fair market value of our assets and financial reporting bases of assets and liabilities, the acquisition price of the partner's units and the taxable income allocation requirements under the Partnership's Second Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). U.S. economic activity continued on a recovery trend during the quarter ended September 30, 2021. The spike in number of new cases due to the COVID-19 delta variant did not slow down the economic recovery. Towards the end of third quarter the trend started to show a reduction in the number of new COVID-19 cases and in the number of COVID-19 related hospitalizations. However, we remain subject to heightened levels of uncertainty related the on-going impact of the COVID-19 Pandemic, and the spread of new variants of the virus. Most of the COVID-19 Pandemic related restrictions imposed in the prior year have been eased, major airlines have resumed their flights, motor vehicle use continues to increase and government vaccination campaigns continue. Additional government measures to curb the spread of the virus include the proposed government mandate for employers to require mandatory vaccination or weekly COVID-19 testing for all employees. The economic recovery has in turn resulted in increased demand and market prices for crude oil and other products, particularly refined petroleum products that we receive revenue for transporting and storing. It has also resulted in an increase in demand and sales volumes in our wholesale marketing business. U.S. Crude oil production as well as the consumption of the hydrocarbon products continued to increase. Although we expect the direct effects from the Pandemic on U.S. oil consumption to continue to decrease, some consumption patterns may be more lasting, including increased working from home and changes in travel behavior, which could limit growth in gasoline and jet fuel consumption. Furthermore, as of September 30, 2021, the COVID-19 Pandemic and the spread of new variants of the virus, continues to cause significant economic disruption globally, including in the U.S. and specific geographic areas where we operate. Therefore, there is continued uncertainty about the duration and future impact of the COVID-19 Pandemic. Additionally, increased infection rates could impact our logistics operations, particularly in high-infection states, if our employees are personally affected by the illness, both through direct infection and quarantine procedures. During the three and nine months ended September 30, 2021, both our West Texas wholesale marketing business and many of our pipeline and transportation customers experienced an increase in demand and pricing due to the resumption of some economic activities as discussed above. For the nine months ended September 30, 2021, the impact of this positive trend was netted by the reduced volumes during the severe freezing conditions experienced in February 2021. Our pipelines and transportation revenue streams were largely protected by minimum volume commitments under existing throughput contracts with customers during the current and prior periods, but continued pressure on our customers could present risks to our existing and new business opportunities as well as on collectability on our receivables. Our management continues to monitor the COVID-19 infections in the communities around our company locations, the impact on our operations and whether there is a need to update our remote policies and quarantine protocols. We continue to be exposed to risk from our suppliers and customers who are facing similar challenges. To the extent that uncertainties related to the COVID-19 Pandemic have been identified and are believed to have an impact on our current period results of operations or financial position based on the requirements for assessing such financial statement impact under U.S. 26 | Management's Discussion and Analysis generally accepted accounting principles, we have considered them in the preparation of our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021, which are included in Item 1. of this Quarterly Report on Form 10-Q. Other uncertainties related to the impact of the COVID-19 Pandemic and other events may exist that have not been identified, and could impact our future results of operations and financial position, the nature of which and the extent to which are currently unknown. The U.S. Federal Government's passage and/or enactment of additional stimulus and relief measures, may impact the extent to which the risk underlying these uncertainties are realized. In addition, management continues to actively respond to the impact of the COVID-19 Pandemic and other events on our business. Such efforts include (but are not limited to) the following: • Identifying alternative financing solutions to enhance our access to sources of liquidity; • Implementing regular site cleaning and disinfecting procedures; • Adopting remote working where possible. Where on-site operations are required, appropriate safety precautions taken; and • Working with our employees to implement other site-specific precautionary measures to reduce the risk of exposure. The extent to which our future results are affected by the COVID-19 Pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the COVID-19 Pandemic; additional actions by businesses and governments in response to the COVID-19 Pandemic; and the speed and effectiveness of responses to combat the virus. The COVID-19 Pandemic, and the volatile regional and global economic conditions stemming from the Pandemic, could also exacerbate the risk factors identified in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. The COVID-19 Pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business. See also 'Risk Factors' in Part I, Item 1A. of our Annual Report on Form 10-K for further discussion of risks associated with the COVID-19 Pandemic. Our Reporting Segments and Assets Our business consists of two reportable segments: Pipelines and Transportation The assets and investments in our pipelines and transportation segment consist of pipelines, tanks, offloading facilities, trucks and ancillary assets, which provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services primarily in support of Delek Holdings' refining operations in Tyler, Texas, El Dorado, Arkansas and Big Spring, Texas. Additionally, the assets in this segment provide crude oil transportation services to certain third parties. In providing these services, we do not take ownership of the products or crude oil that we transport or store. Therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment. Wholesale Marketing and Terminalling The assets in our wholesale marketing and terminalling segment consist of refined products terminals and pipelines in Texas, Tennessee, Arkansas and Oklahoma. We generate revenue in our wholesale marketing and terminalling segment by providing marketing services for the refined products output of the Tyler and Big Spring refineries, engaging in wholesale activity at our terminals in West Texas and at terminals owned by third parties, whereby we purchase light products for sale and exchange to third parties, and by providing terminalling services at our refined products terminals to independent third parties and Delek Holdings. 2021 Strategic Developments Inflation Adjustments On July 1, 2021, the tariffs on certain of our FERC regulated pipelines and the throughput fees and storage fees under certain of our agreements with Delek Holdings and third parties that are subject to adjustments using FERC indexing decreased by approximately 0.6%, which was the amount of the change in the FERC oil pipeline index. Under certain of our agreements with Delek Holdings and third parties, the fees that are subject to adjustments using the consumer price index increased 4.4% and the fees that are subject to adjustments using the producer price index increased approximately 2.3%. High Yield Debt - 7.125% Senior Notes due 2028 On May 24, 2021, the Partnership and its wholly owned subsidiary Delek Logistics Finance Corp. ("Finance Corp." and together with the Partnership, the "Issuers") issued $400.0 million in aggregate principal amount of the Issuers’ 7.125% Senior Notes due 2028 (the “2028 Notes”), along with the related guarantees of the 2028 Notes. We used the net proceeds from the sale of the 2028 Notes to repay a 27 | Management's Discussion and Analysis portion of the outstanding borrowings under our revolving credit facility. See Note 7 to our accompanying condensed consolidated financial statements for additional information. Exclusive Supply Agreement In May 2021, we executed an exclusive supply and strategic relationship agreement with Baker Petrolite LLC (an affiliate of Baker Hughes Company) ("Baker"). The agreement provides that, under certain circumstances, Baker will supply certain chemicals exclusively to us within a defined territory. Those chemicals allow us, through blending competencies utilizing proprietary intellectual property, to clarify slurry which can then be used in International Maritime Organization-compliant products. The agreement has a 5-year initial term and a 5-year extension option. How We Generate Revenue The Partnership generates revenue by charging fees to Delek Holdings and third parties for gathering, transporting, offloading and storing crude oil and for marketing, distributing, transporting, throughputting and storing intermediate and refined products. We also wholesale market refined products primarily in the West Texas market. A substantial majority of our contribution margin, which we define as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization, is derived from commercial agreements with Delek Holdings with initial terms ranging from five to ten years, which gives us a contractual revenue base that we believe enhances the stability of our cash flows. As more fully described below, our commercial agreements with Delek Holdings typically include minimum volume or throughput commitments by Delek Holdings, which we believe will provide a stable revenue stream in the future. The fees charged under our agreements with Delek Holdings and third parties are indexed to inflation-based indices. In addition, the rates charged with respect to our assets that are subject to inflation indexing may increase or decrease, typically on July 1 of each year, by the amount of any change in various inflation-based indices, including FERC, provided that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement. Commercial Agreements with Delek Holdings The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which we provide various services, including crude oil gathering, crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings, and Delek Holdings commits to provide us with minimum monthly throughput volumes of crude oil, intermediate and refined products. Generally, these agreements include minimum quarterly volume, revenue or throughput commitments and have tariffs or fees indexed to inflation-based indices, provided that the tariffs or fees will not be decreased below the initial amount. See our Annual Report on Form 10-K filed with the SEC on March 1, 2021 for a discussion of our material commercial agreements with Delek Holdings. Other Transactions The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of gathering systems in the Permian Basin (the "Delek Permian Gathering Project"). The majority of the gathering systems has been constructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and are still subject to the terms of the DPG Management Agreement. The Partnership is also considered the operator for the project and is responsible for the oversight of the project design, procurement and construction of project segments and for providing other related services. See Note 3 to our accompanying condensed consolidated financial statements for additional information on the DPG Management Agreement. How We Evaluate Our Operations We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: ■ volumes (including pipeline throughput and terminal volumes) ■ contribution margin per barrel ■ operating and maintenance expenses ■ cost of materials and other ■ EBITDA and distributable cash flow (as such terms are defined below). 28 | Management's Discussion and Analysis Volumes The amount of revenue we generate primarily depends on the volumes of crude oil and refined products that we handle in our pipeline, transportation, terminalling, storage and marketing operations. These volumes are primarily affected by the supply of and demand for crude oil, intermediate and refined products in the markets served directly or indirectly by our assets. Although Delek Holdings has committed to minimum volumes under certain of the commercial agreements, as described above, our results of operations will be impacted by: • Delek Holdings' utilization of our assets in excess of its minimum volume commitments; • our ability to identify and execute acquisitions and organic expansion projects, and capture incremental volume increases from Delek Holdings or third parties; • our ability to increase throughput volumes at our refined products terminals and provide additional ancillary services at those terminals; • our ability to identify and serve new customers in our marketing and trucking operations; and • our ability to make connections to third-party facilities and pipelines. Contribution Margin per Barrel Because we do not allocate general and administrative expenses by segment, we measure the performance of our segments by the amount of contribution margin as generated in operations. Contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization. For our wholesale marketing and terminalling segment, we also measure gross margin per barrel. Gross margin per barrel reflects the gross margin (net revenues less cost of materials and other) of the wholesale marketing operations divided by the number of barrels of refined products sold during the measurement period. Both contribution margin and gross margin per barrel can be affected by fluctuations in the prices and cost of gasoline, distillate fuel, ethanol and RINs. Historically, the profitability of our wholesale marketing operations has been affected by commodity price volatility, (specifically as it relates to changes in the price of refined products between the time we purchase such products from our suppliers and the time we sell the products to our wholesale customers), and the fluctuation in the value of RINs. Commodity price volatility may also impact our wholesale marketing operations when the selling price of refined products does not adjust as quickly as the purchase price. Operating and Maintenance Expenses We seek to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses include the costs associated with the operation of owned terminals and pipelines and terminalling expenses at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business. These expenses generally remain relatively stable across broad ranges of throughput volumes, but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses. Additionally, compliance with federal, state and local laws and regulations relating to the protection of the environment, health and safety may require us to incur additional expenditures. We will seek to manage our maintenance expenditures on our pipelines and terminals by scheduling maintenance over time to avoid significant variability in our maintenance expenditures and minimize their impact on our cash flow. Cost of Materials and Other These costs include: (i) all costs of purchased refined products in our wholesale marketing and terminalling segment, as well as additives and related transportation of such products; (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance; (iii) the cost of pipeline capacity leased from any third parties; and (iv) gains and losses related to our commodity hedging activities. 29 | Management's Discussion and Analysis Financing The Partnership has declared its intent to make a cash distribution to its unitholders at a distribution rate of $0.95 per unit for the quarter ended September 30, 2021 ($3.80 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of its available cash (as defined in the Partnership Agreement) to its unitholders quarterly. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our DKL Credit Facility and any potential future issuances of equity and debt securities. See Note 8 to the accompanying condensed consolidated financial statements for a discussion of historic cash distributions. Market Trends Business Environment Fluctuations in crude oil prices and the prices of related refined products impact our operations and the operations of other master limited partnerships in the midstream energy sector. In particular, crude oil prices and the prices of related refined products have the ability to influence drilling activity in many basins and the amounts of capital spending that crude oil exploration and production companies incur to support future growth. During the three and nine months ended September 30, 2021, the U.S. economic activity continued its recovery path resulting in increases in consumption and demand for crude oil and refined products, although heightened uncertainty still remains due to the on-going COVID-19 Pandemic and the spread of new variants of the virus. Compared to the three and nine months ended September 30, 2020, where reduced demand for crude oil and refined products related to the COVID-19 Pandemic, combined with production increases from OPEC+, had led to a significant reduction in crude oil prices, crude oil prices during the three and nine months ended September 30, 2021 were steadily increasing. The price of oil (WTI Cushing) closed at $75.03 per barrel on September 30, 2021, $34.81 per barrel higher than on September 30, 2020. The opening January 2021 price of oil (WTI Cushing) was $47.62 and reached the January 2021 high closing price of oil of $53.57 per barrel, which further increased to $61.45 beginning April 2021 and reached a high of $75.45 per barrel on September 27, 2021. Due to the sustained increase in oil prices, during the three and nine months ended September 30, 2021, we experienced improved margins in the West Texas area, and better throughput for our assets with improved gross margins, when compared to the same period in 2020. We believe we are strategically positioned, in these tougher market conditions to continue developing profitable growth projects that are needed to support future distribution growth in the midstream energy sector for the Partnership. West Texas Marketing Operations Overall demand for gathering and terminalling services in a particular area is generally driven by crude oil production in the area, which can be impacted by crude oil prices, refining economics and access to alternate delivery and transportation infrastructure. Additionally, volatility in crude oil, intermediate and refined products prices in the West Texas area and the value attributable to RINs can affect the results of our West Texas operations. For example, demand for refined products from our West Texas operations to industries that support crude oil exploration and production was subdued during the three and nine months ended September 30, 2020 due to the impact of the COVID-19 Pandemic leading to lower demand and sales of refined products and remained largely depressed during most of 2020. As discussed above, the U.S. economic activity is recovering and demand for and prices of crude oil and related refined products increased during the three and nine months ended September 30, 2021 as consumption of oil increased spurred by easing of COVID-19 related restrictions. Although we expect the direct effects from the pandemic on U.S. oil consumption to decrease, some consumption patterns may be more lasting, including increased working from home and changes in travel behavior, which could limit growth in gasoline and jet fuel consumption. See the chart below for the high, low and average price per barrel of WTI crude oil for each of the quarterly periods in 2020 and for the three quarterly periods in 2021. 30 | Management's Discussion and Analysis The volatility of refined products prices may impact our margin in the West Texas operations when the selling price of refined products does not adjust as quickly as the purchase price. See the charts below for the range of prices per gallon of gasoline and diesel for each of the quarterly periods in 2020 and for the three quarterly periods in 2021. 31 | Management's Discussion and Analysis Our West Texas operations can benefit from RINs that are generated by ethanol blending activities. As a result, changes in the price of RINs can affect our results of operations. The RINs we generate are sold primarily to Delek Holdings at market prices. We sold approximately $2.7 million and $8.1 million of RINs to Delek Holdings during the three and nine months ended September 30, 2021, respectively. Additionally, we sold approximately $0.8 million and $2.3 million of RINs to Delek Holdings during the three and nine months ended September 30, 2020, respectively. See below for the high, low and average prices of RINs for each of the quarterly periods in 2020 and in the three quarterly periods in 2021. All of these factors are subject to change over time. As part of our overall business strategy, management considers aspects such as location, acquisition and expansion opportunities and factors impacting the utilization of the refineries (and therefore throughput volumes), which may impact our performance in the market. 32 | Management's Discussion and Analysis Contractual Obligations There have been no material changes to our contractual obligations and commercial commitments during the three and nine months ended September 30, 2021 from those disclosed in our Annual Report on Form 10-K. Critical Accounting Policies The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, complex or subjective judgments or estimates. Based on this definition and as further described in our Annual Report on Form 10-K, we believe our critical accounting policies include the following: (i) evaluating impairment for property, plant and equipment and intangibles, and (ii) evaluating potential impairment of goodwill. During the nine months ended September 30, 2021, we updated our critical accounting policies to include accounting policies that have become critical as a result of new events. Accordingly we added a critical accounting policy related to equity method investments impairment assessment as follows: Equity Method Investments and Impairment Equity investments for which we determine we have significant influence are accounted for as equity method investments. Amounts recognized for equity method investments are included in our consolidated balance sheets and adjusted for our share of the net earnings and losses of the investee, dividends received and cash distributions from the investee, which are separately stated in our consolidated statements of income and comprehensive income and our consolidated statements of cash flows. The equity method investments are assessed for possible impairment when events indicate that the fair value of the investment may be below the carrying value. In such circumstances, we are required to determine the fair value of the investment and compare it to the carrying value. When the fair value is less than carrying value and when such condition is deemed to be other than temporary, the carrying value of the investment is considered to be impaired and is adjusted to its fair value, and the amount of the impairment is included in net income. In making the determination as to whether a decline is other than temporary, the Partnership considers such factors as the duration and extent of the decline, the investee’s financial performance, and our ability and intention to retain the investment for a period that will be sufficient to allow for any anticipated recovery in the investment’s market value. The new cost basis of the investment is not changed for subsequent recoveries in fair value. During the second quarter ended June 30, 2021, we identified the non-renewal of a significant revenue contract which expired on August 31, 2021 by a customer and major shareholder of Andeavor Logistics RIO Pipeline LLC ("Andeavor Logistics") and lower competitor tariff rates compared to FERC approved tariff rates as triggering events requiring that we perform an impairment assessment on our equity method investment. The fair value of our equity method investment was estimated using the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management’s expectations of the investee’s future revenue (including the throughput barrel per day sold and related reduced tariff rates), operating expenses and earnings before interest, taxes, depreciation and amortization, capital expenditures and an anticipated tax rate (“EBITDA”) and the estimated long term growth rate. The related cash flow forecasts are discounted using an estimated weighted average cost of capital (“WACC”) at the date of valuation. For the market approach, we utilized the estimated 2022 EBITDA multiples for guideline comparable companies applied to Andeavor Logistics' estimated 2022 EBITDA to estimate the fair value. We performed certain analyses on the most significant inputs in our valuation model to evaluate the impact of the judgments made on the fair value of the investee. This included sensitivity analysis and stress testing on certain of our inputs to our valuation model, including the estimated revenue (including the throughput barrel per day and tariff rates), EBITDA margin and WACC. Based on our analyses, we determined that there was no other than temporary impairment on our equity method investment as of June 30, 2021. As of September 30, 2021 we performed a qualitative assessment evaluating whether there were any significant changes in the key assumptions and other significant inputs in our valuation model and concluded that there were no significant changes that would warrant a quantitative assessment to be performed. Qualitative matters that may impact our estimates of the fair value of our equity method investment include assumptions regarding the timing of another throughput contract and ramp up of throughput volumes, timing of competitor tariff rates recovery compared to FERC tariff rates, the pipeline location and resultant impact on possible customers capacity utilization, the Delaware Permian Basin takeaway and production levels, regulatory impacts, competitors entering the location by building competing pipelines, and other operational issues which might affect Andeavor Logistics’ ability to scale up throughput capacity. The Partnership bases its assumptions on projected financial information that the Partnership believes is reasonable, but those assumptions require judgment and are forward looking in nature. However, actual results may differ materially from those projections. If actual results were subsequently materially lower than expected, if significant adverse changes were to occur in its operating environment, if a significant increase in the discount rate were to be needed, and/or if changes in other assumptions were to happen, the Partnership’s estimate of the fair value of its equity investment could change materially. 33 | Management's Discussion and Analysis Non-GAAP Measures Our management uses certain "non-GAAP" operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include: • Earnings before interest, taxes, depreciation and amortization ("EBITDA") - calculated as net income before net interest expense, income tax expense, depreciation and amortization expense, including amortization of customer contract intangible assets, which is included as a component of net revenues in our accompanying condensed consolidated statements of income. • Distributable cash flow - calculated as net cash flow from operating activities plus or minus changes in assets and liabilities, less maintenance capital expenditures net of reimbursements and other adjustments not expected to settle in cash. The Partnership believes this is an appropriate reflection of a liquidity measure by which users of its financial statements can assess its ability to generate cash. EBITDA and distributable cash flow are non-U.S. GAAP supplemental financial measures that management and external users of our condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: • our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods; • the ability of our assets to generate sufficient cash flow to make distributions to our unitholders; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. We believe that the presentation of EBITDA and distributable cash flow provide information useful to investors in assessing our financial condition and results of operations. EBITDA and distributable cash flow should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA and distributable cash flow may be defined differently by other partnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other partnerships, thereby diminishing their utility. For a reconciliation of EBITDA and distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, please refer to "Results of Operations" below. 34 | Management's Discussion and Analysis Summary of Financial and Other Information A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance. The following table and discussion present a summary of our consolidated results of operations for the three and nine months ended September 30, 2021 and 2020, including a reconciliation of net income to EBITDA and net cash flow provided by operating activities to distributable cash flow. Statement of Operations Data (in thousands, except unit and per unit amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net revenues: Pipelines and transportation $ 76,202 $ 71,479 $ 211,612 $ 182,872 Wholesale marketing and terminalling 113,425 70,789 299,406 240,434 Total 189,627 142,268 511,018 423,306 Operating costs and expenses: Cost of materials and other 105,129 60,692 274,995 205,877 Operating expenses (excluding depreciation and amortization) 17,345 14,230 46,942 41,423 General and administrative expenses 6,141 6,122 17,018 16,973 Depreciation and amortization 10,156 9,459 30,862 24,452 Other operating expense (income), net 273 — 54 (107) Total operating costs and expenses 139,044 90,503 369,871 288,618 Operating income 50,583 51,765 141,147 134,688 Interest expense, net 14,529 10,360 35,924 32,854 Income from equity method investments (7,261) (4,860) (17,952) (16,875) Other (income) expense, net (115) 105 (118) 103 Total non-operating costs and expenses 7,153 5,605 17,854 16,082 Income before income tax expense 43,430 46,160 123,293 118,606 Income tax (benefit) expense (194) (168) 156 67 Net income attributable to partners $ 43,624 $ 46,328 $ 123,137 $ 118,539 Comprehensive income attributable to partners $ 43,624 $ 46,328 $ 123,137 $ 118,539 EBITDA (1) $ 69,917 $ 67,782 $ 195,487 $ 181,320 Less: General partner's interest in net income, including incentive distribution rights (2) — — — 18,724 Limited partners' interest in net income $ 43,624 $ 46,328 $ 123,137 $ 99,815 Net income per limited partner unit: Common units - basic $ 1.00 $ 1.26 $ 2.83 $ 3.30 Common units - diluted $ 1.00 $ 1.26 $ 2.83 $ 3.30 Weighted average limited partner units outstanding: Common units - basic 43,454,535 36,889,761 43,447,739 30,290,051 Common units - diluted 43,468,289 36,894,043 43,457,857 30,292,261 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. (2) Prior to August 13, 2020, general partner distributions (including IDRs) consisted of the 2.0% general partner interest and IDRs, which represented the right of the general partner to receive increasing percentages of quarterly distributions of available cash from operating surplus in excess of 0.43125 per unit per quarter. In connection with the IDR Restructuring Transaction on August 13, 2020, the IDRs were eliminated and the general partner interest became a non-economic general partner interest. 35 | Management's Discussion and Analysis Non-GAAP Reconciliations The following table provides a reconciliation of EBITDA and distributable cash flow to the most directly comparable U.S. GAAP measure, or net income and net cash from operating activities, respectively. Reconciliation of net income to EBITDA (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 43,624 $ 46,328 $ 123,137 $ 118,539 Add: Income tax (benefit) expense (194) (168) 156 67 Depreciation and amortization 10,156 9,459 30,862 24,452 Amortization of customer contract intangible assets 1,802 1,803 5,408 5,408 Interest expense, net 14,529 10,360 35,924 32,854 EBITDA (1) $ 69,917 $ 67,782 $ 195,487 $ 181,320 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. Reconciliation of net cash from operating activities to distributable cash flow (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net cash provided by operating activities $ 74,752 $ 62,273 $ 222,276 $ 134,654 Changes in assets and liabilities (16,256) (2,458) (56,898) 18,541 Distributions from equity method investments in investing activities 845 1,033 6,245 2,723 Non-cash lease expense (2,460) (1,596) (6,967) (2,236) Maintenance and regulatory capital expenditures (1) (850) (27) (3,712) (760) Reimbursement from Delek Holdings for capital expenditures (2) 11 26 1,588 81 Accretion of asset retirement obligations (116) (106) (346) (320) Deferred income taxes (138) (47) (203) (990) Other operating (expense) income, net (273) — (54) 107 Distributable cash flow (3) $ 55,515 $ 59,098 $ 161,929 $ 151,800 (1) Maintenance and regulatory capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance and regulatory capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. (2) For the three and nine month periods ended September 30, 2021 and 2020, Delek Holdings reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements). (3) For a definition of distributable cash flow, please see "Non-GAAP Measures" above. 36 | Management's Discussion and Analysis Results of Operations Consolidated Results of Operations — Comparison of the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 The table below presents a summary of our consolidated results of operations. The discussion immediately following presents the consolidated results of operations (in thousands): Consolidated Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Revenues: Affiliates $ 123,519 $ 95,410 $ 308,435 289,739 Third-Party 66,108 46,858 202,583 133,567 Total Consolidated 189,627 142,268 511,018 423,306 Cost of materials and other 105,129 60,692 274,995 205,877 Operating expenses (excluding depreciation and amortization presented below) 17,345 14,230 46,942 41,423 Contribution margin 67,153 67,346 189,081 176,006 General and administrative expenses 6,141 6,122 17,018 16,973 Depreciation and amortization 10,156 9,459 30,862 24,452 Other operating expense (income), net 273 — 54 (107) Operating income $ 50,583 $ 51,765 $ 141,147 $ 134,688 Net Revenues Q3 2021 vs. Q3 2020 Net revenues increased by $47.4 million, or 33.3%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increased revenues at our Big Spring Refinery Crude Pipeline (the "BSR Crude Pipeline"), as a result of new contracts executed in the second quarter of 2020, which had higher throughput volumes during the third quarter of 2021 compared to the third quarter of 2020; • increased revenues for the Trucking Assets, due to higher volumes transported from El Dorado; • increase in revenues for the Paline pipeline and Plains connection system, due to higher throughput volumes; and • increases in the average sales prices per gallon of gasoline and diesel sold and average volumes of gasoline sold, partially offset by a decrease in the average volumes of diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased $0.93 per gallon and $0.95 per gallon, respectively; and ◦ the average volumes of gasoline sold increased by 2.9 million gallons, partially offset by a 0.5 million gallons decrease in the average volumes of diesel sold. YTD 2021 vs. YTD 2020 Net revenues increased by $87.7 million, or 20.7%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increased revenues associated with agreements executed in connection with the Big Spring Gathering Assets and the Trucking Assets acquisitions, which were effective March 31, 2020 and May 1, 2020, respectively. See Note 2 to the condensed consolidated financial statements in Item 1. Financial Statements, for additional information; • increased revenues at our BSR Crude Pipeline, as a result of new contracts executed in the second quarter of 2020; and • increases in the average sales prices per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations: 37 | Management's Discussion and Analysis ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.69 per gallon and $0.69 per gallon, respectively; and ◦ the volume of gasoline and diesel sold decreased by 10.7 million gallons and 9.0 million gallons, respectively. Such increases were partially offset by the following: • decreases in throughputs due to the impact of the severe freezing conditions that affected most of the regions where we operate resulting in lower volumes outside of contractual minimum volume commitments during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020; and • decreases in throughputs at the Paline pipeline due to scheduled pipeline maintenance. Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other increased by $44.4 million, or 73.2%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold and average volumes of gasoline sold, partially offset by a decrease in the average volumes of diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased $1.01 per gallon and $0.96 per gallon, respectively; and ◦ the average volumes of gasoline sold increased by 2.9 million gallons, partially offset by a 0.5 million gallons decrease in the average volumes of diesel sold. YTD 2021 vs. YTD 2020 Cost of materials and other increased by $69.1 million, or 33.6%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased by $0.75 per gallon and $0.68 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 10.7 million gallons and 9.0 million gallons, respectively. Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses increased by $3.1 million, or 21.9%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; • increase in energy costs, due to higher natural gas prices; and • increases in utilities, maintenance and other variable expenses due to higher throughput. YTD 2021 vs. YTD 2020 Operating expenses increased by $5.5 million, or 13.3%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in employee and outside service costs after cost cutting measures implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; • increase in energy costs due to higher natural gas prices; • increases in variable expenses such as maintenance and materials costs due to higher throughput; and • increases in utility costs as a result of significantly higher energy costs during the February 2021 severe freezing conditions that affected most of the regions where we operate. 38 | Management's Discussion and Analysis General and Administrative Expenses The changes in general and administrative expenses for both the third quarter of 2021 compared to the third quarter of 2020 and the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 were immaterial. Depreciation and Amortization Q3 2021 vs. Q3 2020 Depreciation and amortization increased by $0.7 million, or 7.4%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • additions to assets as part of operational growth projects. YTD 2021 vs. YTD 2020 Depreciation and amortization increased by $6.4 million, or 26.2%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • addition of assets to our asset base as a result of the Trucking Assets Acquisition and the Big Spring Gathering Assets Acquisition. Interest Expense Q3 2021 vs. Q3 2020 During the three months ended September 30, 2021 we incurred $14.5 million of interest expense, compared to $10.4 million during the three months ended September 30, 2020, an increase of $4.1 million, or 40.0%. This increase was primarily driven by the following: • higher fixed rate interest on the new 2028 Notes during the third quarter of 2021 compared to our floating interest rates under the DKL Credit Facility; and • partially offset by a decrease in floating interest rates applicable to the DKL Credit Facility and lower total debt levels. YTD 2021 vs. YTD 2020 During the nine months ended September 30, 2021 we incurred $35.9 million of interest expense, compared to $32.9 million during the nine months ended September 30, 2020, an increase of $3.0 million, or 9.3%. This increase was primarily driven by the following: • higher fixed rate interest on the new 2028 Notes issued during second quarter of 2021 compared to our floating interest rates under the DKL Credit Facility; • increased borrowings under the DKL Credit Facility as a result of our Big Spring Gathering Assets Acquisition, the Trucking Assets Acquisition and the IDR Restructuring Transaction; and • partially offset by a decrease in floating interest rates applicable to the DKL Credit Facility. Results from Equity Method Investments Q3 2021 vs. Q3 2020 We recognized income of $7.3 million from equity method investments during the third quarter of 2021 compared to $4.9 million for the third quarter of 2020, an increase of $2.4 million, or 49.4%. This increase was primarily driven by the following: • increase in income from our Red River equity method investment due to higher throughput volumes and resulting revenue increases. Caddo and Rio equity method investments income slightly increased as well. YTD 2021 vs. YTD 2020 During the nine months ended September 30, 2021 we recognized income of $18.0 million from equity method investments, compared to $16.9 million for the nine months ended September 30, 2020, an increase of $1.1 million, or 6.4%. This increase was primarily driven by the following: • increase in income from our Red River equity method investment due to higher throughput volumes and resulting revenue increases. Caddo and Rio equity method investments income slightly increased as well; • partially offset by lower income from our equity method investments in the first quarter of 2021 due to lower volumes as the impact of the February 2021 severe freezing conditions was pervasive across all of our equity method investments' pipeline systems. 39 | Management's Discussion and Analysis Operating Segments We review operating results in two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each reportable segment based on the segment contribution margin. Segment reporting is discussed in more detail in Note 11 to our accompanying condensed consolidated financial statements. Segment contribution margin = Net revenues - Cost of materials and other - Operating expenses, excluding depreciation and amortization Pipelines and Transportation Segment Our pipelines and transportation segment assets provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services to Delek Holdings and third parties. These assets include: • the pipeline assets used to support Delek Holdings' El Dorado refinery (the "El Dorado Assets") • the gathering system that supports transportation of crude oil to the El Dorado Refinery (the "El Dorado Gathering System") • the Paline Pipeline System • the East Texas Crude Logistics System • the Tyler-Big Sandy Pipeline • the El Dorado Tank Assets and El Dorado Rail Offloading Racks • the Tyler Tank Assets and Tyler Crude Tank • the Greenville-Mount Pleasant Pipeline and Greenville Storage Facility • refined product pipeline capacity leased from Enterprise TE Products Pipeline Company ("Enterprise") that runs from El Dorado, Arkansas to our Memphis terminal and the Big Spring Pipeline • pipelines and storage assets acquired in the Big Spring Logistic Assets Acquisition • assets acquired in the Big Spring Gathering Assets Acquisition • assets acquired in the Trucking Assets Acquisition In addition to these operating systems, we own or lease 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties. The following tables and discussion present the results of operations and certain operating statistics of the pipelines and transportation segment for the three and nine months ended September 30, 2021 and 2020: Pipelines and Transportation Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Revenues: Affiliates $ 70,879 $ 68,444 $ 199,591 $ 168,285 Third-Party 5,323 3,035 12,021 14,587 Total Pipelines and Transportation 76,202 71,479 211,612 182,872 Cost of materials and other 15,170 14,342 42,595 31,622 Operating expenses (excluding depreciation and amortization presented below) 13,680 10,749 34,710 31,936 Segment contribution margin $ 47,352 $ 46,388 $ 134,307 $ 119,314 Throughputs (average bpd) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 El Dorado Assets: Crude pipelines (non-gathered) 81,929 78,244 60,344 76,750 Refined products pipelines to Enterprise Systems 62,263 55,740 42,733 55,315 El Dorado Gathering System 14,086 13,659 14,056 13,520 East Texas Crude Logistics System 18,644 22,591 24,045 15,705 Big Spring Gathering System 84,325 90,719 79,251 85,845 Plains Connection System 131,571 104,314 120,905 96,961 40 | Management's Discussion and Analysis Comparison of the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 Net Revenues Q3 2021 vs. Q3 2020 Net revenues for the pipelines and transportation segment increased by $4.7 million, or 6.6%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increased revenues at our BSR Crude Pipeline, as a result of new contracts executed in the second quarter of 2020, which had higher throughput volumes during the third quarter of 2021 compared to the third quarter of 2020; • increased revenues for the El Dorado trucking due to higher volumes transported; and • increase in revenues for the Paline pipeline and Plains connection due to higher throughput volumes. YTD 2021 vs. YTD 2020 Net revenues for the pipelines and transportation segment increased by $28.7 million, or 15.7%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increased revenues associated with agreements executed in connection with the Big Spring Gathering Assets Acquisition and the Trucking Assets Acquisition, which were effective March 31, 2020 and May 1, 2020, respectively. See Note 2 to the condensed consolidated financial statements in Item 1. Financial Statements, for additional information; • increased revenues at our BSR Crude Pipeline, as a result of new contracts executed in the second quarter of 2020, during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020; and • partially offset by decreases in throughputs due to the impact of the severe freezing conditions that affected most of the regions where we operate resulting in lower volumes outside of contractual minimum volume commitments and decreases in throughputs at the Paline pipeline due to scheduled pipeline maintenance during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020. Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other for the pipelines and transportation segment increased $0.8 million, or 5.8%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in transportation costs related to our trucking assets, including driver wages and benefits and fuel expenses proportionate to increase in fees, insurance, supplies and maintenance expenses. YTD 2021 vs. YTD 2020 Cost of materials and other for the pipelines and transportation segment increased by $11.0 million, or 34.7%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in transportation costs related to our Trucking Assets due to the Trucking Assets Acquisition, which was effective May 1, 2020; and • increases in driver wages and benefits and fuel expense proportionate to increases in fees, insurance, supplies and maintenance expenses. Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses for the pipelines and transportation segment increased by $2.9 million, or 27.3%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increase in employee and outside service costs compared to same period prior year when cost cutting measures were implemented to respond to the COVID-19 Pandemic including delaying non-essential projects; • increase in energy costs due to higher natural gas prices; and • increase in utilities and other variable expenses due to higher throughputs. 41 | Management's Discussion and Analysis YTD 2021 vs. YTD 2020 Operating expenses for the pipelines and transportation segment increased by $2.8 million, or 8.7%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increase in energy costs due to higher natural gas prices; and • increase in utility costs as a result of significantly higher energy costs during the February 2021 severe freezing conditions that affected most of the regions where we operate. Contribution Margin Q3 2021 vs. Q3 2020 Contribution margin for the pipelines and transportation segment increased by $1.0 million, or 2.1%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in revenue due to higher throughput volumes as explained above; and • partially offset by increases in operating expenses. YTD 2021 vs. YTD 2020 Contribution margin for the pipelines and transportation segment increased by $15.0 million, or 12.6%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in revenues associated with agreements executed in connection with the Big Spring Gathering Assets Acquisition, the Trucking Assets Acquisition and the BSR Crude Pipeline; and • partially offset by the increase in cost of materials and other in connection with the Trucking Assets Acquisition and an increase in operating expenses. 42 | Management's Discussion and Analysis Wholesale Marketing and Terminalling Segment We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties. The tables and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three and nine months ended September 30, 2021 and 2020 : Wholesale Marketing and Terminalling Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Revenues: Affiliates $ 52,640 $ 26,966 $ 108,844 $ 121,454 Third-Party 60,785 43,823 190,562 118,980 Total Wholesale Marketing and Terminalling 113,425 70,789 299,406 240,434 Cost of materials and other 89,959 46,350 232,400 174,255 Operating expenses (excluding depreciation and amortization presented below) 3,665 3,481 12,232 9,487 Segment contribution margin $ 19,801 $ 20,958 $ 54,774 $ 56,692 Operating Information Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 East Texas - Tyler Refinery sales volumes (average bpd) (1) 71,847 73,417 72,791 70,376 Big Spring marketing throughputs (average bpd) 81,880 78,659 76,680 73,701 West Texas marketing throughputs (average bpd) 10,560 9,948 10,033 11,718 West Texas gross margin per barrel $ 3.33 $ 3.42 $ 3.64 $ 2.37 Terminalling throughputs (average bpd) (2) 144,355 160,843 142,959 145,240 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville, Tennessee terminals. Comparison of the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 Net Revenues Q3 2021 vs. Q3 2020 Net revenues for the wholesale marketing and terminalling segment increased by $42.6 million, or 60.2%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in the average sales prices per gallon of gasoline and diesel sold and average volumes of gasoline sold, partially offset by a decrease in the average volumes of diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased $0.93 per gallon and $0.95 per gallon, respectively; and ◦ the average volumes of gasoline sold increased by 2.9 million gallons, partially offset by a 0.5 million gallons decrease in the average volumes of diesel sold. YTD 2021 vs. YTD 2020 Net revenues for the wholesale marketing and terminalling segment increased by $59.0 million, or 24.5%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: 43 | Management's Discussion and Analysis • increases in the average sales prices per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.69 per gallon and $0.69 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 10.7 million gallons and 9.0 million gallons, respectively. The following charts show summaries of the average sales prices per gallon of gasoline and diesel and refined products volume impacting our West Texas operations. Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other for our wholesale marketing and terminalling segment increased by $43.6 million, or 94.1%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold and average volumes of gasoline sold, partially offset by decreases in the average volumes of diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased $1.01 per gallon and $0.96 per gallon, respectively; and ◦ the average volumes of gasoline sold increased by 2.9 million gallons, partially offset by a 0.5 million gallons decrease in the average volumes of diesel sold. 44 | Management's Discussion and Analysis YTD 2021 vs. YTD 2020 Cost of materials and other for our wholesale marketing and terminalling segment increased by $58.1 million, or 33.4%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased by $0.75 per gallon and $0.68 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 10.7 million gallons and 9.0 million gallons, respectively. The following chart shows a summary of the average prices per gallon of gasoline and diesel sold in our West Texas operations for the three and nine months ended September 30, 2021 and 2020. Refer to the Refined Products Volume chart above for a summary of volumes impacting our West Texas operations. Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses increased by $0.2 million, or 5.3%, in the in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in variable expenses such as utilities, maintenance and material costs; and • this increase was partially offset by lower operating costs associated with allocated contract services pertaining to certain of our assets. YTD 2021 vs. YTD 2020 Operating expenses increased by $2.7 million, or 28.9%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in variable expenses such as utilities, maintenance and material costs; • increase in utility costs as a result of significantly higher energy costs during the February 2021 severe freezing conditions that affected most of the regions where we operate; and • this increase was partially offset by lower operating costs associated with allocated contract services pertaining to certain of our assets. Contribution Margin Q3 2021 vs. Q3 2020 Contribution margin for the wholesale marketing and terminalling segment decreased by $1.2 million, or 5.5%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: 45 | Management's Discussion and Analysis • increase in cost of materials and other due to increases in average cost per gallon of diesel and gasoline sold as described above. Such decreases were offset by: • increase in revenue due to increases in average price per gallon of diesel and gasoline as described above. YTD 2021 vs. YTD 2020 The decrease of $1.9 million, or 3.4%, in contribution margin for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to increases in cost of materials and other and operating expenses offset by increases in revenue as described above. Liquidity and Capital Resources We consider the following when assessing our liquidity and capital resources: (i) cash generated from operations; (iii) potential issuance of additional equity; and (ii) borrowings under our revolving credit facility; (iv) potential issuance of additional debt securities. At September 30, 2021 our total liquidity amounted to $594.0 million, comprised of $589.1 million in unused credit commitments under the DKL Credit Facility and $4.9 million in cash and cash equivalents. We have the ability to increase the DKL Credit Facility to $1.0 billion subject to receiving increased or new commitments from lenders and meeting certain requirements under the credit facility. Historically, we have generated adequate cash from operations to fund ongoing working capital requirements, pay quarterly cash distributions and operational capital expenditures, and we expect the same to continue in the foreseeable future. Other funding sources, including the issuance of additional debt securities, have been utilized to fund growth capital projects such as dropdowns. In addition, we have historically been able to source funding at rates that reflect market conditions, our financial position and our credit ratings. We continue to monitor market conditions, our financial position and our credit ratings and expect future funding sources to be at rates that are sustainable and profitable for the Partnership. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us. We believe we have sufficient financial resources from the above sources to meet our funding requirements in the next 12 months, including working capital requirements, quarterly cash distributions and capital expenditures. Nevertheless, our ability to satisfy working capital requirements, to service our debt obligations, to fund planned capital expenditures, or to pay distributions will depend upon future operating performance, which will be affected by prevailing economic conditions in the oil industry and other financial and business factors, including the current COVID-19 Pandemic and crude oil prices, some of which are beyond our control. Our largest customer is Delek Holdings, a related party, with whom we have various commercial agreements. Delek Holdings has initiated several steps as part of a strategic plan to navigate the current volatile markets and preserve or enhance its liquidity, including re-negotiating and extending financing arrangements, temporary suspension of growth and non-essential projects, reductions in capital and operating expenditures, divesting of non-strategic and underperforming assets, suspension of its stock repurchases and dividends, and exploring other potential financing opportunities. We believe such actions will allow Delek Holdings to continue to honor its commercial agreements with us. In addition, we eliminated the IDRs which helped lower our cost of capital and preserve our liquidity. We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to a significant decline in crude oil prices or uncertainty created by the COVID-19 Pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our debt agreements. Management continues to actively respond to the impact of the COVID-19 Pandemic to enhance our liquidity position. Such actions include seeking alternative financing solutions and enacting cost reduction measures. Refer to the Business Overview section of this MD&A for a complete discussion of the uncertainties identified by management and the actions taken to respond to the COVID-19 Pandemic. We believe we were in compliance with the covenants in all our debt facilities as of September 30, 2021. After considering the potential effect of the uncertainty created by the COVID-19 Pandemic on our operations, we currently expect to remain in compliance with our debt covenants. See Note 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Cash Distributions On October 26, 2021, the board of directors of our general partner declared a distribution of $0.950 per common unit (the "Distribution"), which equates to approximately $41.3 million per quarter, based on the number of common units expected to be outstanding as of November 5, 2021. The Distribution is expected to be paid on November 10, 2021 to common unitholders of record on November 5, 2021 46 | Management's Discussion and Analysis and represents a 5.0% increase over the third quarter 2020 distribution. We have set a distribution growth guidance of 5% for the full year 2021. This increase in the distribution is consistent with our intent to maintain an attractive distribution growth profile over the long term. Although our Partnership Agreement requires that we distribute all of our available cash each quarter, we do not otherwise have a legal obligation to distribute any particular amount per common unit. The table below summarizes the quarterly distributions related to our quarterly financial results: Quarter Ended Total Quarterly Distribution Per Limited Partner Unit Total Quarterly Distribution Per Limited Partner Unit, Annualized Total Cash Distribution, including general partner interest and IDRs (in thousands) Date of Distribution Unitholders Record Date September 30, 2020 $ 0.905 $ 3.62 $ 39,308 November 12, 2020 November 6, 2020 December 31, 2020 $ 0.910 $ 3.64 $ 39,533 February 9, 2021 February 2, 2021 March 31, 2021 $ 0.920 $ 3.68 $ 39,968 May 14, 2021 May 10, 2021 June 30, 2021 $ 0.940 $ 3.76 $ 40,846 August 11, 2021 August 5, 2021 September 30, 2021 $ 0.950 $ 3.80 $ 41,286 November 10, 2021 (1) November 5, 2021 (1) Expected date of distribution. Cash Flows The following table sets forth a summary of our consolidated cash flows for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by operating activities $ 222,276 $ 134,654 Net cash used in investing activities (7,971) (116,419) Net cash (used in) provided by financing activities (213,684) (17,756) Net (decrease) increase in cash and cash equivalents $ 621 $ 479 Operating Activities Net cash provided by operating activities was $222.3 million for the nine months ended September 30, 2021, compared to $134.7 million for the nine months ended September 30, 2020, resulting in a $87.6 million increase in net cash provided by operating activities. The cash receipts from customer activities increased by $89.3 million and cash payments to suppliers and for allocations from Delek Holdings for salaries increased by $6.7 million. In addition, cash dividends received from equity method investments decreased by $2.7 million and cash paid for debt interest decreased by $7.7 million. Investing Activities Net cash used in investing activities decreased by $108.4 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease in cash used in investing activities was primarily due to lower contributions to equity method investments and no acquisitions during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. We disbursed $1.4 million in additional contributions to our equity method investments during the nine months ended September 30, 2021 compared to $11.8 million during the nine months ended September 30, 2020. The Big Spring Gathering Assets Acquisition, effective on March 31, 2020, was partially financed with cash from a drawdown of the DKL Credit Facility amounting to $100.0 million which was recorded in investing activities and the Trucking Assets Acquisition was financed with cash from drawdowns of the DKL Credit Facility amounting to $48 million of which $0.5 million was recorded as investing activity with $47.6 million recorded in financing activities as a distribution to Delek Holdings and the other owners of our general partner prior to the IDR Restructuring Transaction pursuant to the asset acquisitions under common control guidance. Transaction costs paid amounting to $1.0 million were capitalized for the Big Spring Gathering Assets Acquisition and the Trucking Assets Acquisition. There was no asset acquisition during the nine months ended September 30, 2021. In addition there were additions to property, plant and equipment amounting to $12.4 million, additions to intangible assets amounting to $0.7 million and distributions from equity method investments amounting $6.2 million during the nine months ended September 30, 2021 compared to additions to property, plant and equipment amounting to $6.9 million and distributions from equity method investments amounting to $2.7 million during the nine months ended September 30, 2020. 47 | Management's Discussion and Analysis Financing Activities Net cash used in financing activities amounted to $213.7 million during the nine months ended September 30, 2021 compared to $17.8 million net cash provided by financing activities during the nine months ended September 30, 2020. We repaid $485.7 million under the revolving credit facility during the nine months ended September 30, 2021, compared to net proceeds of $172.3 million under the revolving credit facility during the nine months ended September 30, 2020. In addition, we paid quarterly cash distributions totaling $120.4 million during the nine months ended September 30, 2021, compared to quarterly cash distributions totaling $97.5 million during the nine months ended September 30, 2020. Payments to Delek Holdings unitholders related to Trucking Assets Acquisition amounting to $47.6 million and payments to our general partner for conversion of its interest and elimination of IDR amounting to $45.0 million were recorded in financing activities during the nine months ended September 30, 2020 and there were no such payments during the nine months ended September 30, 2021. On May 24, 2021, the Partnership and our wholly owned subsidiary Delek Logistics Finance Corp. ("Finance Corp." and together with the Partnership, the "Issuers") issued $400.0 million in aggregate principal amount of 7.125% senior notes due 2028 (the "2028 Notes"). Proceeds of $400.0 million were received and deferred financing costs amounting to $6.2 million were paid. The Partnership used the net proceeds received from the sale of the 2028 Notes to repay portion of the outstanding borrowings under the revolving credit facility. The sources of cash during the nine months ended September 30, 2020 primarily consisted of the $100.0 million drawdown under the DKL Credit Facility to part-finance the Big Spring Gathering Assets Acquisition. The Big Spring Gathering Assets Acquisition was also financed by the issuance of 5.0 million units to Delek US Energy, Inc. (a wholly owned subsidiary of Delek Holdings). Debt Overview As of September 30, 2021, we had total indebtedness of $901.4 million comprised of $260.9 million under the amended and restated senior secured revolving agreement (the "DKL Credit Facility"), $246.4 million of 6.75% senior notes due 2025 (the “2025 Notes”), the latter net of deferred financing costs and original issue discount, and $394.1 million of the 2028 Notes, net of deferred financing costs. Deferred financing costs and original issue discount on the 2025 Notes amounted to $2.7 million and $0.9 million, respectively. Deferred financing costs on the 2028 Notes amounted to $5.9 million. The decrease of $90.9 million in our long-term debt balance compared to the balance at December 31, 2020 resulted from the payments under the DKL Credit Facility during the nine months ended September 30, 2021, partially offset by the amortization of the deferred financing costs and original issuance discount under our 2025 and 2028 Notes and by the incurrence of the new 2028 Notes. As of September 30, 2021, our total indebtedness consisted of: • An aggregate principal amount of $260.9 million under the DKL Credit Facility ("revolving credit facility"), due on September 28, 2023, with an average borrowing rate of 2.62%. • An aggregate principal amount of $246.4 million, under the 2025 Notes (6.75% senior notes), due in 2025, with an effective interest rate of 7.21%. • An aggregate principal amount of $394.1 million, under the 2028 Notes (7.125% senior notes), due in 2028, with an effective interest rate of 7.41%. We believe we were in compliance with the covenants in all our debt facilities as of September 30, 2021. See Note 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Agreements Governing Certain Indebtedness of Delek Holdings Although we are not contractually bound by and are not liable for Delek Holdings' debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, certain of Delek Holdings' credit arrangements require that Delek Holdings meet certain minimum covenant levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders' equity to adjusted total assets. Delek Holdings, due to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek Holdings to violate these and any other covenants in its credit arrangements or otherwise be in default under any of its credit arrangements. As a result we cannot assure you that such covenants will not impact our ability to use the full capacity under our revolving credit facility in the future. Delek Holdings' level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek Holdings' level of indebtedness, financial performance and credit ratings. Equity Units Overview On August 13, 2020, we closed the IDR Restructuring Transaction. To effect this transaction, our partnership agreement was amended and restated. See Note 3 to our accompanying condensed consolidated financial statements for additional details. In August 2020, we filed a shelf registration statement, which subsequently became effective, with the SEC for the proposed re-sale or disposition from time to time by Delek Holdings of up to 14.0 million common limited partner units representing limited partner interests in the Partnership. We will not sell any securities under this shelf registration statement and we will not receive any proceeds from the sale of the securities by Delek Holdings. 48 | Management's Discussion and Analysis On March 31, 2020, we issued 5.0 million units to Delek Holdings as part of the consideration for the Big Spring Gathering Assets Acquisition. In connection with the issuance of these units and in accordance with the Partnership Agreement, we issued additional general partner units in an amount necessary to maintain the 2% general partner interest as defined in the Partnership Agreement. Contemporaneous with the above issuance, the Board of the general partner waived distributions in respect of the IDRs associated with the 5.0 million Additional Units for at least two years, through at least the distribution for the quarter ending March 31, 2022 ("IDR Waiver"). The IDR Waiver essentially reduced the distribution made to the holders of the IDRs during this period, as the holders would not receive a share of the distribution made on the Additional Units. An additional waiver letter was signed that waived all of the distributions for the first quarter of 2020 on the Additional Units with respect to base distributions and the IDRs. The IDR Restructuring Transaction on August 13, 2020 permanently eliminated all of the IDRs. See Note 3 to our accompanying condensed consolidated financial statements for additional details. Capital Spending A key component of our long-term strategy is our capital expenditure program. The following table summarizes our actual capital expenditures for the nine months ended September 30, 2021 and planned capital expenditures for the full year 2021 by segment and by major category (in thousands): Full Year 2021 Forecast Nine Months Ended September 30, 2021 Pipelines and Transportation Regulatory (2) $ 2,151 $ 1,046 Maintenance (1) 223 95 Discretionary projects (2) 16,008 8,805 Pipelines and transportation segment total $ 18,382 $ 9,946 Wholesale Marketing and Terminalling Regulatory (3) $ 1,291 $ 311 Maintenance (1) 1,354 1,083 Discretionary (3) 3,553 3,186 Wholesale marketing and terminalling segment total $ 6,198 $ 4,580 Total capital spending $ 24,580 $ 14,526 (1) Maintenance capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines, tanks and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Delek Holdings has agreed to reimburse us with respect to certain assets it has transferred to us pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements). (2) The majority of the $2.2 million budgeted for regulatory projects in the pipelines and transportation segment is expected to be spent on certain of our pipelines to maintain their operational integrity. The majority of the $16.0 million for discretionary projects in the pipelines and transportation segment is expected to be spent on scheduled maintenance and improvements to certain of our tanks and development of our DPG assets. These expenditures have historically been and will continue to be financed through cash generated from operations. (3) The majority of the $1.3 million and $3.6 million budgeted for regulatory and discretionary projects in the wholesale marketing and terminalling segment relates to scheduled maintenance and improvements on our terminalling tanks and racks at certain of our terminals. These expenditures have historically been and will continue to be financed through cash generated from operations. The amount of our capital expenditure budget is subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects. For example, we may experience increases in the cost of and/or timing to obtain necessary equipment required for our continued compliance with government regulations or to complete improvement projects. Additionally, the scope and cost of employee or contractor labor expense related to installation of that equipment could increase from our projections. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q. 49 | Management's Discussion and Analysis