Delek Logistics Partners, LP 10-K

ITEM 7. 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 consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (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,” or “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 December 20, 2021, Delek Holdings announced a program to sell certain common limited partner units representing limited partner interests in the Partnership. See Note 12 to our consolidated financial statements Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information. 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. See Note 11 to our consolidated financial statements Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information. In May 2021, we executed an exclusive supply and strategic relationship agreement with Baker Petrolite LLC (an affiliate of Baker Hughes Company) ("Baker"). See "2021 Developments" for further details. 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 (@DelekLogistics). 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 Annual Report on Form 10-K (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, 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: • 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; 47 | Management's Discussion and Analysis • 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; • significant operational, investment or other changes required by existing or future environmental statutes and regulations, including international agreements and national or regional legislation and regulatory measures to limit or reduce greenhouse gas emissions; • 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; • the effects of future litigation or environmental liabilities that are not covered by insurance; and • other factors discussed elsewhere in this 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, 48 | Management's Discussion and Analysis 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. See "Part 1—Items 1 and 2. Business and Properties—Company Overview" for further details. U.S. economic activity was on a recovery trend during the year ended December 31, 2021. The spike in number of new cases due to new COVID-19 variants, with most recent cases related to the Omicron variant, dampened the expectations of some economists regarding economic recovery and increasing demand for oil. For example, due to travel restrictions put in place as a result of Omicron, the global oil demand forecast for 2022 was originally revised down by analysts. However, the wave of infections related to the Omicron variant appears to be less severe and potentially of shorter duration than prior waves. Consequently, tailwinds in the midstream industry remained intact, with most industry players providing solid performance in 2021 supported by a macro recovery in the oil and gas industry and positive company-level developments. U.S. oil production, crucial to midstream industry performance, has been steadily rising amid higher crude oil prices and positive general economic sentiments. However, we remain subject to heightened levels of uncertainty and increased risks related to the on-going impact of the COVID-19 Pandemic, with possible increase in new infection rates and the spread of new variants of the virus, which could have a negative impact oil demand and production. 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. 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. 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 December 31, 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 corporate employees seconded by Delek Holdings to work for the Partnership are personally affected by the illness, both through direct infection and quarantine procedures. Increasingly unstable environmental conditions and spontaneous extreme weather events are making it costlier and more difficult for oil and gas companies to operate in certain environments. Consequently, climate-change, and related current and proposed regulations, is directly and indirectly hitting industry bottom lines globally and in specific geographic areas where we operate. Current and proposed climate-change and environmental regulations, laws and government policies affect where and how companies invest, conduct their operations and formulate their products and, in some cases, limit their profits directly. We remain committed to complying with all regulations, laws and government policies designed to curb the growing climate-change crisis. The current and future impact of climate-change and compliance initiatives to our logistic operations remain uncertain. During the year ended December 31, 2021, our West Texas wholesale marketing business, many of our pipeline and transportation customers, and customers of our joint venture entities, experienced an increase in demand and pricing due to the resumption of some economic activities as discussed above. 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 and revenue streams of our joint venture entities 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 and climate-change 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. generally accepted accounting principles, we have considered them in the preparation of our consolidated financial statements for the year ended December 31, 2021, which are included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. 49 | Management's Discussion and Analysis 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 corporate employees seconded by Delek Holdings to work for the Partnership 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 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 this Annual Report on Form 10-K for further discussion of risks associated with the COVID-19 Pandemic and climate-change. Our Reporting Segments and Assets Our business consists of three 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 typically 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. Investments in Pipeline Joint Ventures The Partnership owns a portion of three joint ventures (accounted for as equity method investments) that have constructed separate crude oil pipeline systems and related ancillary assets, which serve third parties and subsidiaries of Delek Holdings. 2021 Developments Sale of Common Units by Delek Holdings On December 22, 2021, Delek Holdings issued a press release regarding a program to sell up to 434,590 of its common limited partner units, representing limited partner interests in the Partnership, over the next three months in open market transactions. We will not sell any securities under this program and we will not receive any proceeds from the sale of the securities by Delek Holdings. See Note 4 to our accompanying consolidated financial statements for additional details. 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. On January 20, 2022 the FERC reduced the index by approximately 1% 50 | Management's Discussion and Analysis and ordered affected operators to file new tariffs consistent with the reduction to be effective from and after March 1, 2022. 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%. See "Part 1—Items 1 and 2. Business and Properties—Company Overview—2021 Developments" for further details. 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 portion of the outstanding borrowings under our revolving credit facility. See Note 11 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further 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. Business Strategies Our objectives are to maintain stable cash flows and to grow the quarterly distributions paid to our unitholders over time. We are focused on growing our asset base within our geographic area through acquisitions, project development, joint ventures, enhancing our existing systems and lowering our carbon footprint. While we will continue to evaluate ways to provide Delek Holdings with logistics services, our emphasis will be to increase the logistics services that we offer to third parties. We intend to achieve these objectives through the following business strategies: • Generate Stable Cash Flow. We will continue to pursue opportunities to provide logistics, marketing and other services to Delek Holdings and third parties pursuant to long-term, fee-based contracts. In new service contracts, we will endeavor to include minimum volume throughput or other commitments, similar to those included in our current commercial agreements with Delek Holdings. • Focus on Growing Our Business. We intend to evaluate and pursue opportunities to grow our business through both strategic acquisitions and expansion and construction projects, both internally funded or in combination with potential external partners and through investments in joint ventures. Additionally, we believe that our strong relationship with Delek Holdings will enhance our opportunities to grow our business. ◦ Pursue Acquisitions . We plan to pursue strategic acquisitions that both complement our existing assets and provide attractive returns for our unitholders. As we continue to grow through acquisitions, we believe we will be able to increase our third party business. In addition to those opportunities to acquire assets from Delek Holdings described below, we believe that our current asset base, and our knowledge of the regional markets in which we operate, will enable us to target and complete attractive third-party acquisitions. ◦ Investments in Joint Ventures. We have grown our asset base to include investments in joint ventures, which have contributed to our initiative to grow our midstream business, while increasing our crude oil sourcing flexibility. We intend to continue evaluating growth opportunities through these investments. • Engage in Mutually Beneficial Transactions with Delek Holdings. Delek Holdings has granted us a right of first offer on certain logistics assets. We intend to review our right to purchase any such assets as they are offered to us under the terms of the right of first offer, from time to time. Delek Holdings is also required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek Holdings may acquire or construct in the future. Further, we anticipate additional growth opportunities through subsequent dropdowns of logistics assets acquired or developed by Delek Holdings. For example, Delek Holdings anticipates offering us certain gathering and logistics assets. However, there can be no assurance as to the timing of any such transaction or whether or on what terms dropdowns will be offered to us by Delek Holdings. We continue to evaluate options with respect to dropdown transactions, which may include changes in capital structure. ◦ Pursue Attractive Expansion and Construction Opportunities. We intend to pursue organic growth opportunities that complement our existing businesses or that provide attractive returns within or outside our current geographic footprint. We plan to evaluate potential opportunities to make capital investments that will be used to expand our existing asset base through the expansion and construction of new logistics assets to support growth of any of our customers', including Delek Holdings', businesses and from increased third-party activity. These construction projects may be developed either through joint venture relationships or by us acting independently, depending on size and scale. • Optimize Our Existing Assets and Expand Our Customer Base. We seek to enhance the profitability of our existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization. We also expect to further diversify our customer base by increasing third-party throughput volumes running through certain of our existing systems and expanding our existing asset portfolio to service more third-party customers. 51 | Management's Discussion and Analysis • Lowering Our Carbon Footprint. We seek to grow our business whilst staying conscious of and minimizing the negative environmental impact. We will continue investing in cutting edge technologies that will reduce our carbon emissions as we achieve our growth objectives and sustainably improve unitholder returns. We expect to achieve this objective through ESG-Conscious Investments with Clear Value Propositions and Sustainable Returns. 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 Note 4 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K 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 4 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K 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) ■ net income of joint ventures 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, except for the investments in pipeline joint ventures segment. 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 Renewable Identification Numbers ("RINs"). Historically, the profitability of our wholesale 52 | Management's Discussion and Analysis marketing operations has been affected by commodity price volatility, (specifically as it relates to changes in the price of refined products between the time we purchase such products from our suppliers and the time we sell the products to our wholesale customers), and the fluctuation in the value of RINs. Commodity price volatility may also impact our wholesale marketing operations when the selling price of refined products does not adjust as quickly as the purchase price. Our wholesale marketing gross margin may also be impacted by the fixed price ethanol agreements we enter into to fix the price we pay for ethanol. Operating and Maintenance Expenses We seek to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses include the costs associated with the operation of owned terminals and pipelines and terminalling expenses at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business. These expenses generally remain relatively stable across broad ranges of throughput volumes, but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of said 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. Financing The Partnership paid a cash distribution to its unitholders at a distribution rate of $0.975 per unit for the quarter ended December 31, 2021 ($3.90 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 revolving credit facility and any potential future issuances of equity and debt securities. See Note 12 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a discussion of historic cash distributions. How We Evaluate Our Investments in Pipeline Joint Ventures We make strategic investments in pipeline joint ventures generally when it provides an economic benefit in terms of pipeline access we can use for our existing or future customers and when we expect a rate of return that meets our internal investment criteria. Our existing investments in pipeline joint ventures all provide a combination of strategic benefit and return on investment. The strategic benefit for each is described below: • The RIO Pipeline is positioned in the Delaware basin and benefits from drilling activity in the area, while also offering producers and shippers connections to Midland, Texas takeaway pipelines; • The Caddo Pipeline provides crude oil logistics connectivity for shippers from Longview, Texas area to Shreveport, Louisiana area; and • The Red River Pipeline provides crude oil transportation and optionality from Cushing, Oklahoma to Longview, Texas area and connectivity to our Caddo JV along with DKL Paline pipeline for access to Gulf Coast markets. It also has additional expansion optionality. 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 months and year ended December 31, 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 months and year ended December 31, 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 months and year ended December 31, 2021 were steadily increasing. 53 | Management's Discussion and Analysis The price of oil (WTI Cushing) closed at $76.99 per barrel on December 31, 2021, $28.47 per barrel higher than on December 31, 2020. The opening January 2021 price of oil (WTI Cushing) was $47.62, increased to $61.45 beginning April 2021 and reached a high of $84.65 per barrel on October 26, 2021. Due to the sustained increase in oil prices, during the three months and year ended December 31, 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 remain positively cautious about the recovery in demand and price of crude oil as it is not without volatility. The COVID-19 Pandemic, future OPEC+ decisions, global geopolitical and economic uncertainty continue to contribute to volatility in the financial and commodity markets. Our exposure to crude oil production, demand and commodity price fluctuations in our pipelines and transportation segment and our joint venture entities was limited due to minimum volume commitments under existing throughput contracts with customers, but continued pressure on our customers could present risks to our existing and new business opportunities as well as on collectability on our receivables. 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 year ended December 31, 2021 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 year ended December 31, 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 chart below for the high, low and average price per barrel of WTI crude oil for each of the quarterly periods during the years ended December 31, 2021 and 2020. Also, the volatility of refined products prices may impact our margin in the West Texas operations when the selling price of refined products does not adjust as quickly as the purchase price. See below for the range of prices per gallon of gasoline and diesel for each of the quarterly periods during the years ended December 31, 2021 and 2020. 54 | Management's Discussion and Analysis 55 | 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 $10.3 million and $3.4 million of RINs to Delek Holdings during the years ended December 31, 2021 and 2020, respectively. See below for the high, low and average prices of RINs for each of the quarterly periods during the years ended December 31, 2021 and 2020. 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. 56 | 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 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 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. See below for a reconciliation of EBITDA and distributable cash flow to their most directly comparable U.S. GAAP financial measures. Non-GAAP Reconciliations The following table provides a reconciliation of EBITDA and distributable cash flow (which are defined above) 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) Year Ended December 31, 2021 2020 Net income $ 164,822 $ 159,256 Add: Income tax expense 153 223 Depreciation and amortization 42,770 35,731 Amortization of customer contract intangible assets 7,211 7,211 Interest expense, net 50,221 42,874 EBITDA $ 265,177 $ 245,295 Reconciliation of net cash from operating activities to distributable cash flow (in thousands) Year Ended December 31, 2021 2020 Net cash provided by operating activities $ 275,162 $ 193,016 Changes in assets and liabilities (51,429) 19,777 Distributions from equity method investments in investing activities 8,774 2,741 Non-cash lease expense (9,652) (6,075) Maintenance and regulatory capital expenditures (1) (8,232) (1,296) Reimbursement from Delek Holdings for capital expenditures (2) 1,913 263 Accretion of asset retirement obligations (461) (427) Deferred income taxes (353) (401) Other operating income, net 59 66 Distributable cash flow $ 215,781 $ 207,664 (1) Maintenance and regulatory capital expenditures represent cash expenditures (including 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 include 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 years ended December 31, 2021 and 2020, Delek Holdings reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 4 to our accompanying consolidated financial statements). 57 | Management's Discussion and Analysis Results of Operations A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations but should not serve as the only criteria for predicting our future performance. Consolidated Results of Operations - Comparison of the Year Ended December 31, 2021 versus the Year Ended December 31, 2020 The following table presents a summary of our consolidated results of operations and our segment operating performance for the years ended December 31, 2021 and December 31, 2020 (in thousands). The discussion of the year-over-year changes immediately following presents the consolidated results of operations for the year ended December 31, 2021. A detailed discussion of the fiscal 2020 year-over-year changes can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the Annual Report on Form 10-K filed on March 1, 2021. Consolidated Year Ended December 31, 2021 2020 Net revenues: Affiliate $ 418,826 $ 382,666 Third-Party 282,076 180,752 Total Consolidated 700,902 563,418 Cost of materials and other 384,409 269,094 Operating expenses (excluding depreciation and amortization presented below) 60,735 56,279 Contribution margin 255,758 238,045 General and administrative expenses 22,545 22,587 Depreciation and amortization 42,770 35,731 Other operating expense, net (59) (66) Operating income $ 190,502 $ 179,793 Interest expense, net 50,221 42,874 Income from equity method investments (24,575) (22,693) Other (income) expense, net (119) 133 Total non-operating expenses, net 25,527 20,314 Income before income tax expense 164,975 159,479 Income tax expense 153 223 Net income attributable to partners $ 164,822 $ 159,256 Net Revenues Net revenues increased by $137.5 million, or 24.4%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by the following: • increased revenues associated with agreements executed in connection with the Permian Gathering Assets (formerly referred to as the Big Spring Gathering Assets Acquisition) and the Trucking Assets acquisitions, which were effective March 31, 2020 and May 1, 2020, respectively. See Note 3 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, 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: ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.78 per gallon and $0.83 per gallon, respectively; and ◦ the volume of gasoline and diesel sold decreased by 10.5 million gallons and 8.8 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 year ended December 31, 2021 when compared to the year ended December 31, 2020; and 58 | Management's Discussion and Analysis • decreases in throughputs at the Paline Pipeline due to scheduled pipeline maintenance. Cost of Materials and Other Cost of materials and other increased by $115.3 million, or 42.9%, in the year ended December 31, 2021 compared to the year ended December 31, 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 $0.83 per gallon and $0.80 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 10.5 million gallons and 8.8 million gallons, respectively. Operating Expenses Operating expenses increased by $4.5 million, or 7.9%, in the year ended December 31, 2021 compared to the year ended December 31, 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; and • increases in variable expenses such as maintenance and materials costs due to higher throughput. General and Administrative Expenses The changes in general and administrative expenses for the year ended December 31, 2021 compared to the year ended December 31, 2020 were immaterial. Depreciation and Amortization Depreciation and amortization increased by $7.0 million, or 19.7%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by the following: • addition of assets to our asset base as a result of the Trucking Assets Acquisition and the Permian Gathering Assets Acquisition; and • higher asset additions in the current year compared to prior year as some projects which had been temporarily suspended when COVID-19 induced liquidity conservation were commenced. Interest Expense Interest expense increased by $7.3 million, or 17.1%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, 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 Permian 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 Income from equity method investments increased by $1.9 million, or 8.3%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by the following: • increase in income from our Red River equity method investment due to higher throughput volumes and resulting revenue increases; and • partially offset by decrease in income from Caddo and Rio equity method investments and 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. The Rio equity method investment income was also impacted by a major customer contract termination during the third quarter of 2021, resulting in lower revenues for the year. 59 | Management's Discussion and Analysis Operating Segments We review operating results in three reportable segments: (i) pipelines and transportation; (ii) wholesale marketing and terminalling; and (iii) investments in pipeline joint ventures. 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, except for the investments in pipeline joint ventures segment, which is measured based on net income. Segment reporting is discussed in more detail in Note 15 to our accompanying consolidated financial statements. Segment contribution margin is defined as follows: 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 Logistics Assets Acquisition • assets acquired in the Permian 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 table and discussion present the results of operations and certain operating statistics of the pipelines and transportation segment for the years ended December 31, 2021 and 2020. A detailed discussion of the fiscal 2020 year-over-year changes can be found in Item 7, Managements' Discussion and Analysis of Financial Condition and Results of Operations, of the Annual Report on Form 10-K filed on March 1, 2021. Pipelines and Transportation Year Ended December 31, 2021 2020 Net Revenues: Affiliate $ 271,033 $ 233,873 Third-Party 16,612 17,596 Total Pipelines and Transportation 287,645 251,469 Cost of materials and other 59,821 45,934 Operating expenses (excluding depreciation and amortization) 43,818 42,267 Segment contribution margin $ 184,006 $ 163,268 Throughputs (average bpd) Year Ended December 31, 2021 2020 El Dorado Assets: Crude pipelines (non-gathered) 65,335 74,179 Refined products pipelines to Enterprise Systems 48,757 53,702 El Dorado Gathering System 14,460 13,466 East Texas Crude Logistics System 22,647 15,960 Permian Gathering System (1) 80,285 82,817 Plains Connection System (1) 124,025 104,770 (1) Throughputs for the Permian Gathering System (formerly known as the Big Spring Gathering System) and the Plains Connection System are for approximately 275 days we owned the assets following the Permian Gathering Assets Acquisition effective March 31, 2020. 60 | Management's Discussion and Analysis Operational Comparison of the Year Ended December 31, 2021 versus the Year Ended December 31, 2020 Net Revenues Net revenues for the pipelines and transportation segment increased by $36.2 million, or 14.4%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, driven primarily by the following: • increased revenues associated with agreements executed in connection with the Permian Gathering Assets Acquisition and the Trucking Assets Acquisition, which were effective March 31, 2020 and May 1, 2020, respectively. See Note 3 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, 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 year ended December 31, 2021 when compared to the year ended December 31, 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 year ended December 31, 2021 when compared to the year ended December 31, 2020. Cost of Materials and Other Cost of materials and other for the pipelines and transportation segment increased by $13.9 million, or 30.2%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, driven primarily 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 Operating expenses for the pipelines and transportation segment increased by $1.6 million, or 3.7%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by the following: • increase in energy costs due to higher natural gas prices; and • 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. Contribution Margin Contribution margin for the pipelines and transportation segment increased by $20.7 million, or 12.7%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by the following: • increases in revenues associated with agreements executed in connection with the Permian 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. 61 | 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 table and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the years ended December 31, 2021 and 2020. A detailed discussion of the fiscal 2020 year-over-year changes can be found in Item 7, Managements' Discussion and Analysis of Financial Condition and Results of Operations, of the Annual Report on Form 10-K filed on March 1, 2021. Wholesale Marketing and Terminalling Year Ended December 31, 2021 2020 Net revenues: Affiliate $ 147,793 $ 148,793 Third-Party 265,464 163,156 Total Wholesale Marketing and Terminalling 413,257 311,949 Cost of materials and other 324,588 223,160 Operating expenses (excluding depreciation and amortization presented below) 16,917 14,012 Segment contribution margin $ 71,752 $ 74,777 Operating Information Year Ended December 31, 2021 2020 East Texas - Tyler Refinery sales volumes (average bpd) (1) 68,497 71,182 Big Spring marketing throughputs (average bpd) 78,370 76,345 West Texas marketing throughputs (average bpd) 10,026 11,264 West Texas marketing gross margin per barrel $ 3.72 $ 2.37 Terminalling throughputs (average bpd) (2) 138,301 147,251 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, our El Dorado and North Little Rock, Arkansas terminals and our Memphis and Nashville, Tennessee terminals. Operational Comparison of the Year Ended December 31, 2021 versus the Year Ended December 31, 2020 Net Revenues Net revenues for the wholesale marketing and terminalling segment increased by $101.3 million, or 32.5%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by the following: • 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 $0.78 per gallon and $0.83 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 10.5 million gallons and 8.8 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 for the years ended December 31, 2021 and 2020. 62 | Management's Discussion and Analysis Cost of Materials and Other Cost of materials and other for the wholesale marketing and terminalling segment increased by $101.4 million, or 45.5% , in the year ended December 31, 2021 compared to the year ended December 31, 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 $0.83 per gallon and $0.80 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 10.5 million gallons and 8.8 million gallons, respectively. The following chart shows a summary of the average prices per gallon of gasoline and diesel purchased in our West Texas operations for the years ended December 31, 2021 and 2020. Refer to the Refined Products Volume - Gallons chart above for a summary of volumes impacting our West Texas operations. 63 | Management's Discussion and Analysis Operating Expenses Operating expenses increased by $2.9 million, or 20.7%, in the year ended December 31, 2021 compared to the year ended December 31, 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. Contribution Margin Contribution margin for the wholesale marketing and terminalling segment decreased by $3.0 million, or 4.0%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by the following: • increases in cost of materials and other due to increases in average cost per gallon of diesel and gasoline sold; • increases in operating expenses; and • partially offset by increases in revenue due to increases in average sales price per gallon of diesel and gasoline sold. 64 | Management's Discussion and Analysis Investments in Pipeline Joint Ventures Segment The Investments in Pipeline Joint Venture segment relates to equity method accounted strategic Joint Venture investments which support the Delek Holdings operations in terms of offering connection to takeaway pipelines, alternative crude supply sources and flow of high quality crude oil to the Delek Holdings refining system. As a result, Delek Holdings is a major shipper and customer on certain of the Joint Venture pipelines, with minimum volume commitment ("MVC") agreements, which cushion the Joint Venture entities during periods of low activity as recently experienced due to the impact of COVID-19 Pandemic and impact of the extreme weather events. The other Joint Venture owners are usually major shippers on the pipelines resulting in a majority of the revenue of the Joint Venture entities coming from MVC agreements with related entities. Investments in pipeline joint ventures segment include the Partnership's joint ventures investments described in Note 14 to our accompanying consolidated financial statements. Refer to Consolidated Results of Operations above for details and discussion of the investments in pipeline joint ventures segment for the year ended December 31, 2021. Liquidity and Capital Resources Sources of Capital 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 December 31, 2021 our total liquidity amounted to $596.3 million comprised of $592.0 million in unused credit commitments under the DKL Credit Facility and $4.3 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 December 31, 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 11 to our consolidated financial statements for a complete discussion of our third-party indebtedness. 65 | Management's Discussion and Analysis Cash Distributions On January 21, 2022, the board of directors of our general partner declared a distribution of $0.975 per common unit (the "Distribution"), which equates to approximately $42 million per quarter, or approximately $170 million per year, based on the number of common units outstanding as of February 1, 2022. The Distribution was paid on February 8, 2022 to common unitholders of record on February 1, 2022 and represents a 7.1% increase over the fourth quarter 2020 distribution. We have set a distribution growth guidance of 5% for the full year 2022. 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 2021 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 (in thousands) Date of Distribution Unitholders Record Date 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 November 5, 2021 December 31, 2021 $0.975 $3.90 $42,384 February 8, 2022 February 1, 2022 Cash Flows The following table sets forth a summary of our consolidated cash flows for the years ended December 31, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 Net cash provided by operating activities 275,162 193,016 Net cash used in investing activities (16,360) (123,138) Net cash used in by financing activities (258,753) (71,180) Net increase (decrease) in cash and cash equivalents $ 49 $ (1,302) Operating Activities Net cash provided by operating activities increased by $82.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in cash provided by operations was primarily due to higher net cash receipts from customers and cash dividends from the Equity Method Investments during the year ended December 31, 2021 compared to the year ended December 31, 2020 driven by the increase in revenue for the operations. These cash flow increases were offset by higher cash paid out to suppliers for inventory during the year ended December 31, 2021 compared to the year ended December 31, 2020 as a result of a increase in cost per barrel for the marketing operations and increases in operational expenses. Investing Activities Net cash used in investing activities decreased by $106.8 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. There were no asset acquisitions during the year ended December 31, 2021 compared to the acquisition of the Permian Gathering Assets and Trucking Assets during the year ended December 31, 2020. Additionally, there were lower contributions to equity method investments during the year ended December 31, 2021 compared to the year ended December 31, 2020. The Permian Gathering Assets Acquisition was partially financed with cash from drawdown of the DKL Credit Facility amounting to $100.0 million and the Trucking Assets Acquisition was financed with cash from drawdown of the DKL Credit Facility amounting to $48.0 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 general partner unitholders pursuant to the asset acquisitions under common control guidance. Transaction costs paid amounting to $1.0 million were capitalized for the Permian Gathering Assets Acquisition and the Trucking Assets Acquisition. We disbursed $1.4 million in additional contributions to our equity method investments during the year ended December 31, 2021 compared to $12.2 million during the year ended December 31, 2020. These decreases were offset by additions to property, plant and equipment amounting to $24.0 million and distributions from equity method investments amounting $8.8 million during the year ended December 31, 2021 compared to additions to property, plant and equipment amounting to $13.3 million and distributions from equity method investments amounting to $2.7 million during the year ended December 31, 2020. Financing Activities Net cash used in financing activities increased by $187.6 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. We repaid $488.6 million under the revolving credit facility during the year ended December 31, 2021, compared to net proceeds of $158.2 million under the revolving credit facility during the year ended December 31, 2020. In addition, we paid quarterly cash distributions 66 | Management's Discussion and Analysis totaling $161.7 million during the year ended December 31, 2021, compared to quarterly cash distributions totaling $136.8 million during the year ended December 31, 2020. 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 millions were received and deferred financing costs amounting to $(6.2) millions 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. During the year ended December 31, 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, whilst there were no such payments during the year ended December 31, 2021. The sources of cash to finance the asset acquisitions from Delek Holdings during the year ended December 31, 2020 primarily consisted of the $100.0 million drawdown under the DKL Credit Facility to part-finance the Permian Gathering Assets Acquisition and $48.0 million drawdown to finance the Trucking Asset Acquisition. The Permian 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 US Holdings, Inc.). Debt Overview As of December 31, 2021, we had total indebtedness of $899.0 million comprised of $394.3 million of 7.125% senior notes due 2028 (the "2028 Notes"), net of deferred financing costs, $258.0 million under the amended and restated senior secured revolving agreement (the "DKL Credit Facility") and $246.7 million of 6.75% senior notes due 2025 (the “2025 Notes”), the latter net of deferred financing costs and original issue discount. Deferred financing costs amounted to $5.7 million on the 2028 Notes. Deferred financing costs and original issue discount on the 2025 Notes amounted to $2.5 million and $0.8 million, respectively. The decrease of $93.3 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 year ended December 31, 2021, partially offset by the amortization of the deferred financing costs and original issuance discount under our 2025 and 2028 Notes. As of December 31, 2021, our total indebtedness consisted of: • An aggregate principal amount of $258.0 million under the Delek Logistics Credit Facility ("revolving credit facility"), due on September 28, 2023, with average borrowing rate of 2.46%. • An aggregate principal amount of $246.7 million, under the Delek Logistics Notes (6.75% senior notes), due in 2025, with an effective interest rate of 7.20%. • An aggregate principal amount of $394.3 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 debt facilities as of December 31, 2021. See Note 11 to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K 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. Please read Item 1A. "Risk Factors—Risks Relating to Our Business—Delek Holdings’ level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek Holdings' level of indebtedness and financial performance and credit ratings.” Equity Units Overview On December 20, 2021, Delek Holdings announced a program to sell up to 434,590 common limited partner units over the next three months in open market transactions. See Note 4 to our accompanying consolidated financial statements for additional details. On August 13, 2020, we closed the IDR Restructuring Transaction. To effect this transaction, our Partnership Agreement was amended and restated. See Note 4 to our accompanying consolidated financial statements for additional details. In August 2020, we filed a shelf registration statement, which subsequently became effective, with the U.S. Securities and Exchange Commission for the proposed re-sale or disposition from time to time by Delek Holdings of up to 14.0 million common limited partner units. 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. On March 31, 2020, we issued 5.0 million common limited partner units to Delek Holdings as part of the consideration for the Permian 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. 67 | Management's Discussion and Analysis 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 4 to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, 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 year ended December 31, 2021 and planned capital expenditures for the full year 2022 by segment and by major category: (in thousands) Full Year 2022 Forecast Year Ended December 31, 2021 Pipelines and Transportation Regulatory (2) $ 5,919 $ 1,897 Maintenance (1) 3,538 3,631 Discretionary (2) 58,739 16,814 Pipelines and Transportation Segment Total (4) $ 68,196 $ 22,342 Wholesale Marketing and Terminalling Regulatory (3) $ 2,135 $ 663 Maintenance (1) 250 1,099 Discretionary 214 3,347 Wholesale Marketing and Terminalling Segment Total (4) $ 2,599 $ 5,109 Total Capital Spending (4) $ 70,795 $ 27,451 (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 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 4 to our accompanying consolidated financial statements). (2) The majority of the $58.7 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 Permian Gathering Assets. The $5.9 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. These expenditures have historically been and will continue to be financed through cash generated from operations. (3) The majority of the $2.1 million budgeted for regulatory 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. (4) Capital spending for the year ended December 31, 2021 excludes contributions to equity method investments amounting to $1.4 million. There are no scheduled contributions to equity method investments for 2022. 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. Long-term Cash Requirements Information regarding our known contractual obligations of the types described below, as of December 31, 2021, is set forth in the following table (in thousands): <1 Year 1-3 Years 3-5 Years >5 Years Total Long term debt and notes payable $ — $ 258,000 $ 250,000 $ 400,000 $ 908,000 Interest (1) 51,815 95,531 65,438 42,750 255,534 Finance Lease Obligation 2,965 3,127 24 — 6,116 Operating lease commitments (2) 7,775 11,981 2,784 425 22,965 Total $ 62,555 $ 368,639 $ 318,246 $ 443,175 $ 1,192,615 (1) Includes expected interest payments on debt balances outstanding under the DKL Credit Facility and the 2025 and 2028 Notes at December 31, 2021. Floating interest rate debt is calculated using rates in effect on December 31, 2021. (2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of December 31, 2021. We also have other non-current liabilities pertaining to environmental liabilities and asset retirement obligations. With the exception of amounts classified as current, there is uncertainty as to the timing of future cash flows related to these obligations. As such, we have excluded the future 68 | Management's Discussion and Analysis cash flows from the contractual commitments table above. See additional information on asset retirement obligations and environmental liabilities in Notes 2 and 17, respectively, to our consolidated financial statements in Item 8. Other Cash Requirements Our other cash requirements consisted of operating activities, cash distributions to unitholders, contributions to investments in joint ventures and capital expenditures. Operating activities included cash outflows related to payments to suppliers for crude and other materials and payments for services. Refer to the Cash Flow section for our operating activities spend in 2021. While many of the expenses related to the operating activities are variable in nature, some of the expenditures can be somewhat fixed in the short-term due to forward planning on our level of activity. Refer to Cash Distributions section for cash distributions made in 2021 and planned distributions for 2022. Refer to the capital spending section for our capital expenditures for 2021 and our planned capital expenditures for 2022. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements through the date of the filing of this Annual Report on Form 10-K. 69 | Management's Discussion and Analysis Critical Accounting Estimates The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. We prepare our consolidated financial statements in conformity with GAAP, and in the process of applying these principles, we must make judgments, assumptions and estimates based on the best available information at the time. To aid a reader's understanding, management has identified our critical accounting estimates. These estimates are considered critical because they are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments. Often they require judgments and estimation about matters which are inherently uncertain and involve measuring at a specific point in time, events which are continuous in nature. Actual results may differ based on the accuracy of the information utilized and subsequent events, some over which we may have little or no control. 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 carrying value of each equity method investment is evaluated for impairment when conditions exist that indicate it is more likely than not that an impairment may have occurred, which may include the loss of a key contract, lack of sustained earnings or a deterioration of market conditions, among others. 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 year ended December 31, 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 indicator requiring that we perform an impairment assessment on our equity method investment. No indicators were identified on our equity method investments in Red River and Caddo. The fair value of our Andeavor Logistics 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 December 31, 2021. We performed a sensitivity analysis on our impairment test as of December 31, 2021, noting the following: Sensitivity Equity Method Investment Balance at December 31, 2021 Stress Testing Range of Estimated Fair Values % Estimated Fair Value exceeds Carrying Value (1) Increase in WACC that could cause impairment (2) Percentage decrease in tariff rates that could cause impairment (2) Andeavor Logistics $44,319 $44,224 - $71,556 > 20% 6.5% (30.0)% (1) Carrying Value compared to our selected Fair Value Point Estimate (2) Assumes no other changes in any of the key assumptions related to the selected Point Estimate. 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. 70 | Management's Discussion and Analysis New Accounting Pronouncements See Note 2 to the consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a discussion of new accounting pronouncements applicable to us.