Delek Logistics Partners, LP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 25, 2022 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Logistics Partners, LP," the "Partnership," "we," "us," "our," or like terms, may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Holdings" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than the Partnership and its subsidiaries and its general partner. On April 8, 2022, DKL Delaware Gathering, LLC (the “Purchaser”), a subsidiary of the Partnership, entered into a Membership Interest Purchase Agreement with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (the “Purchased Interests”), related to Seller’s crude oil and gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico (the “Purchase Agreement”). The Partnership also entered into a guaranty agreement with the Seller in order to guaranty the payment obligations of the Purchaser under the Purchase Agreement. See Note 14 for further information. The Partnership announces material information to the public about the Partnership, its products and services and other matters through a variety of means, including filings with the Securities and Exchange Commission, press releases, public conference calls, the Partnership's website (www.deleklogistics.com), the investor relations section of the website (ir.deleklogistics.com), the news section of its website (www.deleklogistics.com/news), and/or social media, including its Twitter account (@DelekUSLogistics). The Partnership encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time. Forward-Looking Statements This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, statements regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the COVID-19 Pandemic and the actions of members of the Organization of Petroleum Exporting Countries ("OPEC") and other leading oil producing countries (together with OPEC, "OPEC+") with respect to oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to: • 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; 21 | Management's Discussion and Analysis • industry dynamics, including Permian Basin growth, ownership concentration, efficiencies and takeaway capacity; • the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or legal actions and other effects related to spills, releases and tank failures; • changes in insurance markets impacting costs and the level and types of coverage available; • the timing and extent of changes in commodity prices and demand for refined products and the impact of the COVID-19 Pandemic on such demand; • the wholesale marketing margins we are able to obtain and the number of barrels of product we are able to purchase and sell in our West Texas wholesale business; • the suspension, reduction or termination of Delek Holdings' or its assignees' or third-party's obligations under our commercial agreements including the duration, fees or terms thereof; • the results of our investments in joint ventures; • the ability to secure commercial agreements with Delek Holdings or third parties upon expiration of existing agreements; • the possibility of inefficiencies, curtailments, or shutdowns in refinery operations or pipelines, whether due to infection in the workforce or in response to reductions in demand as a result of the COVID-19 Pandemic; • disruptions due to equipment interruption or failure, or other events, including terrorism, sabotage or cyber attacks, at our facilities, Delek Holdings’ facilities or third-party facilities on which our business is dependent; • changes in the availability and cost of capital of debt and equity financing; • our reliance on information technology systems in our day-to-day operations; • changes in general economic conditions, including uncertainty regarding the timing, pace and extent of economic recovery in the United States due to the COVID-19 Pandemic or future pandemics; • the effects of existing and future laws and governmental regulations, including, but not limited to, the rules and regulations promulgated by the Federal Energy Regulatory Commission ("FERC") and state commissions and those relating to environmental protection, pipeline integrity and safety as well as current and future restrictions on commercial and economic activities in response to the COVID-19 Pandemic; • 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 Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. 22 | Management's Discussion and Analysis Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 Pandemic and any worsening of the global business and economic environment. In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise. Business Overview The Partnership primarily owns and operates crude oil, intermediate and refined products logistics and marketing assets. We gather, transport, offload and store crude oil and intermediate products and market, distribute, transport and store refined products primarily in select regions of the southeastern United States and Texas for Delek Holdings and third parties. A substantial majority of our existing assets are both integral to and dependent upon the success of Delek Holdings' refining operations, as many of our assets are contracted exclusively to Delek Holdings in support of its Tyler, El Dorado and Big Spring refineries. The Partnership is not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. Instead, for purposes of such income taxes, each partner of the Partnership is required to take into account its share of items of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and the fair market value of our assets and financial reporting bases of assets and liabilities, the acquisition price of the partner's units and the taxable income allocation requirements under the Partnership's Second Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). The economy continues to recover from the impact of the COVID-19 Pandemic, both globally and domestically. Improved consumer demand resulting from stabilization in cases of COVID-19 and decreasing mortality rates during much of the period and across much of the country, and corresponding to the availability of vaccines, have contributed to improvements in domestic refining margins. However, on February 24, 2022 Russia launched a military invasion on Ukraine (the "Russia-Ukraine war"). In response to the unprovoked invasion, among other sanctions imposed, many countries, including the US, have banned the import of Russian commodities, including oil and gas. Russia is one of the world's top oil and gas suppliers, responsible for providing more than 40% of the natural gas supply to Europe and more than 8% of the world's oil supply. To combat record high oil prices, the Biden administration recently announced the largest release of oil in U.S. history from the nation’s strategic stockpiles, followed by a smaller, but still sizable, release from European countries. While these events have contributed to additional uncertainty in the global market, it's impact on supply of crude oil and refined products has caused significant increases in demand for our customers' products which is expected to continue for much of 2022. Management has actively responded to the continuing impact of these economic disruptions on our business. To the extent warranted, we continue to monitor the impact and implement measures to mitigate the risk. Such efforts include (but are not limited to) the following: • Reviewing planned production throughputs at our refineries and planning for optimization of operations; • Coordinating planned maintenance activities with possible downtime as a result of possible reductions in throughputs; • Searching for additional storage capacity if needed to store potential builds in crude oil or refined product inventories; • Finding additional suppliers for key or specialty items or securing inventory or priority status with existing vendors; • Continued monitoring of capital expenditures; • Suspending the share repurchase program and dividend distributions until our internal parameters are met for resuming such activities; • Adopting modified remote working where possible and when immediate exposure risk warrants, and where on-site operations are required, taking appropriate safety precautions; • Identifying alternative financing solutions as needed to enhance our access to sources of liquidity; and • Enacting cost reduction measures across the organization, including reducing contract services, reducing overtime and other employee related costs, and reducing or eliminating non-critical travel. The combination of these efforts has served to mitigate other negative factors impacting our cash flows and operations, and has improved our liquidity positioning, operational flexibility and ability to respond to the continued economic impact of the COVID-19 Pandemic, the Russia-Ukraine War, and other events. 23 | Management's Discussion and Analysis See also 'Risk Factors' in Part I, Item 1A. of our Annual Report on Form 10-K for further discussion of risks associated with the COVID-19 Pandemic. Our Reporting Segments and Assets Our business consists of 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 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. 2022 Strategic Developments Slurry Clarifying Services Agreement We executed a series of agreements with DK Trading & Supply, LLC (“DKT&S”) and Alon Refining Krotz Springs, whereby the Partnership will operate and maintain a facility, located within the Krotz Springs, Louisiana refinery, to process slurry for DKT&S. Using a process that incorporates horizontal and vertical centrifuges, we will remove metals, ash, and other solids from the slurry. The clarified product can then be sold to DKT&S or one of its affiliates. As consideration for the processing services, we will receive a fixed rate per barrel processing fee in addition to a margin-based payment. The Partnership and DKT&S have agreed to a minimum delivery commitment volume to be processed in the facility. The initial term of the agreement is for a period of three years, and thereafter, will continue a year-to-year basis unless canceled by either party. 3 Bear Energy - New Mexico, LLC Acquisition On April 8, 2022, DKL Delaware Gathering, LLC (the “Purchaser”), a subsidiary of the Partnership, entered into a Membership Interest Purchase Agreement with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (the “Purchased Interests”), related to Seller’s crude oil and gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico (the “Purchase Agreement”). The Partnership also entered into a guaranty agreement with the Seller in order to guaranty the payment obligations of the Purchaser under the Purchase Agreement. The purchase price for the Purchased Interests is $624.7 million, subject to customary adjustments under the Purchase Agreement for net working capital and indebtedness. The Purchaser paid a deposit under the Purchase Agreement of approximately $31.2 million. The deposit may be retained by the Seller upon certain termination events described in the Purchase Agreement. At closing, the deposit will be applied to the purchase price to be paid under the Purchase Agreement. The transactions contemplated by the Purchase Agreement are expected to close around mid-year 2022. The closing is subject to customary closing conditions set forth in the Purchase Agreement, including regulatory approvals. The Purchase Agreement also contains representations and warranties of the parties, indemnification obligations, termination rights, and other covenants and agreements. Expansion of connectors project In connection with the Permian Gathering System Acquisition (formerly known as the Big Spring Gathering Acquisition), we agreed to expend $33.8 million to construct additional Receipt Points to our gathering pipeline at the request of Delek Holdings producers with which we have dedicated acreage agreements, to be owned and operated by the Partnership. Such Receipt Points, once completed, result in 24 | Management's Discussion and Analysis incremental pipeline revenues, subject to the minimum volume commitments and other terms of the throughput and deficiency commercial agreement with Delek Holdings, entered into in connection with this Acquisition. Additionally, both Delek Holdings and the Partnership continue to identify and secure dedicated acreage and producer agreements that require construction of receipt points and also provide the opportunity for additional pipeline volumes, but that are not required under the original commitment. Related to these incremental agreements, the Partnership has begun construction or otherwise separately committed to construct receipt points where the estimated remaining costs to complete totaled $45.8 million as of March 31, 2022, all of which is expected to be expended during 2022. See Note 12 for additional information. How We Generate Revenue The Partnership generates revenue by charging fees to Delek Holdings and third parties for gathering, transporting, offloading and storing crude oil and for marketing, distributing, transporting, throughputting and storing intermediate and refined products. We also wholesale market refined products primarily in the West Texas market. A substantial majority of our contribution margin, which we define as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization, is derived from commercial agreements with Delek Holdings with initial terms ranging from five to ten years, which gives us a contractual revenue base that we believe enhances the stability of our cash flows. As more fully described below, our commercial agreements with Delek Holdings typically include minimum volume or throughput commitments by Delek Holdings, which we believe will provide a stable revenue stream in the future. The fees charged under our agreements with Delek Holdings and third parties are indexed to inflation-based indices. In addition, the rates charged with respect to our assets that are subject to inflation indexing may increase or decrease, typically on July 1 of each year, by the amount of any change in various inflation-based indices, including FERC, provided that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement. Commercial Agreements with Delek Holdings The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which we provide various services, including crude oil gathering, crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings, and Delek Holdings commits to provide us with minimum monthly throughput volumes of crude oil, intermediate and refined products. Generally, these agreements include minimum quarterly volume, revenue or throughput commitments and have tariffs or fees indexed to inflation-based indices, provided that the tariffs or fees will not be decreased below the initial amount. See our Annual Report on Form 10-K filed with the SEC on February 25, 2022 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 2 to our accompanying condensed consolidated financial statements for additional information on the DPG Management Agreement. How We Evaluate Our Operations We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: ■ volumes (including pipeline throughput and terminal volumes) ■ contribution margin per barrel ■ operating and maintenance expenses ■ cost of materials and other ■ EBITDA and distributable cash flow (as such terms are defined below). 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; 25 | Management's Discussion and Analysis • 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 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 has declared its intent to make a cash distribution to its unitholders at a distribution rate of $0.98 per unit for the quarter ended March 31, 2022 ($3.92 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of its available cash (as defined in the Partnership Agreement) to its unitholders quarterly. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our DKL Credit Facility and any potential future issuances of equity and debt securities. See Note 7 to the accompanying condensed consolidated financial statements 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 26 | Management's Discussion and Analysis 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 ended March 31, 2022, 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 ended March 31, 2021, crude oil prices during the three months ended March 31, 2022 were steadily increasing. The price of oil (WTI Cushing) closed at $100.28 per barrel on March 31, 2022, $41.12 per barrel higher than on March 31, 2021. The opening January 2022 price of oil (WTI Cushing) was $76.08 and reached the January 2022 high closing price of oil of $88.15 per barrel. Due to the sustained increase in oil prices, during the three months ended March 31, 2022, 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 2021. 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 and prices of crude oil and related refined products increased as economic activity began to recover during 2021 due to the increase in vaccinations. As discussed above, the U.S. economic activity continues to recover and demand for and prices of crude oil and related refined products continued on the rise during the three months ended March 31, 2022, as consumption of oil increased, spurred by easing of COVID-19 related restrictions. Although we expect the direct effects from the pandemic on U.S. oil consumption to decrease, some consumption patterns may be more lasting, including increased working from home and changes in travel behavior, which could limit growth in gasoline and jet fuel consumption. See the chart below for the high, low and average price per barrel of WTI crude oil for each of the quarterly periods in 2021 and for the quarterly period in 2022. 27 | Management's Discussion and Analysis The volatility of refined products prices may impact our margin in the West Texas operations when the selling price of refined products does not adjust as quickly as the purchase price. See the charts below for the range of prices per gallon of gasoline and diesel for each of the quarterly periods in 2021 and for the quarterly period in 2022. 28 | Management's Discussion and Analysis Contractual Obligations There have been no material changes to our contractual obligations and commercial commitments during the three months ended March 31, 2022 from those disclosed in our Annual Report on Form 10-K. Critical Accounting Estimates The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting estimates as those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, complex or subjective judgments or estimates. Based on this definition and as further described in our Annual Report on Form 10-K, we believe our critical accounting estimates include estimates related to equity method investments impairment assessment. Non-GAAP Measures Our management uses certain "non-GAAP" operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include: • Earnings before interest, taxes, depreciation and amortization ("EBITDA") - calculated as net income before net interest expense, income tax expense, depreciation and amortization expense, including amortization of customer contract intangible assets, which is included as a component of net revenues in our accompanying condensed consolidated statements of income. • Distributable cash flow - calculated as net cash flow from operating activities plus or minus changes in assets and liabilities, less maintenance capital expenditures net of reimbursements and other adjustments not expected to settle in cash. The Partnership believes this is an appropriate reflection of a liquidity measure by which users of its financial statements can assess its ability to generate cash. EBITDA and distributable cash flow are non-U.S. GAAP supplemental financial measures that management and external users of our condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: • our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods; • the ability of our assets to generate sufficient cash flow to make distributions to our unitholders; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. We believe that the presentation of EBITDA and distributable cash flow provide information useful to investors in assessing our financial condition and results of operations. EBITDA and distributable cash flow should not be considered alternatives to net income, operating 29 | Management's Discussion and Analysis income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA and distributable cash flow may be defined differently by other partnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other partnerships, thereby diminishing their utility. For a reconciliation of EBITDA and distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, please refer to "Results of Operations" below. 30 | Management's Discussion and Analysis Summary of Financial and Other Information A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance. The following table and discussion present a summary of our consolidated results of operations for the three months ended March 31, 2022 and 2021, including a reconciliation of net income to EBITDA and net cash flow provided by operating activities to distributable cash flow. Statement of Operations Data (in thousands, except unit and per unit amounts) Three Months Ended March 31, 2022 2021 Net revenues: Pipelines and transportation $ 75,805 $ 64,975 Wholesale marketing and terminalling 130,776 87,938 Total 206,581 152,913 Operating costs and expenses: Cost of materials and other 126,194 81,171 Operating expenses (excluding depreciation and amortization) 18,107 14,811 General and administrative expenses 5,095 4,105 Depreciation and amortization 10,335 10,739 Other operating expense (income), net 12 (83) Total operating costs and expenses 159,743 110,743 Operating income 46,838 42,170 Interest expense, net 14,250 9,737 Income from equity method investments (7,026) (4,049) Other (income) expense, net (1) 31 Total non-operating costs and expenses 7,223 5,719 Income before income tax expense 39,615 36,451 Income tax (benefit) expense 101 184 Net income attributable to partners $ 39,514 $ 36,267 Comprehensive income attributable to partners $ 39,514 $ 36,267 EBITDA (1) $ 66,003 $ 58,730 Net income per limited partner unit: Common units - basic $ 0.91 $ 0.83 Common units - diluted $ 0.91 $ 0.83 Weighted average limited partner units outstanding: Common units - basic 43,471,536 43,443,336 Common units - diluted 43,481,572 43,449,059 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. 31 | Management's Discussion and Analysis Non-GAAP Reconciliations The following table provides a reconciliation of EBITDA and distributable cash flow to the most directly comparable U.S. GAAP measure, or net income and net cash from operating activities, respectively. Reconciliation of net income to EBITDA (in thousands) Three Months Ended March 31, 2022 2021 Net income $ 39,514 $ 36,267 Add: Income tax expense 101 184 Depreciation and amortization 10,335 10,739 Amortization of customer contract intangible assets 1,803 1,803 Interest expense, net 14,250 9,737 EBITDA (1) $ 66,003 $ 58,730 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. Reconciliation of net cash from operating activities to distributable cash flow (in thousands) Three Months Ended March 31, 2022 2021 Net cash provided by operating activities $ 47,920 $ 61,732 Changes in assets and liabilities 6,012 (10,863) Distributions from equity method investments in investing activities 550 3,924 Non-cash lease expense (1,798) (2,018) Maintenance and regulatory capital expenditures (1) (807) (515) (Refund to) reimbursement from Delek Holdings for capital expenditures (2) (15) 359 Accretion of asset retirement obligations (124) (115) Deferred income taxes — (65) Other operating (expense) income, net (12) 83 Distributable cash flow (3) $ 51,726 $ 52,522 (1) Maintenance and regulatory capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance and regulatory capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. (2) For the three month periods ended March 31, 2022 and 2021, Delek Holdings reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 2 to our accompanying condensed consolidated financial statements). (3) For a definition of distributable cash flow, please see "Non-GAAP Measures" above. 32 | Management's Discussion and Analysis Results of Operations Consolidated Results of Operations — Comparison of the three months ended March 31, 2022 compared to the three months ended March 31, 2021 The table below presents a summary of our consolidated results of operations. The discussion immediately following presents the consolidated results of operations (in thousands): Consolidated Three Months Ended March 31, 2022 2021 Net Revenues: Affiliates $ 123,754 96,194 Third-Party 82,827 56,719 Total Consolidated 206,581 152,913 Cost of materials and other 126,194 81,171 Operating expenses (excluding depreciation and amortization presented below) 18,107 14,811 Contribution margin 62,280 56,931 General and administrative expenses 5,095 4,105 Depreciation and amortization 10,335 10,739 Other operating expense (income), net 12 (83) Operating income $ 46,838 $ 42,170 Net Revenues Q1 2022 vs. Q1 2021 Net revenues increased by $53.7 million, or 35.1%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in the average sales prices per gallon of gasoline and diesel sold and average volume of diesel sold, partially offset by decrease in the average volume of gasoline sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.94 per gallon and $1.25 per gallon, respectively; and ◦ the average volume of gasoline sold decreased by 3.4 million gallons and the average volume of diesel sold increased by 2.5 million gallons. • increases in pipeline throughputs, where the first quarter of 2021 were negatively impacted by severe weather events. Cost of Materials and Other Q1 2022 vs. Q1 2021 Cost of materials and other increased by $45.0 million, or 55.5%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold and the average volume of diesel sold, partially offset by decrease in the average volume of gasoline sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased by $0.97 per gallon and $1.25 per gallon, respectively; and ◦ the average volume of gasoline sold decreased by 3.4 million gallons and the average volume of diesel sold increased by 2.5 million gallons. 33 | Management's Discussion and Analysis Operating Expenses Q1 2022 vs. Q1 2021 Operating expenses increased by $3.3 million, or 22.3%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in employee and outside service costs; and • increases in variable expenses such as maintenance and materials costs due to higher throughput. General and Administrative Expenses General and administrative expenses increased by $1.0 million, or 24.1%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increase in professional consulting fees; and • increase in employee and outside services costs. Depreciation and Amortization Q1 2022 vs. Q1 2021 The changes in depreciation and amortization for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were immaterial. Interest Expense Q1 2022 vs. Q1 2021 During the three months ended March 31, 2022 we incurred $14.3 million of interest expense, compared to $9.7 million during the three months ended March 31, 2021, an increase of $4.6 million, or 47.4%. This increase was primarily driven by the following: • higher fixed rate interest on the 2028 Notes compared to our floating interest rates under the DKL Credit Facility; and • increase in floating interest rates applicable to the DKL Credit Facility. Results from Equity Method Investments Q1 2022 vs. Q1 2021 During the three months ended March 31, 2022 we recognized income of $7.0 million from equity method investments, compared to $4.0 million for the three months ended March 31, 2021, an increase of $3.0 million, or 73.5%. This increase was primarily driven by the following: • increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases; and • partially offset by decrease in income from Rio equity method investments. 34 | Management's Discussion and Analysis Operating Segments We review operating results in two reportable segments: (i) pipelines and transportation and (ii) wholesale marketing and terminalling. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each reportable segment based on the segment contribution margin. Segment reporting is discussed in more detail in Note 10 to our accompanying condensed consolidated financial statements. Segment contribution margin = Net revenues - Cost of materials and other - Operating expenses, excluding depreciation and amortization Pipelines and Transportation Segment Our pipelines and transportation segment assets provide crude oil gathering and crude oil, intermediate and refined products transportation and storage services to Delek Holdings and third parties. These assets include: • the pipeline assets used to support Delek Holdings' El Dorado refinery (the "El Dorado Assets") • the gathering system that supports transportation of crude oil to the El Dorado Refinery (the "El Dorado Gathering System") • the Paline Pipeline System • the East Texas Crude Logistics System • the Tyler-Big Sandy Pipeline • the El Dorado Tank Assets and El Dorado Rail Offloading Racks • the Tyler Tank Assets and Tyler Crude Tank • the Greenville-Mount Pleasant Pipeline and Greenville Storage Facility • refined product pipeline capacity leased from Enterprise TE Products Pipeline Company ("Enterprise") that runs from El Dorado, Arkansas to our Memphis terminal and the Big Spring Pipeline • pipelines and storage assets acquired in the Big Spring 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 tables and discussion present the results of operations and certain operating statistics of the pipelines and transportation segment for the three months ended March 31, 2022 and 2021: Pipelines and Transportation Three Months Ended March 31, 2022 2021 Net Revenues: Affiliates $ 71,023 $ 63,048 Third-Party 4,782 1,927 Total Pipelines and Transportation 75,805 64,975 Cost of materials and other 19,602 13,079 Operating expenses (excluding depreciation and amortization presented below) 12,958 10,172 Segment contribution margin $ 43,245 $ 41,724 Throughputs (average bpd) Three Months Ended March 31, 2022 2021 El Dorado Assets: Crude pipelines (non-gathered) 72,872 44,118 Refined products pipelines to Enterprise Systems 59,522 26,349 El Dorado Gathering System 16,156 11,880 East Texas Crude Logistics System 16,056 26,075 Permian Gathering System (1) 100,325 73,724 Plains Connection System 162,007 108,361 Trucking Assets 9,306 10,187 (1) Formerly known as the Big Spring Gathering System. Excludes volumes that are being temporarily transported via trucks while connectors are under construction. 35 | Management's Discussion and Analysis Comparison of the three months ended March 31, 2022 compared to the three months ended March 31, 2021 Net Revenues Q1 2022 vs. Q1 2021 Net revenues for the pipelines and transportation segment increased by $10.8 million, or 16.7%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increased revenues associated with the Slurry Clarifying Services Agreement, which was effective January 1, 2022; • increases in throughputs due to the impact of the severe freezing conditions that affected most of the regions where we operate and increases in throughputs at the Paline Pipeline due to scheduled pipeline maintenance during three months ended March 31, 2021 compared to the three months ended March 31, 2022; and • increased revenues at our BSR Crude Pipeline, as a result of Luther Station becoming operational in 2021. Cost of Materials and Other Q1 2022 vs. Q1 2021 Cost of materials and other for the pipelines and transportation segment increased by $6.5 million, or 49.9%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in driver wages and benefits and fuel expense proportionate to increases in fees, insurance, supplies and maintenance expenses. Operating Expenses Q1 2022 vs. Q1 2021 Operating expenses for the pipelines and transportation segment increased by $2.8 million, or 27.4%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in employee and outside service costs. Contribution Margin Q1 2022 vs. Q1 2021 Contribution margin for the pipelines and transportation segment increased by $1.5 million, or 3.6%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in revenue due to higher throughput volumes as explained above; and • partially offset by increases in operating expenses. 36 | Management's Discussion and Analysis Wholesale Marketing and Terminalling Segment We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties. The tables and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three months ended March 31, 2022 and 2021 : Wholesale Marketing and Terminalling Three Months Ended March 31, 2022 2021 Net Revenues: Affiliates $ 52,731 $ 33,146 Third-Party 78,045 54,792 Total Wholesale Marketing and Terminalling 130,776 87,938 Cost of materials and other 106,592 68,092 Operating expenses (excluding depreciation and amortization presented below) 5,149 4,639 Segment contribution margin $ 19,035 $ 15,207 Operating Information Three Months Ended March 31, 2022 2021 East Texas - Tyler Refinery sales volumes (average bpd) (1) 70,578 71,963 Big Spring marketing throughputs (average bpd) 75,549 72,927 West Texas marketing throughputs (average bpd) 9,913 10,138 West Texas gross margin per barrel $ 3.04 $ 3.42 Terminalling throughputs (average bpd) (2) 137,622 144,539 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville, Tennessee terminals. Comparison of the three months ended March 31, 2022 compared to the three months ended March 31, 2021 Net Revenues Q1 2022 vs. Q1 2021 Net revenues for the wholesale marketing and terminalling segment increased by $42.8 million, or 48.7%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in the average sales prices per gallon of gasoline and diesel sold and the average volume of diesel sold, partially offset by decrease in the average volume of gasoline sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.94 per gallon and $1.25 per gallon, respectively; and ◦ the average volume of gasoline sold decreased by 3.4 million gallons and the average volume of diesel sold increased by 2.5 million gallons. 37 | Management's Discussion and Analysis The following charts show summaries of the average sales prices per gallon of gasoline and diesel and refined products volume impacting our West Texas operations. Cost of Materials and Other Q1 2022 vs. Q1 2021 Cost of materials and other for our wholesale marketing and terminalling segment increased by $38.5 million, or 56.5%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold and the average volume of diesel sold, partially offset by decrease in the average volume of gasoline sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased by $0.97 per gallon and $1.25 per gallon, respectively; and ◦ the average volume of gasoline sold decreased by 3.4 million gallons and the average volume of diesel sold increased by 2.5 million gallons. The following chart shows a summary of the average prices per gallon of gasoline and diesel sold in our West Texas operations for the three months ended March 31, 2022 and 2021. Refer to the Refined Products Volume chart above for a summary of volumes impacting our West Texas operations. 38 | Management's Discussion and Analysis Operating Expenses Q1 2022 vs. Q1 2021 Changes in operating expenses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were immaterial. Contribution Margin Q1 2022 vs. Q1 2021 The increase of $3.8 million, or 25.2%, in contribution margin for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was due to the following: • increases in revenue due to increases in average sales prices per gallon of diesel and gasoline sold; and • partially offset by increases in cost of materials and other due to increases in average cost per gallon of diesel and gasoline sold and increases in operating expenses. 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 9 to our accompanying condensed consolidated financial statements. Refer to Consolidated Results of Operations above for details and discussion of the investments in pipeline joint ventures segment for the quarter ended March 31, 2022. Liquidity and Capital Resources Source 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 March 31, 2022 our total liquidity amounted to $588.6 million, comprised of $585.9 million in unused credit commitments under the DKL Credit Facility and $2.7 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 39 | Management's Discussion and Analysis 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. If market conditions were to change, for instance due to the uncertainty created by the COVID-19 Pandemic or the Russia - Ukraine War, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be unfavorably impacted. 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 March 31, 2022. 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 6 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Cash Distributions On April 25, 2022, the board of directors of our general partner declared a distribution of $0.98 per common unit (the "Distribution"), which equates to approximately $42,604 per quarter, based on the number of common units expected to be outstanding as of May 5, 2022. The Distribution is expected to be paid on May 12, 2022 to common unitholders of record on May 5, 2022 and represents a 6.5% increase over the first quarter 2021 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 the periods indicated: Quarter Ended Total Quarterly Distribution Per Limited Partner Unit Total Quarterly Distribution Per Limited Partner Unit, Annualized Total Cash Distribution (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 March 31, 2022 $ 0.980 $ 3.92 $ 42,604 May 12, 2022 (1) May 5, 2022 (1) Expected date of distribution. Cash Flows The following table sets forth a summary of our consolidated cash flows for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Net cash provided by operating activities $ 47,920 $ 61,732 Net cash used in investing activities (12,476) (3,965) Net cash (used in) provided by financing activities (37,010) (48,633) Net (decrease) increase in cash and cash equivalents $ (1,566) $ 9,134 40 | Management's Discussion and Analysis Operating Activities Net cash provided by operating activities was $47.9 million for the three months ended March 31, 2022, compared to $61.7 million for the three months ended March 31, 2021, resulting in a $13.8 million decrease in net cash provided by operating activities. The cash receipts from customer activities increased by $45.5 million and cash payments to suppliers and for allocations from Delek Holdings for salaries increased by $65.0 million. In addition, cash dividends received from equity method investments increased by $2.9 million and cash paid for debt interest decreased by $2.8 million. Investing Activities Net cash used in investing activities increased by $8.5 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. There were additions to property, plant and equipment amounting to $10.6 million, purchases of intangible assets amounting to $2.4 million and distributions from equity method investments amounting $0.6 million during the three months ended March 31, 2022 compared to additions to property, plant and equipment amounting to $6.1 million, purchases of intangible assets amounting to $0.5 million and distributions from equity method investments amounting to $3.9 million during the three months ended March 31, 2021. Additionally, there were no contributions to our equity method investments during the three months ended March 31, 2022 compared to $1.4 million during the three months ended March 31, 2021. Financing Activities Net cash used in financing activities amounted to $37.0 million during the three months ended March 31, 2022 compared to $48.6 million net cash provided by financing activities during the three months ended March 31, 2021. We borrowed $6.1 million under the revolving credit facility during the three months ended March 31, 2022, compared to repayments of $9.1 million under the revolving credit facility during the three months ended March 31, 2021. We paid quarterly cash distributions totaling $42.4 million during the three months ended March 31, 2022, compared to quarterly cash distributions totaling $39.5 million during the three months ended March 31, 2021. In addition, we made payments on finance lease liability in the amount of $0.7 million during the three months ended March 31, 2022 with no comparable activity during the three months ended March 31, 2021. Debt Overview As of March 31, 2022, we had total indebtedness of $905.5 million comprised of $264.1 million under the amended and restated senior secured revolving agreement (the "DKL Credit Facility"), $246.9 million of 6.75% senior notes due 2025 (the “2025 Notes”), net of deferred financing costs and original issue discount, and $394.5 million of the 2028 Notes, net of deferred financing costs. Deferred financing costs and original issue discount on the 2025 Notes amounted to $2.3 million and $0.7 million, respectively. Deferred financing costs on the 2028 Notes amounted to $5.5 million. The increase of $6.1 million in our long-term debt balance compared to the balance at December 31, 2021 resulted primarily from the borrowings under the DKL Credit Facility during the three months ended March 31, 2022: • An aggregate principal amount of $264.1 million under the DKL Credit Facility ("revolving credit facility"), due on September 28, 2023, with an average borrowing rate of 2.67%. • An aggregate principal amount of $246.9 million, under the 2025 Notes (6.75% senior notes), due in 2025, with an effective interest rate of 7.20%. • An aggregate principal amount of $394.5 million, under the 2028 Notes (7.125% senior notes), due in 2028, with an effective interest rate of 7.05%. We believe we were in compliance with the covenants in all of our debt facilities as of March 31, 2022. See Note 6 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Agreements Governing Certain Indebtedness of Delek Holdings Although we are not contractually bound by and are not liable for Delek Holdings' debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, certain of Delek Holdings' credit arrangements require that Delek Holdings meet certain minimum covenant levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders' equity to adjusted total assets. Delek Holdings, due to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek Holdings to violate these and any other covenants in its credit arrangements or otherwise be in default under any of its credit arrangements. As a result we cannot assure you that such covenants will not impact our ability to use the full capacity under our revolving credit facility in the future. Delek Holdings' level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek Holdings' level of indebtedness, financial performance and credit ratings. 41 | Management's Discussion and Analysis Equity Units Overview On April 14, 2022, we filed a shelf registration statement with the SEC, which was declared effective on April 29, 2022, which provides the Partnership the ability to offer up to $200.0 million of our common limited partner units from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. 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 three months ended March 31, 2022 and planned capital expenditures for the full year 2022 by segment and by major category (in thousands): Full Year 2022 Forecast Three Months Ended March 31, 2022 Pipelines and Transportation Regulatory (2) $ 5,265 $ 1,251 Maintenance (1) 5,780 29 Discretionary projects (2) 58,823 6,869 Pipelines and transportation segment total (4) $ 69,868 $ 8,149 Wholesale Marketing and Terminalling Regulatory (3) $ 2,292 $ 792 Maintenance (1) 215 — Discretionary (3) 225 145 Wholesale marketing and terminalling segment total (4) $ 2,732 $ 937 Total capital spending (4) $ 72,600 $ 9,086 (1) Maintenance capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines, tanks and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Delek Holdings has agreed to reimburse us with respect to certain assets it has transferred to us pursuant to the terms of the Omnibus Agreement (as defined in Note 2 to our accompanying condensed consolidated financial statements). (2) The majority of the $5.3 million and $5.8 million budgeted for regulatory and maintenance projects in the pipelines and transportation segment is expected to be spent on certain of our pipelines to maintain their operational integrity and scheduled maintenance and improvements on our assets. The majority of the $58.8 million for discretionary projects in the pipelines and transportation segment is expected to be spent on development of our DPG assets. These expenditures have historically been and will continue to be financed through cash generated from operations. (3) The majority of the $2.3 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) There were no capital contributions to equity method investments for the three months ended March 31, 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. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q. 42 | Management's Discussion and Analysis