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. 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 (or the "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; • risks related to realizing the anticipated benefits of the 3 Bear Acquisition and how the failure to do so could adversely affect our business, financial results and operations; • our future coverage, leverage, financial flexibility and growth, and our ability to improve performance and achieve distribution growth at any level or at all; • Delek Holdings' future growth, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution; • industry dynamics, including Permian Basin growth, ownership concentration, efficiencies and takeaway capacity; • the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or legal actions and other effects related to spills, releases and tank failures; • changes in insurance markets impacting costs and the level and types of coverage available; • the timing and extent of changes in commodity prices and demand for refined products and the impact of the COVID-19 Pandemic on such demand; 24 | Management's Discussion and Analysis • the effects of the military conflict that began with the Russian invasion of Ukraine (the "Russia-Ukraine War"), including the impact of sanctions brought by the United States and other countries against Russia or its allies; • 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 renewable identification numbers ("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. 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. 25 | Management's Discussion and Analysis 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. We recently acquired 100% of the interest in 3 Bear Delaware Holding – NM, LLC ("3 Bear"), which expands our third-party revenue and includes crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin of New Mexico. We are currently in the process of integrating these operations into our existing businesses and assessing the long-term impact to our reportable segments. See “2022 Strategic Developments” and Note 2 for further information about this acquisition. 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. Business and Economic Environment Overview An elevated hydrocarbon pricing environment has resulted in a strong demand for hydrocarbons and presented an opportunity for the Partnership to leverage its extensive network of logistics assets, resulting in increased throughputs and higher utilization during the third quarter 2022 as compared to the prior year. Our successful integration of 3 Bear further diversifies our logistics customer base to include significantly more third-party customers, it allows us to provide comprehensive logistics services in the Delaware Basin, while also serving as a funnel into our existing midstream Permian activities. As producers continue to ramp up production within the Permian, the Partnership is well positioned to continue to add value through our gathering and processing services as a result of integrating our 3 Bear operations which complement our existing Permian Gathering System assets. Our positioning allows our customers the ability to control quality and adds optionality to place barrels in a variety of markets. Through our joint venture projects, we have increased our supply network to take advantage of growth opportunities in expanding markets and added additional flexibility which has delivered realized value through the entire Delek Logistics system. Expectations of an economic downturn as well as initiatives to reduce carbon footprints through energy transition to renewables, have softened the demand expectations for hydrocarbons and natural gas. We are well positioned to manage through an economic downturn because of built-in recessionary protections which include minimum volume commitments on throughput and dedicated acreage agreements. The Partnership has embraced opportunities to enhance our environmental stewardship. It is expected that renewables, other than hydrocarbons, will continue to grow as a percentage of total energy consumption; however, a material reduction in the reliance on oil and gas for energy consumption is unlikely. Therefore, liquid transportation fuels will continue to be in high demand, and we aspire to be a leader in energy transformation while still providing affordable transportation fuels that improve the standard of living in the communities that we serve. Our Reporting Segments and Assets As of September 30, 2022, our business consists of the following four reportable segments: Pipelines and Transportation The operational 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. The Partnership generates revenue in its pipelines and transportation segment by charging fees to customers, generally based on throughput or other relevant volumetric measures, for services associated with gathering, transporting, offloading and storing crude oil and refined products. Furthermore, a substantial majority of our pipelines and transportation segment revenues (and also contribution margin) 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. 26 | Management's Discussion and Analysis Wholesale Marketing and Terminalling The operational 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. Our wholesale marketing and terminalling segment provides wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties from whom we receive fees for marketing, transporting, storing and terminalling refined products and to whom we wholesale market refined products. In providing certain of these services, we take ownership of the products and are therefore exposed to market risks related to the volatility of commodity and refined product prices in our West Texas operations, which depend on many factors, including demand and supply of refined products in the West Texas market, the timing of refined product deliveries and downtime at refineries in the surrounding area. Effective March 1, 2018, this segment also includes certain wholesale marketing and terminalling assets acquired from Delek Holdings, primarily located at or adjacent to the Big Spring Refinery. As of March 31, 2022, we generated revenue in our wholesale marketing and terminalling segment by (i) providing marketing services for the refined products output of the Tyler Refinery and the Big Spring Refinery, (ii) engaging in wholesale activity at our Abilene and San Angelo, Texas terminals, as well as at terminals owned by third parties, whereby we purchase light products for sale and exchange to third parties, and (iii) providing terminalling services to independent third parties and Delek Holdings. 3 Bear Operations The operational assets in our 3 Bear operations segment, which we acquired in connection with the 3 Bear Acquisition, consist of approximately 485 miles of pipelines, 88 million cubic feet ("MMCf") per day ("MMCf/d") of cryogenic natural gas processing capacity, 140 thousand barrels ("MBbl") per day ("MBbl/d") of crude gathering capacity, 120 MBbl of crude storage capacity and 200 MBbl/d of water disposal capacity. These assets support 3 Bear’s crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico. Additionally, the combination of these services provides a comprehensive, integrated midstream service offering to producers. With respect to our acquired 3 Bear operations segment, we generate two principal types of revenues: • Product sales - comprised of residual products as a result of our gathering services where 3 Bear meets the definition of the principal rather than an agent, and where such revenue is recognized upon satisfaction of the performance obligation, which is generally upon delivery • Gathering and processing services - comprised of fees charged for one or more of the following services under dedicated acreage and other long-term fee-based contracts: gathering, processing and transportation of natural gas; gathering, transportation and storage of NGLs; gathering, recycling and disposal of wastewater; and transportation, storage and distribution of crude oil, and other hydrocarbon-based products. The contractual fees are generally related to the volume of natural gas, NGLs, water, crude oil that is gathered, transported, stored or processed and therefore is not directly impacted by commodity prices. 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 provide crude oil and refined product pipeline transportation to third parties and subsidiaries of Delek Holdings. Because the 3 Bear Acquisition occurred in June 2022, integration efforts continue to be in process as of September 30, 2022. In connection with those efforts, management is continuing to: (1) review, refine and integrate operational and management reporting processes, controls, policies and procedures for the acquired operations; (2) develop an operator-view understanding of the nature of the acquired operations and the similarity/dissimilarity compared to our legacy operating segments; and (3) to evaluate the nature and level of discrete financial information on results of operations that will ultimately be used to manage the acquired operations on a long-term basis. As a result, it is possible that segment presentation could change in the near term and that such changes could include the creation of new or different reportable segments or changes to the view of aggregation into existing reportable segments which are not yet determinable. 27 | Management's Discussion and Analysis 2022 Strategic Developments 3 Bear Acquisition On June 1, 2022, the Partnership, through its subsidiary DKL Delaware Gathering, LLC, acquired 100% of the limited liability company interests in 3 Bear related to the Seller’s crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico (the "3 Bear Acquisition"). The purchase price for 3 Bear was $628.1 million. The 3 Bear Acquisition was financed through a combination of cash on hand and borrowings under the Partnership's existing credit agreement. Through this strategic transaction, the Partnership expects to significantly increase its third party revenue and further diversify its customer and product mix, expand its footprint into the Delaware sub-basin of the Permian, and provide immediate accretion to Distributable Cash Flow. Additionally, we believe the addition of 3 Bear may provide access to expanded carbon capture opportunities. Amendments to DKL Credit Facility In May 2022, we entered into Second and Third Amendments to our Third Amended and Restated Credit Agreement, which provided for the transition from a LIBOR benchmark to a term Secured Overnight Financing Rate benchmark (“Term SOFR”) and also amended certain financial covenant calculations in order to provide flexibility in connection with the timing of the 3 Bear Acquisition. Additionally, on May 26, 2022, we entered into a Fourth Amendment to Third Amended and Restated Credit Agreement to, among other things, increase the U.S. Revolving Credit Commitments (as defined in the Credit Agreement) by an amount equal to $150 million under an existing accordion feature, for an aggregate amount of commitments under our Existing Credit Agreement of $1.0 billion. The exercise of the accordion feature gave us the flexibility to utilize borrowings under the Credit Agreement to help fund the acquisition of 3 Bear while continuing to maintain sufficient availability to continue to effectively manage our working capital needs and liquidity risk, and to evaluate longer term capitalization strategies. On October 13, 2022, we entered into a Fourth Amended and Restated Credit Agreement with Fifth Third, as administrative agent and a syndicate of lenders (the "2022 DKL Credit Facility"). The 2022 DKL Credit Facility, among other things, (i) increased total aggregate commitments to $1.2 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and $25.0 million for swing line loans (the “DKL Revolving Facility”) with an extended maturity date of October 13, 2027, and (B) a new senior secured term loan in the original principal amount of $300.0 million (the “DKL Term Facility”), (ii) reset the accordion feature under the DKL Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of the Partnership and one or more existing or new lenders and (ii) provided for the DKL Term Facility be drawn in full on October 13, 2022, with a maturity date of October 13, 2024, and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances. 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. Connectors Expansion 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 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 $25.3 million as of September 30, 2022, all of which is expected to be expended during 2022. See Note 13 for additional information. Inflation Adjustments On July 1, 2022, 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 increased by approximately 8.7%, which was the amount of the change in the FERC oil pipeline index. The tariff on FERC regulated system acquired from 3 Bear has 28 | Management's Discussion and Analysis historically been adjusted as of January 1 each year. Under certain of our agreements with Delek Holdings and third parties, the fees that are subject to adjustments using the consumer price index increased 7.1% and the fees that are subject to adjustments using the producer price index increased approximately 10.8%. 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 with Delek Holdings The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of gathering systems in the Permian Basin (the "Delek Permian Gathering Project"). The majority of the gathering systems has been constructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and are still subject to the terms of the DPG Management Agreement. The Partnership is also considered the operator for the project and is responsible for the oversight of the project design, procurement and construction of project segments and for providing other related services. See Note 3 to our accompanying condensed consolidated financial statements for additional information on the DPG Management Agreement. How We Evaluate Our Operations We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: ■ volumes (including pipeline throughput and terminal volumes) ■ contribution margin per barrel ■ operating and maintenance expenses ■ cost of materials and other ■ EBITDA and distributable cash flow (as such terms are defined below). Volumes The amount of revenue we generate primarily depends on the volumes of crude oil, natural gas, natural gas liquids ("NGLs"), refined products, and produced water 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, natural gas, NGLs, 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: • Utilization of our assets in excess of 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; • our ability to successfully integrate the 3 Bear business and to successfully realize the anticipated benefits of the financial and operating synergies of the 3 Bear Acquisition, including our ability to serve existing customers and to identify and serve new customers in those related lines of business and geographic location; 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 operating 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 29 | Management's Discussion and Analysis 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; (iii) the cost of pipeline capacity leased from any third parties; (iv) gains and losses related to our commodity hedging activities; and (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; (v) all costs of natural gas purchases and other direct cost of product sales in our 3 Bear operations segment, including costs associate with condensate and skim oil, and to the extent applicable, the related transportation of such products. Financing The Partnership has declared a cash distribution to its unitholders at a distribution rate of $0.99 per unit for the quarter ended September 30, 2022 ($3.96 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of its available cash (as defined in the Partnership Agreement) to its unitholders quarterly. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our DKL Credit Facility and any potential future issuances of equity and debt securities. See Note 8 to the accompanying condensed consolidated financial statements for further discussion. 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. 30 | Management's Discussion and Analysis Market Trends Fluctuations in crude oil, natural gas and NGLs prices and the prices of related refined and other hydrocarbon products impact operations in the midstream energy sector. For example, the prices of each of these 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. Exploration and production activities have a direct impact on volumes transported through our gathering assets in the geologic basins in which we operate. Additionally, the demand for hydrocarbon-based refined products and related crack spreads significantly impact production decisions of our refining customers and likewise throughputs on our pipelines and other logistics assets. Finally, fluctuations in demand and commodity prices for refined products, as well as the value attributable to RINs, directly impacts our wholesale marketing operations, where we are subject to short-term commodity price fluctuations at the rack. Most of the logistics services we provide (including pipelines and transportation, gathering and processing services) are subject to long-term fee-based contracts with minimum volume commitments or long-term dedicated acreage agreements which mitigate most of our short-term financial risk to price and demand volatility. However, sustained depressed demand/prices over the longer term could not only curb exploration and production expansion opportunities under our agreements, it could also impact our customers' willingness or ability to renew commercial agreements or result in liquidity or credit constraints that could impact our longer term relationship with them. That said, our recent acquisition of 3 Bear and recent expansion of our gas processing capabilities have improved both our customer and geographic diversification which lowers concentration risk in those areas, in addition to adding service offerings to our portfolio. Furthermore, our dedicated acreage agreements provide significant growth opportunities in strong economic conditions (e.g., high demand/high commodity prices) without incremental customer acquisition cost. Given all of these factors, we believe that we continue to be strategically positioned, even in tougher market conditions, to sustain positive operating results and cash flows and to continue developing profitable growth projects that are needed to support future distribution growth. Market Outlook for the Remainder of 2022 As we look to the remainder of the year, commodity markets are predicting a decline in demand as consumer purchasing continues to be eroded by inflation. Such conditions could spell a global economic downturn, which may upend markets in unexpected ways and make capital more difficult to come by. However, due to years of global underinvestment in oil production and the supply-constrained demand for oil and related commodity prices may continue to be strong, sitting at or near the higher end of the life-cycle. That said, domestic regulatory intervention could put pressure on profits of oil companies and may have unanticipated effects on the commodities markets and capital markets, as well as on exploration and production activities. We are continuously evaluating forward markets and have actively engaged cost and risk mitigation strategies to proactively take advantage of opportunities through disciplined capital allocation. We are committed to lowering our costs in all aspects of our business and challenging ourselves to achieve operating excellence by improving efficiency. We are continuously looking to improve our operating and general and administrative cost structure and are exploring a zero-based budgeting process for 2023. For these reasons, we continue to position the Company to expand our third-party revenue diversification as well as our midstream footprint and product offerings to take advantage of favorable volume environments while working to ensure steady-stream minimum volume income streams and cash flows that will provide sustainability in periods of market disruption. Additionally, we will continue to balance the cost of debt and cost of equity while continuing to exercise a longer-term sustainable view of capital allocation. From a geographic positioning perspective, absent government intervention, industry analysts expect Brent crude oil, a global benchmark crude oil, to WTI differential to continue to be favorable for domestic exports throughout 2022, including the U.S. Gulf Coast region. Furthermore, while the likelihood of a favorable Midland-Cushing differential is constrained by overbuilt pipeline capacity, significant export developments and other factors could quickly shift differentials to be more favorable to our Permian-heavy gathering and logistics positioning. The charts on the following page provide historical commodity pricing statistics for crude oil, refined product and natural gas. 31 | Management's Discussion and Analysis 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. Additionally, we have identified the following critical accounting policy that impacts the nine months ended September 30, 2022: Business Combinations We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and 32 | Management's Discussion and Analysis apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value. 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 and assists in evaluating our ongoing operating performance for current and comparative periods. EBITDA and distributable cash flow should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA and distributable cash flow may be defined differently by other partnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other partnerships, thereby diminishing their utility. For a reconciliation of EBITDA and distributable cash flow to their most directly comparable financial measures calculated and presented in accordance with U.S. GAAP, please refer to "Results of Operations" below. 33 | Management's Discussion and Analysis Summary of Financial and Other Information A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance. The following table and discussion present a summary of our consolidated results of operations for the three and nine months ended September 30, 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenues: Pipelines and transportation $ 85,278 $ 76,202 $ 241,689 $ 211,612 Wholesale marketing and terminalling 147,865 113,425 444,181 299,406 3 Bear 60,882 — 81,486 — Total 294,025 189,627 767,356 511,018 Operating costs and expenses: Cost of materials and other 177,740 105,129 480,295 274,995 Operating expenses (excluding depreciation and amortization) 25,901 17,588 64,997 48,027 General and administrative expenses 11,959 5,898 30,826 15,933 Depreciation and amortization 19,540 10,156 43,297 30,862 Other operating (income) expense, net (132) 273 (120) 54 Total operating costs and expenses 235,008 139,044 619,295 369,871 Operating income 59,017 50,583 148,061 141,147 Interest expense, net 22,559 14,529 53,621 35,924 Income from equity method investments (8,567) (7,261) (22,666) (17,952) Other income, net (36) (115) (39) (118) Total non-operating costs and expenses 13,956 7,153 30,916 17,854 Income before income tax expense (benefit) 45,061 43,430 117,145 123,293 Income tax expense (benefit) 387 (194) 793 156 Net income attributable to partners $ 44,674 $ 43,624 $ 116,352 $ 123,137 EBITDA (1) $ 88,962 $ 69,917 $ 219,471 $ 195,487 Net income per limited partner unit: Basic $ 1.03 $ 1.00 $ 2.68 $ 2.83 Diluted $ 1.03 $ 1.00 $ 2.67 $ 2.83 Weighted average limited partner units outstanding: Basic 43,485,779 43,454,535 43,477,801 43,447,739 Diluted 43,515,960 43,468,289 43,499,837 43,457,857 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. 34 | Management's Discussion and Analysis Non-GAAP Reconciliations The following table provides a reconciliation of EBITDA and distributable cash flow to the most directly comparable U.S. GAAP measure, or net income and net cash from operating activities, respectively. Reconciliation of net income to EBITDA (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 44,674 $ 43,624 $ 116,352 $ 123,137 Add: Income tax expense (benefit) 387 (194) 793 156 Depreciation and amortization 19,540 10,156 43,297 30,862 Amortization of marketing contract intangible asset 1,802 1,802 5,408 5,408 Interest expense, net 22,559 14,529 53,621 35,924 EBITDA (1) $ 88,962 $ 69,917 $ 219,471 $ 195,487 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. Reconciliation of net cash from operating activities to distributable cash flow (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net cash provided by operating activities $ 164,425 $ 74,752 $ 297,482 $ 222,276 Changes in assets and liabilities (94,450) (16,256) (115,358) (56,898) Distributions from equity method investments in investing activities — 845 1,737 6,245 Non-cash lease expense (2,100) (2,460) (13,584) (6,967) Maintenance and regulatory capital expenditures (1) (2,143) (850) (3,183) (3,712) Reimbursement from Delek Holdings for capital expenditures (2) 19 11 5 1,588 Accretion of asset retirement obligations (168) (116) (415) (346) Deferred income taxes (76) (138) (76) (203) Gain (loss) on sale of assets 132 (273) 120 (54) Distributable cash flow (3) $ 65,639 $ 55,515 $ 166,728 $ 161,929 (1) Maintenance and regulatory capital expenditures represent cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance and regulatory capital expenditures are expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. (2) For the three and nine month periods ended September 30, 2022 and 2021, Delek Holdings reimbursed us for certain capital expenditures pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements). (3) For a definition of distributable cash flow, please see "Non-GAAP Measures" above. 35 | Management's Discussion and Analysis Results of Operations Consolidated Results of Operations — Comparison of the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net Revenues: Affiliates $ 127,150 $ 123,519 $ 375,270 $ 308,435 Third-Party 166,875 66,108 392,086 202,583 Total Consolidated 294,025 189,627 767,356 511,018 Cost of materials and other 177,740 105,129 480,295 274,995 Operating expenses (excluding depreciation and amortization presented below) 25,901 17,588 64,997 48,027 Contribution margin 90,384 66,910 222,064 187,996 General and administrative expenses 11,959 5,898 30,826 15,933 Depreciation and amortization 19,540 10,156 43,297 30,862 Other operating (income) expense, net (132) 273 (120) 54 Operating income $ 59,017 $ 50,583 $ 148,061 $ 141,147 Net Revenues Q3 2022 vs. Q3 2021 Net revenues increased by $104.4 million, or 55.1%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increased revenues of $60.9 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; and • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased $0.57 per gallon and $1.44 per gallon, respectively; and ◦ the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively. • increases in pipeline throughputs, where the third quarter of 2021 was negatively impacted by the COVID-19 Pandemic. YTD 2022 vs. YTD 2021 Net revenues increased by $256.3 million, or 50.2%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: • increased revenues of $81.5 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; • increases in the average sales prices per gallon of gasoline and diesel sold and volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.96 per gallon and $1.56 per gallon, respectively; and ◦ the average volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons. • increases in pipeline throughputs, where the nine months ended September 30, 2021 were negatively impacted by the COVID-19 Pandemic as well as severe weather events. 36 | Management's Discussion and Analysis Cost of Materials and Other Q3 2022 vs. Q3 2021 Cost of materials and other increased by $72.6 million, or 69.1%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increase in costs of materials and other totaling $35.1 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; and • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased $0.56 per gallon and $1.42 per gallon, respectively; and ◦ the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively. YTD 2022 vs. YTD 2021 Cost of materials and other increased by $205.3 million, or 74.7%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: • increase in costs of materials and other totaling $48.9 million as a result of the 3 Bear Acquisition, which was completed on June 1, 2022; and • increases in the average cost per gallon of gasoline and diesel sold and the volume of diesel sold, partially offset by a decrease in the 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 $1.55 per gallon, respectively; and ◦ the volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons. Operating Expenses Q3 2022 vs. Q3 2021 Operating expenses increased by $8.3 million, or 47.3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increase due to additional expenses associated with 3 Bear, which was acquired on June 1, 2022; • increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; • increase in energy costs, due to higher natural gas prices; and • increases in utilities, maintenance and other variable expenses due to higher throughput. YTD 2022 vs. YTD 2021 Operating expenses increased by $17.0 million, or 35.3%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: • increase due to additional expenses associated with 3 Bear, which was acquired on June 1, 2022; • 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 Q3 2022 vs. Q3 2021 General and administrative expenses increased by $6.1 million, or 102.8%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by an increase in outside services costs primarily associated with the 3 Bear Acquisition. YTD 2022 vs. YTD 2021 General and administrative expenses increased by $14.9 million, or 93.5%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by transaction costs incurred in connection with the 3 Bear Acquisition. 37 | Management's Discussion and Analysis Depreciation and Amortization Q3 2022 vs. Q3 2021 Depreciation and amortization increased by $9.4 million, or 92.4%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • the acquisition of property, plant and equipment and customer relationship intangible as part of the 3 Bear Acquisition. YTD 2022 vs. YTD 2021 Depreciation and amortization increased by $12.4 million, or 40.3%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: • the acquisition of property, plant and equipment and customer relationship intangible as part of the 3 Bear Acquisition. Interest Expense Q3 2022 vs. Q3 2021 During the third quarter of 2022 we incurred $22.6 million of interest expense, compared to $14.5 million during the third quarter of 2021, an increase of $8.1 million, or 56.0%. This increase was primarily driven by the following: • increased borrowings under the DKL Credit Facility; and • higher floating rate interests under the DKL Credit Facility. YTD 2022 vs. YTD 2021 During the nine months ended September 30, 2022 we incurred $53.6 million of interest expense, compared to $35.9 million during the nine months ended September 30, 2021, an increase of $17.7 million, or 49.3%. This increase was primarily driven by the following: • increased borrowings under the DKL Credit Facility to fund the 3 Bear Acquisition; • 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 Q3 2022 vs. Q3 2021 We recognized income of $8.6 million from equity method investments during the third quarter of 2022 compared to $7.3 million for the third quarter of 2021, an increase of $1.3 million, or 17.8%. 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. YTD 2022 vs. YTD 2021 During the nine months ended September 30, 2022 we recognized income of $22.7 million from equity method investments, compared to $18.0 million for the nine months ended September 30, 2021, an increase of $4.7 million, or 26.1%. 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 investment. 38 | Management's Discussion and Analysis Operating Segments Our business consists of four reportable segments: (i) pipelines and transportation; (ii) wholesale marketing and terminalling; (iii) 3 Bear; and (iv) investment in pipeline joint ventures. We review operating results in the following two reportable segments on a disaggregated basis: (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. The 3 Bear operations segment was added as a new reportable segment in the second quarter of 2022 in connection with the acquisition of this business on June 1, 2022 and includes the results of operations and cash flows of 3 Bear beginning on June 1, 2022. The Partnership is in the process of identifying its long-term plan for integrating 3 Bear into its existing segments and as a result, the Partnership’s operating segments may change in the near future. Management measures the operating performance of these reportable segments based on the segment contribution margin. Segment reporting is discussed in more detail in Note 11 to our accompanying condensed consolidated financial statements. 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 • 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties The following tables and discussion present the results of operations and certain operating statistics of the pipelines and transportation segment for the three and nine months ended September 30, 2022 and 2021: Pipelines and Transportation Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net Revenues: Affiliates $ 79,395 $ 70,879 $ 225,711 $ 199,591 Third-Party 5,883 5,323 15,978 12,021 Total Pipelines and Transportation 85,278 76,202 241,689 211,612 Cost of materials and other 20,004 15,170 58,272 42,595 Operating expenses (excluding depreciation and amortization presented below) 11,292 13,680 37,789 34,710 Segment contribution margin $ 53,982 $ 47,352 $ 145,628 $ 134,307 Throughputs (average bpd) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 El Dorado Assets: Crude pipelines (non-gathered) 87,653 81,929 81,795 60,344 Refined products pipelines to Enterprise Systems 65,761 62,263 63,391 42,733 El Dorado Gathering System 14,354 14,086 16,150 14,056 East Texas Crude Logistics System 23,960 18,644 20,015 24,045 Permian Gathering System (1) 121,304 84,325 107,699 79,251 Plains Connection System 184,254 131,571 166,864 120,905 Trucking Assets 15,763 11,450 13,606 10,655 (1) Formerly known as the Big Spring Gathering System. Excludes volumes that are being temporarily transported via trucks while connectors are under construction. 39 | Management's Discussion and Analysis Comparison of the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 Net Revenues Q3 2022 vs. Q3 2021 Net revenues for the pipelines and transportation segment increased by $9.1 million, or 11.9%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increases in throughputs, where the third quarter of 2021 was negatively impacted by the COVID-19 Pandemic as well as severe weather events impacting Delek Holdings. YTD 2022 vs. YTD 2021 Net revenues for the pipelines and transportation segment increased by $30.1 million, or 14.2%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 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 nine months ended September 30, 2021 compared to the nine months ended September 30, 2022; and • increased revenues at our BSR Crude Pipeline, as a result of Luther Station becoming operational in 2021. Cost of Materials and Other Q3 2022 vs. Q3 2021 Cost of materials and other for the pipelines and transportation segment increased by $4.8 million, or 31.9%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increases in transportation costs related to our trucking assets, including driver wages and benefits and fuel expenses proportionate to increase in fees, insurance, supplies and maintenance expenses. YTD 2022 vs. YTD 2021 Cost of materials and other for the pipelines and transportation segment increased by $15.7 million, or 36.8%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 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 Q3 2022 vs. Q3 2021 Operating expenses for the pipelines and transportation segment decreased by $2.4 million, or 17.5%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increase in employee and outside service costs compared to same period prior year when cost cutting measures were implemented to respond to the COVID-19 Pandemic including delaying non-essential projects; • increase in energy costs due to higher natural gas prices; and • increase in utilities and other variable expenses due to higher throughputs. YTD 2022 vs. YTD 2021 Operating expenses for the pipelines and transportation segment increased by $3.1 million, or 8.9%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: • increases in employee and outside service costs. 40 | Management's Discussion and Analysis Contribution Margin Q3 2022 vs. Q3 2021 Contribution margin for the pipelines and transportation segment increased by $6.6 million, or 14.0%, in the third quarter of 2022 compared to the third quarter of 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. YTD 2022 vs. YTD 2021 Contribution margin for the pipelines and transportation segment increased by $11.3 million, or 8.4%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 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. 41 | Management's Discussion and Analysis Wholesale Marketing and Terminalling Segment We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek Holdings' refining operations and to independent third parties. The tables and discussion below present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three and nine months ended September 30, 2022 and 2021 : Wholesale Marketing and Terminalling Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net Revenues: Affiliates $ 45,162 $ 52,640 $ 144,004 $ 108,844 Third-Party 102,703 60,785 300,177 190,562 Total Wholesale Marketing and Terminalling 147,865 113,425 444,181 299,406 Cost of materials and other 122,614 89,959 373,126 232,400 Operating expenses (excluding depreciation and amortization presented below) 6,952 3,908 17,397 13,317 Segment contribution margin $ 18,299 $ 19,558 $ 53,658 $ 53,689 Operating Information Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 East Texas - Tyler Refinery sales volumes (average bpd) (1) 65,396 71,847 66,473 72,791 Big Spring marketing throughputs (average bpd) 74,238 81,880 76,135 76,680 West Texas marketing throughputs (average bpd) 10,082 10,560 10,023 10,033 West Texas gross margin per barrel $ 4.23 $ 3.33 $ 3.84 $ 3.64 Terminalling throughputs (average bpd) (2) 142,003 144,355 138,558 142,959 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville, Tennessee terminals. Comparison of the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 Net Revenues Q3 2022 vs. Q3 2021 Net revenues for the wholesale marketing and terminalling segment increased by $34.4 million, or 30.4%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased $0.57 per gallon and $1.44 per gallon, respectively; and ◦ the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively. YTD 2022 vs. YTD 2021 Net revenues for the wholesale marketing and terminalling segment increased by $144.8 million, or 48.4%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: • increases in the average sales prices per gallon of gasoline and diesel sold and volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased by $0.96 per gallon and $1.56 per gallon, respectively; and 42 | Management's Discussion and Analysis ◦ the average volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 million gallons. The following charts show summaries of the average sales prices per gallon of gasoline and diesel and refined products volume impacting our West Texas operations. Cost of Materials and Other Q3 2022 vs. Q3 2021 Cost of materials and other for our wholesale marketing and terminalling segment increased by $32.7 million, or 36.3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased $0.56 per gallon and $1.42 per gallon, respectively; and ◦ the volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively. YTD 2022 vs. YTD 2021 Cost of materials and other for our wholesale marketing and terminalling segment increased by $140.7 million, or 60.6%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: 43 | Management's Discussion and Analysis • increases in the average cost per gallon of gasoline and diesel sold and the volume of diesel sold, partially offset by a decrease in the 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 $1.55 per gallon, respectively; and ◦ the volume of gasoline sold decreased by 2.0 million gallons and the volume of diesel sold increased by 1.9 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 and nine months ended September 30, 2022 and 2021. Refer to the Refined Products Volume chart above for a summary of volumes impacting our West Texas operations. Operating Expenses Q3 2022 vs. Q3 2021 Operating expenses for our wholesale marketing and terminalling segment increased by $3.0 million, or 77.9% in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: • increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; • increase in energy costs, due to higher natural gas prices; and • increases in utilities, maintenance and other variable expenses due to higher throughput. YTD 2022 vs. YTD 2021 Operating expenses for our wholesale marketing and terminalling segment increased by $4.1 million, or 30.6%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 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. Contribution Margin Q3 2022 vs. Q3 2021 Contribution margin for the wholesale marketing and terminalling segment decreased by $1.3 million, or 6.4%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by an increase in cost of materials and other due to increases in average cost per gallon of diesel and gasoline sold as described above. Such decreases were offset by an increase in revenue due to increases in average price per gallon of diesel and gasoline as described above. YTD 2022 vs. YTD 2021 The change in contribution margin for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was immaterial. 44 | Management's Discussion and Analysis 3 Bear Operations 3 Bear Operations Three Months Ended September 30, 2022 Period from June 1 through September 30, 2022 Net Revenues: Affiliates $ 2,593 $ 5,555 Third-Party 58,289 75,931 Total net revenues 60,882 81,486 Cost of materials and other 35,122 48,897 Operating expenses (excluding depreciation and amortization presented below) 7,657 9,811 Segment contribution margin $ 18,103 $ 22,778 Volumes Three Months Ended September 30, 2022 Period from June 1 through September 30, 2022 Natural Gas Gathering and Processing (Mcfd (1) ) 64,429 115,721 Crude Oil Gathering (bpd (2) ) 86,483 164,891 Water Disposal and Recycling (bpd (2) ) 69,411 125,127 (1) Mcfd - average thousand cubic feet per day. (2) bpd - average barrels per day. The 3 Bear operations segment includes the results of operations associated with crude oil and natural gas gathering, processing and transportation operations, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico, since the Acquisition Date, or June 1, 2022. As a result, there is no comparative financial and operating data related to the three months and nine months ended September 30, 2021, and the Partnership's consolidated results of operations for the three and nine months ended September 30, 2022 only reflect segment operations since June 1, 2022. The revenues and contribution margin for the period from the Acquisition Date through September 30, 2022 are largely driven by production volumes and gathering activities, which are a function of both producer activities as well as our capacity, subject to the dedicated acreage agreements and the portions of acreage which have been developed, the extent to which connection points and interconnects have been brought on-line, and the extent to which maintenance or other planned or unplanned operational disruptions may occur. While the strong demand for crude oil and associated products have led to strong levels of production, we performed certain turnaround activities on our Libby plant associated with the expansion project during the month ended June 30, 2022 which reduced volumes of gathered natural gas and related wastewater during the month, and likewise reduced related product sales volumes, though favorable prices on condensate and skim oil largely offset product sales volume decreases. While periodic maintenance or other temporary disruptions may occur, the specific maintenance activities impacting these results were completed during June. See Note 2 for information related to the acquisition and for pro forma financials for the three and nine months ended September 30, 2022. Refer to Consolidated Results of Operations above for details and discussion of the 3 Bear operations segment for the quarter ended September 30, 2022. Investments in Pipeline Joint Ventures Segment The investments in pipeline joint ventures segment relates to investments in entities for which we share joint control that 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 10 to our accompanying condensed consolidated financial statements. 45 | Management's Discussion and Analysis 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 September 30, 2022 our total liquidity amounted to $208.0 million, comprised of $193.1 million in unused credit commitments under the DKL Credit Facility and $14.9 million in cash and cash equivalents, which represented an increase of $75.1 million from June 30, 2022. 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. 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. We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to a significant decline in crude oil prices or uncertainty created by the COVID-19 Pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced. Additionally, it could cause the rating agencies to lower our credit ratings. There are no ratings triggers that would accelerate the maturity of any borrowings under our debt agreements. Management continues to actively respond to the impact of the COVID-19 Pandemic to enhance our liquidity position. Such actions include seeking alternative financing solutions and enacting cost reduction measures. Refer to the Business Overview section of this MD&A for a complete discussion of the uncertainties identified by management and the actions taken to respond to the COVID-19 Pandemic. We believe we were in compliance with the covenants in all our debt facilities as of September 30, 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 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Amendments to DKL Credit Facility In May 2022, we entered into Second and Third Amendments to our Third Amended and Restated Credit Agreement, which provided for the transition from a LIBOR benchmark to a term Secured Overnight Financing Rate benchmark (“Term SOFR”) and also amended certain financial covenant calculations in order to provide flexibility in connection with the timing of the 3 Bear Acquisition. Additionally, on May 26, 2022, we entered into a Fourth Amendment to Third Amended and Restated Credit Agreement to, among other things, increase the U.S. Revolving Credit Commitments (as defined in the Credit Agreement) by an amount equal to $150 million under an existing accordion feature, for an aggregate amount of commitments under our Existing Credit Agreement of $1 billion. The exercise of the accordion feature gave us the flexibility to utilize borrowings under the Credit Agreement to help fund the acquisition of 3 Bear while continuing to maintain sufficient availability to continue to effectively manage our working capital needs and liquidity risk, and to evaluate longer term capitalization strategies. On October 13, 2022, we entered into a Fourth Amended and Restated Credit Agreement with Fifth Third, as administrative agent and a syndicate of lenders (the "2022 DKL Credit Facility"). The DKL Credit Facility, among other things, (i) increased total aggregate commitments to $1.2 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and $25.0 million for swing line loans (the “DKL Revolving Facility”) with an extended maturity date of October 13, 2027, and (B) a new senior secured term loan in the original principal amount of $300.0 million (the “DKL Term Facility”), (ii) reset the accordion feature under the DKL Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of the Partnership and one or more existing or new lenders and 46 | Management's Discussion and Analysis (ii) provided for the DKL Term Facility be drawn in full on October 13, 2022, with a maturity date of October 13, 2024, and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances. Cash Distributions On October 25, 2022, the board of directors of our general partner declared a distribution of $0.99 per common unit (the "Distribution"), which equates to approximately $43.1 million per quarter, based on the number of common units expected to be outstanding as of November 4, 2022. The Distribution is expected to be paid on November 10, 2022 to common unitholders of record on November 4, 2022 and represents a 4.2% increase over the third 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 $ 3.680 $ 39,968 May 14, 2021 May 10, 2021 June 30, 2021 $ 0.940 $ 3.760 $ 40,846 August 11, 2021 August 5, 2021 September 30, 2021 $ 0.950 $ 3.800 $ 41,286 November 10, 2021 November 5, 2021 December 31, 2021 $ 0.975 $ 3.900 $ 42,384 February 8, 2022 February 1, 2022 March 31, 2022 $ 0.980 $ 3.920 $ 42,604 May 12, 2022 May 5, 2022 June 30, 2022 $ 0.985 $ 3.940 $ 42,832 August 11, 2022 August 4, 2022 September 30, 2022 $ 0.990 $ 3.960 $ 43,057 November 10, 2022 (1) November 4, 2022 (1) Expected date of distribution. Cash Flows The following table sets forth a summary of our consolidated cash flows for the nine months ended September 30, 2022 and 2021 (in thousands): Nine Months Ended September 30, 2022 2021 Net cash provided by operating activities $ 297,482 $ 222,276 Net cash used in investing activities (705,087) (7,971) Net cash provided by (used) in financing activities 418,258 (213,684) Net increase in cash and cash equivalents $ 10,653 $ 621 Operating Activities Net cash provided by operating activities was $297.5 million for the nine months ended September 30, 2022, compared to $222.3 million for the nine months ended September 30, 2021, resulting in a $75.2 million increase in net cash provided by operating activities. The cash receipts from customer activities increased by $250.1 million and cash payments to suppliers and for allocations from Delek Holdings for salaries increased by $164.3 million. In addition, cash dividends received from equity method investments increased by $8.1 million and cash paid for debt interest increased by $18.7 million. Investing Activities Net cash used in investing activities increased by $697.1 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The 3 Bear Acquisition, which closed on June 1, 2022, was partially financed through borrowings under the DKL Credit Facility amounting to $625.4 million, which was recorded in investing activities. There were no acquisitions during the nine months ended September 30, 2021. In addition, there were additions to property, plant and equipment amounting to $76.9 million, purchases of intangible assets amounting to $4.7 million and distributions from equity method investments amounting $1.7 million during the nine months ended September 30, 2022 compared to additions to property, plant and equipment amounting to $12.4 million, purchases of intangible assets amounting to $0.7 million and distributions from equity method investments amounting to $6.2 million during the nine months ended September 30, 2021. Additionally, there were no contributions to our equity method investments during the nine months ended September 30, 2022 compared to $1.4 million during the nine months ended September 30, 2021. 47 | Management's Discussion and Analysis Financing Activities Net cash provided by (used) in financing activities amounted to $418.3 million during the nine months ended September 30, 2022 compared to $213.7 million net cash provided by financing activities during the nine months ended September 30, 2021. We had net borrowings of $548.9 million under the revolving credit facility during the nine months ended September 30, 2022, compared to net repayments of $485.7 million under the revolving credit facility during the nine months ended September 30, 2021. We had no proceeds from senior notes during the nine months ended September 30, 2022, compared to proceeds of $400.0 million during the nine months ended September 30, 2021. We paid quarterly cash distributions totaling $128.0 million during the nine months ended September 30, 2022, compared to quarterly cash distributions totaling $120.4 million during the nine months ended September 30, 2021. In addition, we made payments on finance lease liability in the amount of $1.9 million during the nine months ended September 30, 2022, compared to payments on finance lease liability in the amount of $1.4 million during the nine months ended September 30, 2021. Debt Overview As of September 30, 2022, we had total indebtedness of $1,448.8 million comprised of $806.4 million under the amended and restated senior secured revolving agreement (the "DKL Credit Facility"), net of deferred financing costs, $247.4 million of 6.75% senior notes due 2025 (the “2025 Notes”), net of deferred financing costs and original issue discount, and $395.0 million of the 2028 Notes, net of deferred financing costs. Deferred financing costs on the DKL Credit Facility amounted to $0.5 million. Deferred financing costs and original issue discount on the 2025 Notes amounted to $2.0 million and $0.6 million, respectively. Deferred financing costs on the 2028 Notes amounted to $5.0 million. The increase of $549.8 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 nine months ended September 30, 2022: • An aggregate principal amount of $806.4 million under the DKL Credit Facility ("revolving credit facility"), due on September 28, 2023, with an average borrowing rate of 5.64%, which was amended and restated on October 13, 2022. See Note 15 to our accompanying condensed consolidated financial statements for further information. • An aggregate principal amount of $247.4 million, under the 2025 Notes (6.75% senior notes), due in 2025, with an effective interest rate of 7.19%. • An aggregate principal amount of $395.0 million, under the 2028 Notes (7.125% senior notes), due in 2028, with an effective interest rate of 7.40%. We believe we were in compliance with the covenants in all of our debt facilities as of September 30, 2022. See Note 7 to our accompanying condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Agreements Governing Certain Indebtedness of Delek Holdings Although we are not contractually bound by and are not liable for Delek Holdings' debt under its credit arrangements, we are indirectly affected by certain prohibitions and limitations contained therein. Specifically, certain of Delek Holdings' credit arrangements require that Delek Holdings meet certain minimum covenant levels for (i) consolidated shareholders’ equity and (ii) a ratio of consolidated shareholders' equity to adjusted total assets. Delek Holdings, due to its majority ownership and control of our general partner, has the ability to prevent us from taking actions that would cause Delek Holdings to violate these and any other covenants in its credit arrangements or otherwise be in default under any of its credit arrangements. As a result we cannot assure you that such covenants will not impact our ability to use the full capacity under our revolving credit facility in the future. Delek Holdings' level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit profile. Our current and future credit ratings may also be affected by Delek Holdings' level of indebtedness, financial performance and credit ratings. Equity Units Overview On 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, which includes strategic consideration and planning for the timing and extent of regulatory maintenance, sustaining maintenance, and discretionary capital projects. These categories are described below: • Regulatory maintenance projects in the pipelines and transportation segment are those expenditures expected to be spent on certain of our pipelines to maintain their operational integrity pursuant to applicable environmental and other regulatory requirements. 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 in order to maintain environmental and other regulatory compliance. These expenditures have historically been and will continue to be financed through cash generated from operations. 48 | Management's Discussion and Analysis • Sustaining maintenance capital expenditures represent capitalizable 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 maintain compliance with environmental laws and regulations. Delek Holdings has agreed to reimburse us with respect to certain assets it has transferred to us pursuant to the terms of the Omnibus Agreement (as defined in Note 3 to our accompanying condensed consolidated financial statements). When not provided for under reimbursement agreements, such activities are generally funded by cash generated from operations. • Discretionary projects include those projects that do not fall into one of the two categories above, and could include committed expansion projects under contracts with customers as well as other incremental growth projects, but are generally expected to produce incremental cash flows in accordance with our internal return on invested capital policy. Depending on the magnitude, funding for such projects may include cash generated from operations, borrowings under existing credit facilities, or issuances of additional debt or equity securities. The following table summarizes our actual capital expenditures, including any material capital expenditure payments made or forecasted to be made in advance of receipt of goods and materials, for the nine months ended September 30, 2022 and planned capital expenditures for the full year 2022 by segment and by major category (in thousands): Full Year 2022 Forecast Nine Months Ended September 30, 2022 Pipelines and Transportation Regulatory $ 3,733 $ 1,945 Maintenance 1,431 371 Discretionary (1) 84,004 48,477 Pipelines and transportation segment total $ 89,168 $ 50,793 Wholesale Marketing and Terminalling Regulatory $ 909 $ 907 Maintenance 315 — Discretionary 624 430 Wholesale marketing and terminalling segment total $ 1,848 $ 1,337 3 Bear Regulatory $ — $ — Maintenance — 753 Discretionary (2) 25,862 14,889 3 Bear operations segment total $ 25,862 $ 15,642 Total capital spending (3) (4) $ 116,878 $ 67,772 (1) The majority of the $84.0 million for discretionary projects in the pipelines and transportation segment relates to current and forecasted remaining current year spend on development of our DPG Connectors Expansion Project, as discussed in the 2022 Strategic Developments section of Management Discussion and Analysis. Upon completion, these expenditures are expected to generate incremental cash flows under related dedicated acreage and throughput agreements. These capital expenditures are expected to be funded with cash from operations or borrowings under existing credit facilities and potential future issuances of equity and debt securities. The current year spend excludes approximately $12.0 million of capital expenditures that were prepaid in the fourth quarter 2021, but which assets were received and placed in service in 2022. (2) The majority of the $25.9 million budgeted for discretionary projects in the 3 Bear operations segment is expected to be spent on expansions and connections of the assets acquired in the 3 Bear Acquisition. Upon completion, these expenditures are expected to generate incremental cash flows. These capital expenditures are expected to be funded with cash from operations or borrowings under existing credit facilities and potential future issuances of equity and debt securities. (3) There were no capital contributions to equity method investments for the nine months ended September 30, 2022. (4) The current year spend excludes approximately $8.1 million for equipment purchased during the nine months ended September 30, 2022 to be used in future expansion projects. 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. 49 | Management's Discussion and Analysis Long-term Cash Requirements Information regarding our known contractual obligations of the types described below, as of September 30, 2022, 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 $ 806,900 $ 250,000 $ — $ 400,000 $ 1,456,900 Interest (1) 91,231 90,750 57,000 28,500 267,481 Finance lease obligation 2,968 1,668 — — 4,636 Operating lease commitments (2) 8,697 11,556 1,540 1,218 23,011 Total $ 909,796 $ 353,974 $ 58,540 $ 429,718 $ 1,752,028 (1) Includes expected interest payments on debt balances outstanding under the DKL Credit Facility and the 2025 and 2028 Notes at September 30, 2022. Floating interest rate debt is calculated using rates in effect on September 30, 2022. (2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of September 30, 2022. 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. 50 | Management's Discussion and Analysis