Delek Logistics Partners, LP 10-Q

Item 1. Financial Statements Delek Logistics Partners, LP Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except unit and per unit data) March 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 10,964 $ 7,970 Accounts receivable 60,536 53,314 Inventory 2,656 1,483 Other current assets 2,772 2,463 Total current assets 76,928 65,230 Property, plant and equipment: Property, plant and equipment 1,273,942 1,240,684 Less: accumulated depreciation ( 332,814 ) ( 316,680 ) Property, plant and equipment, net 941,128 924,004 Equity method investments 243,273 257,022 Customer relationship intangible, net 194,914 199,440 Marketing contract intangible, net 107,563 109,366 Rights-of-way, net 56,397 55,990 Goodwill 27,051 27,051 Operating lease right-of-use assets 24,882 24,788 Other non-current assets 19,481 16,408 Total assets $ 1,691,617 $ 1,679,299 LIABILITIES AND DEFICIT Current liabilities: Accounts payable $ 23,097 $ 57,403 Accounts payable to related parties 4,477 6,055 Current portion of long-term debt 15,000 15,000 Interest payable 16,552 5,308 Excise and other taxes payable 4,349 8,230 Current portion of operating lease liabilities 8,132 8,020 Accrued expenses and other current liabilities 6,367 6,202 Total current liabilities 77,974 106,218 Non-current liabilities: Long-term debt, net of current portion 1,693,200 1,646,567 Operating lease liabilities, net of current portion 12,175 12,114 Asset retirement obligations 9,509 9,333 Other non-current liabilities 16,181 15,767 Total non-current liabilities 1,731,065 1,683,781 Equity (Deficit): Common unitholders - public; 9,263,842 units issued and outstanding at March 31, 2023 ( 9,257,305 at December 31, 2022) 170,522 172,119 Common unitholders - Delek Holdings; 34,311,278 units issued and outstanding at March 31, 2023 ( 34,311,278 at December 31, 2022) ( 287,944 ) ( 282,819 ) Total deficit ( 117,422 ) ( 110,700 ) Total liabilities and deficit $ 1,691,617 $ 1,679,299 See accompanying notes to the condensed consolidated financial statements 3 | Financial Statements Delek Logistics Partners, LP Condensed Consolidated Statements of Comprehensive Income (Unaudited) (In thousands, except unit and per unit data) Three Months Ended March 31, 2023 2022 Net revenues Affiliate (1) $ 124,999 $ 123,754 Third Party 118,526 82,827 Net revenues 243,525 206,581 Cost of sales: Cost of materials and other - affiliate (1) 91,071 105,885 Cost of materials and other - third party 35,025 20,309 Operating expenses (excluding depreciation and amortization presented below) 24,215 17,543 Depreciation and amortization 19,764 9,861 Total cost of sales 170,075 153,598 Operating expenses related to wholesale business (excluding depreciation and amortization presented below) 525 564 General and administrative expenses 7,510 5,095 Depreciation and amortization 1,341 474 Loss on disposal of assets 142 12 Total operating costs and expenses 179,593 159,743 Operating income 63,932 46,838 Interest expense, net 32,581 14,250 Income from equity method investments ( 6,316 ) ( 7,026 ) Other income, net ( 2 ) ( 1 ) Total non-operating expenses, net 26,263 7,223 Income before income tax expense 37,669 39,615 Income tax expense 302 101 Net income attributable to partners $ 37,367 $ 39,514 Comprehensive income attributable to partners $ 37,367 $ 39,514 Net income per limited partner unit: Basic $ 0.86 $ 0.91 Diluted $ 0.86 $ 0.91 Weighted average limited partner units outstanding: Basic 43,569,963 43,471,536 Diluted 43,585,297 43,481,572 Cash distributions per common limited partner unit $ 1.025 $ 0.980 (1) See Note 3 for a description of our material affiliate revenue and purchases transactions. See accompanying notes to the condensed consolidated financial statements 4 | Financial Statements Delek Logistics Partners, LP Condensed Consolidated Statements of Partners' Equity (Deficit) (Unaudited) (in thousands) Common - Public Common - Delek Holdings Total Balance as of December 31, 2022 $ 172,119 $ ( 282,819 ) $ ( 110,700 ) Cash distributions ( 9,442 ) ( 34,998 ) ( 44,440 ) Net income attributable to partners 7,940 29,427 37,367 Other ( 95 ) 446 351 Balance as of March 31, 2023 $ 170,522 $ ( 287,944 ) $ ( 117,422 ) Common - Public Common - Delek Holdings Total Balance as of December 31, 2021 $ 166,067 $ ( 270,059 ) $ ( 103,992 ) Cash distributions ( 8,570 ) ( 33,830 ) ( 42,400 ) Net income attributable to partners 8,328 31,186 39,514 Delek Holdings unit sale to public 5,110 ( 5,110 ) — Other ( 239 ) 595 356 Balance as of March 31, 2022 $ 170,696 $ ( 277,218 ) $ ( 106,522 ) See accompanying notes to the condensed consolidated financial statements 5 | Financial Statements Delek Logistics Partners, LP Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 37,367 $ 39,514 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,105 10,335 Non-cash lease expense 2,200 1,798 Amortization of customer contract intangible assets 1,803 1,803 Amortization of deferred revenue ( 444 ) ( 444 ) Amortization of deferred financing costs and debt discount 1,127 847 Income from equity method investments ( 6,316 ) ( 7,026 ) Dividends from equity method investments 9,238 6,613 Other non-cash adjustments 780 492 Changes in assets and liabilities: Accounts receivable 2,165 ( 4,966 ) Inventories and other current assets ( 1,482 ) 112 Accounts payable and other current liabilities ( 36,430 ) 14,157 Accounts receivable/payable to related parties ( 1,578 ) ( 14,141 ) Non-current assets and liabilities, net ( 345 ) ( 1,174 ) Net cash provided by operating activities 29,190 47,920 Cash flows from investing activities: Purchases of property, plant and equipment ( 27,837 ) ( 10,613 ) Proceeds from sales of property, plant and equipment — 12 Purchases of intangible assets ( 582 ) ( 2,425 ) Distributions from equity method investments 1,440 550 Net cash used in investing activities ( 26,979 ) ( 12,476 ) Cash flows from financing activities: Distributions to common unitholders - public ( 9,442 ) ( 8,570 ) Distributions to common unitholders - Delek Holdings ( 34,998 ) ( 33,830 ) Proceeds from revolving facility 143,500 113,600 Payments on revolving facility ( 93,400 ) ( 107,500 ) Payments on term loan debt ( 3,750 ) — Deferred financing costs paid ( 400 ) — Payments on financing lease liabilities ( 727 ) ( 710 ) Net cash provided by (used in) financing activities 783 ( 37,010 ) Net increase (decrease) in cash and cash equivalents 2,994 ( 1,566 ) Cash and cash equivalents at the beginning of the period 7,970 4,292 Cash and cash equivalents at the end of the period 10,964 2,726 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 20,210 $ 2,110 Non-cash investing activities: Increase (decrease) in accrued capital expenditures and other $ 8,258 $ ( 1,527 ) Non-cash financing activities: Non-cash lease liability arising from obtaining right of use assets during the period $ 3,456 $ — See accompanying notes to the condensed consolidated financial statements 6 | Notes to Condensed Consolidated Financial Statements (Unaudited) Delek Logistics Partners, LP Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Basis of Presentation As used in this report, the terms "Delek Logistics Partners, LP," the "Partnership," "we," "us," or "our" may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. The Partnership is a Delaware limited partnership formed in April 2012 by Delek US Holdings, Inc. ("Delek Holdings") and its subsidiary Delek Logistics GP, LLC, our general partner (our "general partner"). On April 8, 2022, DKL Delaware Gathering, LLC, a subsidiary of the Partnership, entered into a Membership Interest Purchase Agreement (the “3 Bear Purchase Agreement”) with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100 % of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (“3 Bear”) (subsequently renamed to Delek Delaware Gathering ("Delaware Gathering"), related to the Seller’s 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 (the “Delaware Gathering Acquisition”). The Delaware Gathering Acquisition was completed on June 1, 2022 (the "Acquisition Date"). The Partnership provides gathering, pipeline and other transportation services primarily for crude oil and natural gas customers, storage, wholesale marketing and terminalling services primarily for intermediate and refined product customers, and water disposal and recycling services through its owned assets and joint ventures located primarily in the Permian Basin (including the Delaware sub-basin) and other select areas in the Gulf Coast region. 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. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 (our "Annual Report on Form 10-K"), filed with the U.S. Securities and Exchange Commission (the "SEC") on March 1, 2023 and in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in our Annual Report on Form 10-K. All adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been included. All intercompany accounts and transactions have been eliminated. Such intercompany transactions do not include those with Delek Holdings or our general partner, which are presented as related parties in these accompanying condensed consolidated financial statements. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year. Reclassifications Certain prior period amounts have been reclassified in order to conform to the current period presentation . 2. Acquisitions Delaware Gathering (formerly 3 Bear) We completed the Delaware Gathering Acquisition on June 1, 2022, in which we acquired crude oil and natural gas gathering, processing, and transportation and storage operations, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico. The purchase price for the Delaware Gathering Acquisition was $ 628.3 million. The Delaware Gathering Acquisition was financed through a combination of cash on hand and borrowings under the DKL Credit Facility. For the three months ended March 31, 2023 and 2022, we incurred no incremental direct acquisition and integration costs. Our consolidated financial and operating results reflect the Delaware Gathering Acquisition operations beginning June 1, 2022. Our results of operations included revenue and net income of $ 44.3 million and $ 11.5 million, respectively, for the three months ended March 31, 2023. The Delaware Gathering Acquisition was accounted for using the acquisition method of accounting, whereby the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their fair values. The excess of the consideration paid over the fair value of the net assets acquired was recorded as goodwill. 7 | Notes to Condensed Consolidated Financial Statements (Unaudited) Determination of Purchase Price The table below presents the purchase price (in thousands): Base purchase price: $ 624,700 Add: closing net working capital (as defined in the 3 Bear Purchase Agreement) 3,600 Less: closing indebtedness (as defined in the 3 Bear Purchase Agreement) ( 80,618 ) Cash paid for the adjusted purchase price 547,682 Cash paid to payoff 3 Bear credit agreement (as defined in the 3 Bear Purchase Agreement) 80,618 Purchase price $ 628,300 Purchase Price Allocation The following table summarizes the fair values of assets acquired and liabilities assumed in the Delaware Gathering Acquisition as of June 1, 2022 (in thousands): Assets acquired: Cash and cash equivalents $ 2,678 Accounts receivables, net 28,859 Inventories 1,836 Other current assets 986 Property, plant and equipment 382,799 Operating lease right-of-use assets 7,427 Goodwill 14,848 Customer relationship intangible, net 210,000 Rights-of-way 13,490 Other non-current assets 500 Total assets acquired 663,423 Liabilities assumed: Accounts payable 8,020 Accrued expenses and other current liabilities 22,382 Current portion of operating lease liabilities 1,029 Asset retirement obligations 2,261 Operating lease liabilities, net of current portion 1,431 Total liabilities assumed 35,123 Fair value of net assets acquired $ 628,300 These fair value estimates are preliminary and therefore, the final fair value of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all necessary information has become available, the final working capital adjustment is complete, and we finalize our valuations. To the extent possible, estimates have been considered and recorded, as appropriate, for the items above based on the information available as of March 31, 2023. We will continue to evaluate these items until they are satisfactorily resolved and adjust our purchase price allocation accordingly, within the allowable measurement period (not to exceed one year from the date of acquisition), as defined by Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"). The fair value of property, plant and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recently published data and adjusting replacement cost for physical deterioration, functional and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties. The fair value of customer relationships was based on the income approach. Key assumptions in the income approach include projected revenue attributable to customer relationships, attrition rate, operating margins and discount rates. The fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements. The fair values of all other current assets and payables were equivalent to their carrying values due to their short-term nature. 8 | Notes to Condensed Consolidated Financial Statements (Unaudited) The goodwill recognized in the Delaware Gathering Acquisition is primarily attributable to enhancing our third party revenues, further diversification of our customer and product mix, expanding our footprint into the Delaware basin and bolstering our Environmental, Social and Governance ("ESG") optionality through furthering carbon capture opportunities and greenhouse gas reduction projects currently underway. This goodwill is deductible for income tax purposes. Goodwill related to the Delaware Gathering Acquisition is included in the Gathering and Processing segment. Unaudited Pro Forma Financial Information The following table summarizes the unaudited pro forma financial information of the Partnership assuming the Delaware Gathering Acquisition had occurred on January 1, 2021. The unaudited pro forma financial information has been adjusted to give effect to certain pro forma adjustments that are directly related to the Delaware Gathering Acquisition based on available information and certain assumptions that management believes are factually supportable. The most significant pro forma adjustments relate to (i) incremental interest expense and amortization of deferred financing costs associated with revolving credit facility borrowings incurred in connection with the Delaware Gathering Acquisition, (ii) incremental depreciation resulting from the estimated fair values of acquired property, plant and equipment, (iii) incremental amortization resulting from the estimated fair value of the acquired customer relationship intangibles, (iv) accounting policy alignment and (v) transaction costs. The unaudited pro forma financial information excludes any expected cost savings or other synergies as a result of the Delaware Gathering Acquisition. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the Delaware Gathering Acquisition been effective as of the date presented, nor is it indicative of future operating results of the combined company. Actual results may differ significantly from the unaudited pro forma financial information. Three Months Ended March 31, (in thousands, except per unit data) 2022 Net sales $ 256,940 Net income attributable to partners $ 29,881 Net income per limited partner unit: Basic income per unit $ 0.69 Diluted income per unit $ 0.69 3. Related Party Transactions Commercial Agreements 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 and crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings. Most of these agreements have an initial term ranging from five to ten years , which may be extended for various renewal terms at the option of Delek Holdings. The fees under each agreement are payable to us monthly by Delek Holdings or certain third parties to whom Delek Holdings has assigned certain of its rights and are generally subject to increase or decrease on July 1 of each year, by the amount of any change in various inflation-based indices, however, in no event will the fees be adjusted below the amount initially set forth in the applicable agreement. Under each of these agreements, we are required to maintain the capabilities of our pipelines and terminals, such that Delek Holdings may throughput and/or store, as the case may be, specified volumes of crude oil, intermediate and refined products. See our Annual Report on Form 10-K for a more complete description of our material commercial agreements and other agreements with Delek Holdings. Other Agreements with Delek Holdings In addition to the commercial agreements described above, the Partnership has entered into the following agreements with Delek Holdings: Omnibus Agreement The Partnership entered into an omnibus agreement with Delek Holdings, our general partner, Delek Logistics Operating, LLC, Lion Oil Company, LLC and certain of the Partnership’s and Delek Holdings' other subsidiaries on November 7, 2012, which has been amended and restated from time to time in connection with acquisitions from Delek Holdings (collectively, as amended, the "Omnibus Agreement"). The Omnibus Agreement governs the provision of certain operational services and reimbursement obligations, among other matters, between the Partnership and Delek Holdings, and obligates us to pay an annual fee of $ 4.3 million to Delek Holdings for its provision of centralized corporate services to the Partnership. 9 | Notes to Condensed Consolidated Financial Statements (Unaudited) Pursuant to the terms of the Omnibus Agreement, we are reimbursed by Delek Holdings for certain capital expenditures. These amounts are recorded in other long-term liabilities and are amortized to revenue over the life of the underlying revenue agreement corresponding to the asset. There was no reimbursement by Delek Holdings during the three months ended March 31, 2023. We were reimbursed a nominal amount by Delek Holdings during the three months ended March 31, 2022. Additionally, we are reimbursed or indemnified, as the case may be, for costs incurred in excess of certain amounts related to certain asset failures, pursuant to the terms of the Omnibus Agreement. As of March 31, 2023 and December 31, 2022, there was no receivable from related parties for these matters. These reimbursements are recorded as reductions to operating expenses. There were no reimbursements for these matters in each of the three month periods ended March 31, 2023 and 2022. Other Transactions The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of gathering systems in the Permian Basin. The majority of the gathering systems have 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 oversight of the project design, procurement and construction of project segments and provides other related services. Pursuant to the terms of the DPG Management Agreement, the Partnership receives a monthly operating services fee and a construction services fee, which includes the Partnership's direct costs of managing the project plus an additional percentage fee of the construction costs of each project segment. The agreement extends through December 2023. Total fees paid to the Partnership were $ 0.4 million for both the three months ended March 31, 2023 and 2022, which are recorded in affiliate revenue in our condensed consolidated statements of income. Additionally, the Partnership incurs the costs in connection with the construction of the assets and is subsequently reimbursed by Delek Holdings. Amounts reimbursable by Delek Holdings are recorded in accounts receivable from related parties. Summary of Transactions Revenues from affiliates consist primarily of revenues from gathering, transportation, storage, offloading, Renewable Identification Numbers, wholesale marketing and products terminalling services provided primarily to Delek Holdings based on regulated tariff rates or contractually based fees and product sales. Affiliate operating expenses are primarily comprised of amounts we reimburse Delek Holdings, or our general partner, as the case may be, for the services provided to us under the Partnership Agreement. These expenses could also include reimbursement and indemnification amounts from Delek Holdings, as provided under the Omnibus Agreement. Additionally, the Partnership is required to reimburse Delek Holdings for direct or allocated costs and expenses incurred by Delek Holdings on behalf of the Partnership and for charges Delek Holdings incurred for the management and operation of our logistics assets, including an annual fee for various centralized corporate services, which are included in general and administrative expenses. In addition to these transactions, we purchase refined products and bulk biofuels from Delek Holdings, the costs of which are included in cost of materials and other. A summary of revenue, purchases and expense transactions with Delek Holdings and its affiliates are as follows (in thousands): Three Months Ended March 31, 2023 2022 Revenues $ 124,999 $ 123,754 Purchases $ 91,071 $ 105,885 Operating and maintenance expenses $ 8,823 $ 11,476 General and administrative expenses $ 12,215 $ 3,068 Quarterly Cash Distributions In February 2023, we paid quarterly cash distributions of $ 44.4 million, of which $ 35.0 million were paid to Delek Holdings. In February 2022, we paid quarterly cash distributions of $ 42.4 million, of which $ 33.8 million were paid to Delek Holdings. On April 28, 2023, the board of directors of our general partner declared a quarterly cash distribution totaling $ 44.7 million, based on the available cash as of the date of determination, for the end of the first quarter of 2023, payable on May 15, 2023, of which $ 35.2 million is expected to be paid to Delek Holdings. 10 | Notes to Condensed Consolidated Financial Statements (Unaudited) 4. Revenues We generate revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate products and feed stocks; for distributing, transporting and storing refined products; for marketing refined products output of Delek Holdings' Tyler and Big Spring refineries; and for wholesale marketing in the West Texas area. A significant portion of our revenue is derived from long-term commercial agreements with Delek Holdings, which provide for annual fee adjustments for increases or decreases in the CPI, PPI or the FERC index (refer to Note 3 for a more detailed description of these agreements). In addition to the services we provide to Delek Holdings, we also generate substantial revenue from crude oil, intermediate and refined products transportation services for, and terminalling and marketing services to, third parties primarily in Texas, New Mexico, Tennessee and Arkansas. Certain of these services are provided pursuant to contractual agreements with third parties. Payment terms require customers to pay shortly after delivery and do not contain significant financing components. The majority of our commercial agreements with Delek Holdings meet the definition of a lease because: (1) performance of the contracts is dependent on specified property, plant or equipment and (2) it is remote that one or more parties other than Delek Holdings will take more than a minor amount of the output associated with the specified property, plant or equipment. As part of our adoption of ASC 842, Leases ("ASC 842"), we applied the permitted practical expedient to not separate lease and non-lease components under the predominance principle to designated asset classes associated with the provision of logistics services. We have determined that the predominant component of the related agreements currently in effect is the lease component. Therefore, the combined component is accounted for under the applicable lease accounting guidance. Of our $ 941.1 million net property, plant, and equipment balance as of March 31, 2023, $ 338.2 million is subject to operating leases under our commercial agreements. These agreements do not include options for the lessee to purchase our leased assets, nor do they include any material residual value guarantees or material restrictive covenants. The following table represents a disaggregation of revenue for the gathering and processing, wholesale marketing and terminalling, and storage and transportation segments for the periods indicated (in thousands): Three Months Ended March 31, 2023 Gathering and Processing Wholesale Marketing and Terminalling Storage and Transportation Consolidated Service Revenue - Third Party $ 13,179 $ — $ 297 $ 13,476 Service Revenue - Affiliate (1) 4,301 9,271 20,609 34,181 Product Revenue - Third Party 26,492 78,558 — 105,050 Product Revenue - Affiliate 4,670 979 — 5,649 Lease Revenue - Affiliate 43,790 23,501 17,878 85,169 Total Revenue $ 92,432 $ 112,309 $ 38,784 $ 243,525 Three Months Ended March 31, 2022 Gathering and Processing Wholesale Marketing and Terminalling Storage and Transportation Consolidated Service Revenue - Third Party $ 1,710 $ — $ 3,072 $ 4,782 Service Revenue - Affiliate (1) 4,004 8,545 — 12,549 Product Revenue - Third Party — 78,045 — 78,045 Product Revenue - Affiliate — 31,746 — 31,746 Lease Revenue - Affiliate 36,330 12,440 30,689 79,459 Total Revenue $ 42,044 $ 130,776 $ 33,761 $ 206,581 (1) Net of $ 1.8 million of amortization expense for both the three months ended March 31, 2023 and March 31, 2022, related to a customer contract intangible asset recorded in the wholesale marketing and terminalling segment. As of March 31, 2023, we expect to recognize approximately $ 1.2 billion in lease revenues related to our unfulfilled performance obligations pertaining to the minimum volume commitments and capacity utilization under the non-cancelable terms of our commercial agreements with Delek Holdings. Most of these agreements have an initial term ranging from five to ten years , which may be extended for various renewal terms. We disclose information about remaining performance obligations that have original expected durations of greater than one year. 11 | Notes to Condensed Consolidated Financial Statements (Unaudited) Our unfulfilled performance obligations as of March 31, 2023 were as follows (in thousands): Remainder of 2023 $ 218,135 2024 210,897 2025 185,592 2026 177,917 2027 and thereafter 430,886 Total expected revenue on remaining performance obligations $ 1,223,427 5. Net Income per Unit Basic net income per unit applicable to limited partners is computed by dividing limited partners' interest in net income by the weighted-average number of outstanding common units. Diluted net income per unit applicable to common limited partners includes the effects of potentially dilutive units on our common units. As of March 31, 2023, the only potentially dilutive units outstanding consist of unvested phantom units. Our distributions earned with respect to a given period are declared subsequent to quarter end. Therefore, the table below represents total cash distributions applicable to the period in which the distributions are earned. The expected date of distribution for the distributions earned during the period ended March 31, 2023 is May 15, 2023. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per unit. The calculation of net income per unit is as follows (dollars in thousands, except units and per unit amounts): Three Months Ended March 31, 2023 2022 Net income attributable to partners $ 37,367 $ 39,514 Less: Limited partners' distribution 44,664 42,604 Earnings in deficit of distributions $ ( 7,297 ) $ ( 3,090 ) Limited partners' earnings on common units: Distributions $ 44,664 $ 42,604 Allocation of earnings in deficit of distributions ( 7,297 ) ( 3,090 ) Total limited partners' earnings on common units $ 37,367 $ 39,514 Weighted average limited partner units outstanding: Basic 43,569,963 43,471,536 Diluted 43,585,297 43,481,572 Net income per limited partner unit: Basic $ 0.86 $ 0.91 Diluted (1) $ 0.86 $ 0.91 (1) Outstanding common units totaling 22,632 were excluded from the diluted earnings per unit calculation for the three months ended March 31, 2023. There were no outstanding common units excluded from the diluted earnings per unit calculation for the three months ended March 31, 2022. 12 | Notes to Condensed Consolidated Financial Statements (Unaudited) 6. Long-Term Obligations Outstanding borrowings under the Partnership’s debt instruments are as follows (in thousands): March 31, 2023 December 31, 2022 DKL Revolving Facility 770,600 720,500 DKL Term Facility 296,250 300,000 2028 Notes $ 400,000 $ 400,000 2025 Notes 250,000 250,000 Principal amount of long-term debt 1,716,850 1,670,500 Less: Unamortized discount and deferred financing costs $ 8,650 8,933 Total debt, net of unamortized discount and deferred financing costs $ 1,708,200 1,661,567 Less: Current portion of long-term debt and notes payable $ 15,000 15,000 Long-term debt, net of current portion $ 1,693,200 $ 1,646,567 DKL Credit Facility The DKL Term Facility principal $ 300.0 million was drawn on October 13, 2022. This senior secured facility requires four quarterly amortization payments of $ 3.8 million in 2023 and three quarterly amortization payments of $ 7.5 million in 2024 with final maturity and principal due on October 13, 2024. At the Partnership's option, borrowings bear interest at either the Adjusted Term Secured Overnight Financing Rate benchmark (“SOFR”) or U.S. dollar prime rate, plus an applicable margin. The applicable margin is 2.50 % for the first year of the DKL Term Facility and 3.00 % for the second year for U.S. dollar prime rate borrowings. SOFR rate borrowings include a credit spread adjustment of 0.10 % to 0.25 % plus an applicable margin of 3.50 % for the first year and 4.00 % for the second year. At March 31, 2023 and December 31, 2022, the weighted average borrowing rate was approximately 8.41 % and 7.92 %, respectively. The effective interest rate was 8.83 % as of March 31, 2023. The DKL Revolving Facility has a total capacity of $ 900.0 million, including up to $ 115.0 million for letters of credit and $ 25.0 million in swing line loans. This facility has a maturity date of October 13, 2027 and requires a quarterly unused commitment fee based on average commitment usage, currently at 0.50 % per annum. Interest is measured at either the U.S. dollar prime rate plus an applicable margin of 1.00 % to 2.00 % depending on the Partnership’s Total Leverage Ratio (as defined in the DKL Credit Agreement), or a SOFR rate plus a credit spread adjustment of 0.10 % or 0.25 % and an applicable margin ranging from 2.00 % to 3.00 % depending on the Partnership’s Total Leverage Ratio. As of March 31, 2023 and December 31, 2022, the weighted average interest rate was 7.57 % and 7.55 %, respectively. There were no letters of credit outstanding as of March 31, 2023 or December 31, 2022. The obligations under the 2022 DKL Credit Facility are secured by first priority liens on substantially all of the Partnership’s and its subsidiaries’ tangible and intangible assets. The carrying values of outstanding borrowings under the 2022 DKL Credit Facility as of March 31, 2023 and December 31, 2022 approximate their fair values. Our debt facilities contain affirmative and negative covenants and events of default the Partnership considers usual and customary. As of March 31, 2023, we were in compliance with covenants on all of our debt instruments. 2028 Notes Our 2028 Notes are general unsecured senior obligations comprised of $ 400.0 million in aggregate principal of 7.125 % senior notes maturing June 1, 2028. The 2028 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Delek Logistics Finance Corp.) and will be unconditionally guaranteed on the same basis by certain of the Partnership's future subsidiaries. As of March 31, 2023, the effective interest rate was 7.40 %. The estimated fair value of the 2028 Notes was $ 365.4 million and $ 359.7 million as of March 31, 2023 and December 31, 2022, respectively, measured based upon quoted market prices in an active market, defined as Level 1 in the fair value hierarchy. 2025 Notes Our 2025 Notes are general unsecured senior obligations comprised of $ 250.0 million in aggregate principal of 6.75 % senior notes maturing on May 15, 2025. The 2025 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by the Partnership's existing subsidiaries (other than Delek Logistics Finance Corp.) and will be unconditionally guaranteed on the same basis by certain of the Partnership's future subsidiaries. As of March 31, 2023, the effective interest rate was 7.19 %. The estimated fair value of the 2025 Notes was $ 244.7 million and $ 243.4 million as of March 31, 2023 and December 31, 2022, respectively, measured based upon quoted market prices in an active market, defined as Level 1 in the fair value hierarchy. 13 | Notes to Condensed Consolidated Financial Statements (Unaudited) 7. Equity We had 9,263,842 common limited partner units held by the public outstanding as of March 31, 2023. Additionally, as of March 31, 2023, Delek Holdings owned a 78.7 % limited partner interest in us, consisting of 34,311,278 common limited partner units. Equity Activity The table below summarizes the changes in the number of limited partner units outstanding from December 31, 2022 through March 31, 2023. Common - Public Common - Delek Holdings Total Balance at December 31, 2022 9,257,305 34,311,278 43,568,583 Unit-based compensation awards (1) 6,537 — 6,537 Balance at March 31, 2023 9,263,842 34,311,278 43,575,120 (1) Unit-based compensation awards are presented net of 2,196 units withheld for taxes as of March 31, 2023. Issuance of Additional Securities Our Partnership Agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders. Costs associated with the issuance of securities are allocated to all unitholders' capital accounts based on their ownership interest at the time of issuance. Cash Distributions Our Partnership Agreement sets forth the calculation to be used to determine the amount and priority of available cash distributions that our limited partner unitholders will receive. Our distributions earned with respect to a given period are declared subsequent to quarter end. The table below summarizes the quarterly distributions related to our quarterly financial results: Quarter Ended Total Quarterly Distribution Per Limited Partner Unit Total Cash Distribution (in thousands) Date of Distribution Unitholders Record Date March 31, 2022 $ 0.980 $ 42,604 May 12, 2022 May 5, 2022 June 30, 2022 $ 0.985 $ 42,832 August 11, 2022 August 4, 2022 September 30, 2022 $ 0.990 $ 43,057 November 10, 2022 November 4, 2022 December 31, 2022 $ 1.020 $ 44,440 February 9, 2023 February 2, 2023 March 31, 2023 $ 1.025 $ 44,664 May 15, 2023 (1) May 8, 2023 (1) Expected date of distribution. 8. Equity Method Investments The Partnership owns a 33 % membership interest in Red River Pipeline Company LLC ("Red River"), a joint venture operated with Plains Pipeline, L.P. Red River owns a 16-inch crude oil pipeline running from Cushing, Oklahoma to Longview, Texas with capacity of 235,000 bpd. Summarized financial information for Red River on a 100% basis is shown below (in thousands): As of March 31, 2023 As of December 31, 2022 Current Assets $ 28,249 $ 33,365 Non-current Assets $ 392,238 $ 394,267 Current liabilities $ 4,932 $ 5,144 Three Months Ended March 31, 2023 2022 Revenues $ 18,952 $ 22,686 Gross profit $ 11,487 $ 15,601 Operating income $ 11,294 $ 15,419 Net income $ 11,473 $ 15,396 14 | Notes to Condensed Consolidated Financial Statements (Unaudited) We have two additional joint ventures that have constructed separate crude oil pipeline systems and related ancillary assets, which are serving third parties and subsidiaries of Delek Holdings. We own a 50 % membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. ("CP LLC") to operate one of these pipeline systems and a 33 % membership interest in the entity formed with Andeavor Logistics Rio Pipeline LLC ("Andeavor Logistics"), formerly known as Rangeland Energy II, LLC ("Rangeland Energy") to operate the other pipeline system. Combined summarized financial information for these two equity method investees on a 100% basis is shown below (in thousands): As of March 31, 2023 As of December 31, 2022 Current assets $ 18,049 $ 18,888 Non-current assets $ 228,008 $ 231,898 Current liabilities $ 1,740 $ 1,973 Three Months Ended March 31, 2023 2022 Revenues $ 12,146 $ 8,895 Gross profit $ 7,820 $ 4,238 Operating income $ 6,646 $ 3,568 Net Income $ 6,746 $ 3,569 The Partnership's investments in these three entities were financed through a combination of cash from operations and borrowings under the DKL Credit Facility. The Partnership's investment balances in these joint ventures were as follows (in thousands): As of March 31, 2023 As of December 31, 2022 Red River $ 141,557 $ 149,635 CP LLC 60,332 64,056 Andeavor Logistics 41,384 43,331 Total Equity Method Investments $ 243,273 $ 257,022 We do not consolidate any part of the assets or liabilities or operating results of our equity method investees. Our share of net income or loss of the investees will increase or decrease, as applicable, the carrying value of our investments in unconsolidated affiliates. With respect to our equity method investments, we determined that these entities do not represent variable interest entities and consolidation is not required. We have the ability to exercise significant influence over each of these joint ventures through our participation in the management committees, which make all significant decisions. However, since all significant decisions require the consent of the other investor(s) without regard to economic interest, we have determined that we have joint control and have applied the equity method of accounting. Our investment in these joint ventures is reflected in our investments in pipeline joint ventures segment. 9. Segment Data We aggregate our operating segments into four reportable segments: (i) gathering and processing; (ii) wholesale marketing and terminalling; (iii) storage and transportation; and (iv) investment in pipeline joint ventures. Operations that are not specifically included in the reportable segments are included in Corporate and other segment. During the fourth quarter 2022, we realigned our reportable segments for financial reporting purposes to reflect changes in the manner in which our chief operating decision maker, or CODM, assesses financial information for decision-making purposes. The change primarily represents reporting the operating results of our pipeline operations and legacy gathering assets and the operating results of the Delaware Gathering operations within a new reportable segment called gathering and processing. Prior to this change, the pipeline operations and legacy gathering assets were reported as part of pipelines and transportation segment. The former pipelines and transportation reportable segment was renamed to storage and transportation. We are also now segregating out certain non-segment specific costs and expenses and, when applicable, immaterial operating segments that may not fit into our existing reportable segments as Corporate and Other activities. Corporate and Other primarily includes general and administrative expenses, interest expense and depreciation and amortization. Additionally, the CODM determined that EBITDA is the key performance measure for planning and forecasting purposes and discontinued the use of contribution margin as a measure of performance. While this reporting change did not change our consolidated results, segment data for previous years has been restated and is consistent with the current year presentation throughout the financial statements and the accompanying notes. 15 | Notes to Condensed Consolidated Financial Statements (Unaudited) Segment EBITDA should not be considered a substitute for results prepared in accordance with GAAP and should not be considered alternatives to net income (loss), which is the most directly comparable financial measure to EBITDA that is in accordance with GAAP. Segment EBITDA, as determined and measured by us, should also not be compared to similarly titled measures reported by other companies. The disaggregated financial results for the reporting segments have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting internal operating decisions. The CODM evaluates performance based upon EBITDA. We define EBITDA for any period 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. Segment EBITDA should not be considered a substitute for results prepared in accordance with GAAP and should not be considered alternatives to net income (loss), which is the most directly comparable financial measure to EBITDA that is in accordance with GAAP. Segment EBITDA, as determined and measured by us, should also not be compared to similarly titled measures reported by other companies. Assets by segment is not a measure used to assess the performance of the Partnership by the CODM and thus is not disclosed. The following is a summary of business segment operating performance as measured by EBITDA for the periods indicated (in thousands): Three Months Ended March 31, 2023 (In thousands) Gathering and Processing Wholesale Marketing and Terminalling Storage and Transportation Investments in Pipeline Joint Ventures Corporate and Other Consolidated Net revenues: Affiliate (1) $ 52,761 $ 33,751 $ 38,487 $ — $ — $ 124,999 Third party 39,671 78,558 297 — — 118,526 Total revenue $ 92,432 $ 112,309 $ 38,784 $ — $ — $ 243,525 Segment EBITDA $ 55,445 $ 21,954 $ 13,422 $ 6,316 $ ( 3,979 ) $ 93,158 Depreciation and amortization 16,447 1,689 2,102 — 867 21,105 Amortization of customer contract intangible — 1,803 — — — 1,803 Interest expense, net — — — — 32,581 32,581 Income tax expense 302 Net income $ 37,367 Capital spending $ 32,789 $ 3,116 $ 196 $ — $ — $ 36,101 Three Months Ended March 31, 2022 (In thousands) Gathering and Processing Wholesale Marketing and Terminalling Storage and Transportation Investments in Pipeline Joint Ventures Corporate and Other Consolidated Net revenues: Affiliate (1) $ 40,334 $ 52,731 $ 30,689 $ — $ — $ 123,754 Third party 1,710 78,045 3,072 — — 82,827 Total revenue $ 42,044 $ 130,776 $ 33,761 $ — $ — $ 206,581 Segment EBITDA $ 32,081 $ 20,734 $ 11,108 $ 7,026 $ ( 4,946 ) $ 66,003 Depreciation and amortization 5,841 1,378 2,096 — 1,020 10,335 Amortization of customer contract intangible — 1,803 — — — 1,803 Interest expense, net — — — — 14,250 14,250 Income tax expense 101 Net income $ 39,514 Capital spending $ 8,855 $ 231 $ — $ — $ — $ 9,086 (1) Affiliate revenue for the wholesale marketing and terminalling segment is presented net of amortization expense pertaining to the Marketing Contract Intangible Acquisition. See Note 3 for additional information. 16 | Notes to Condensed Consolidated Financial Statements (Unaudited) 10. Commitments and Contingencies Litigation In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our financial statements. See "Crude Oil and Other Releases" below for discussion of an enforcement action. Environmental, Health and Safety We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the Environmental Protection Agency (the "EPA"), the United States Department of Transportation, the Occupational Safety and Health Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices and pollution prevention measures, as well as the safe operation of our pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our terminals, pipelines, saltwells, trucks and related operations, and may be subject to revocation, modification and renewal. These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters, which could include soil, surface water and groundwater contamination, air pollution, personal injury and property damage allegedly caused by substances which we may have handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we may have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and we expect that there will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including the receipt and response to notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required to comply with existing and new requirements, as well as evolving interpretations and enforcement of existing laws and regulations. Releases of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, or is not a reimbursable event under the Omnibus Agreement, subject us to substantial expenses, including costs to respond to, contain and remediate a release, to comply with applicable laws and regulations and to resolve claims by governmental agencies or other persons for personal injury, property damage, response costs, or natural resources damages. Crude Oil and Other Releases During the three months ended March 31, 2023, there were no significant releases. In August 2021, a release of finished product from our Greenville pipeline occurred near Dixon, Texas (the "Greenville Dixon Release"). Cleanup operations, site maintenance and remediation of this release have been substantially completed, where such costs incurred as of March 31, 2023 totaled $ 4.7 million. We believe any additional costs associated with this release will be immaterial. For other releases that occurred in prior years, we have received regulatory closure or a majority of the cleanup and remediation efforts are substantially complete. We expect regulatory closure in 2023 for the release sites that have not yet received it and do not anticipate material costs associated with any fines or penalties or to complete activities that may be needed to achieve regulatory closure. Regulatory authorities could require additional remediation based on the results of our remediation efforts. We may incur additional expenses as a result of further scrutiny by regulatory authorities and continued compliance with laws and regulations to which our assets are subject. As of March 31, 2023, we have accrued $ 0.3 million for remediation and other such matters related to these releases. Expenses incurred for the remediation of these crude oil and other releases are included in operating expenses in our condensed consolidated statements of income and comprehensive income. The majority of our releases have been subsequently reimbursed by Delek Holdings pursuant to the terms of the Omnibus Agreement, with the exception of the Greenville Dixon Release noted above as it is not covered under the Omnibus Agreement. Reimbursements are recorded as a reduction to operating expense. We do not believe the total costs associated with these events, whether alone or in the aggregate, including any fines or penalties and net of available insurance, indemnification or reimbursement, will have a material adverse effect upon our business, financial condition or results of operations. During the three months ended March 31, 2023, we recorded a nominal amount of crude oil and other releases remediation expenses, net of reimbursable expenses. During the three months ended March 31, 2022 there were no crude oil and other releases remediation expenses, net of reimbursable expenses. 17 | Notes to Condensed Consolidated Financial Statements (Unaudited) 11. Leases We lease certain pipeline and transportation equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain leases also include options to purchase the leased equipment. Certain of our lease agreements include rates based on equipment usage and others include rate inflationary indices based increases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The following table presents additional information related to our operating leases in accordance ASC 842: Three Months Ended March 31, (in thousands) 2023 2022 Lease Cost (1) Operating lease cost $ 3,232 $ 2,641 Short-term lease cost 363 319 Variable lease costs 695 936 Total lease cost $ 4,290 $ 3,896 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ ( 3,232 ) $ ( 2,641 ) Leased assets obtained in exchange for new operating lease liabilities $ 2,294 $ — Leased assets obtained in exchange for new financing lease liabilities $ 1,162 $ — As of March 31, 2023 2022 Weighted-average remaining lease term (years) for operating leases 3.5 3.2 Weighted-average discount rate (2) operating leases 6.9 % 5.8 % Weighted-average remaining lease term (years) for finance lease 2.4 1.9 Weighted-average discount rate (2) finance lease 4.3 % 1.9 % (1) Includes an immaterial amount of financing lease. (2) Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842. 12. Subsequent Events Distribution Declaration On April 28, 2023, our general partner's board of directors declared a quarterly cash distribution of $ 1.025 per unit, payable on May 15, 2023, to unitholders of record on May 8, 2023. 18 | Management's Discussion and Analysis