Delek Logistics Partners, LP 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (''SEC'') on March 1, 2023 (the ''Annual Report on Form 10-K''). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" below for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Logistics Partners, LP," the "Partnership," “we,” “us,” or “our” or like terms, may refer to Delek Logistics Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless otherwise noted or the context requires otherwise, references in this report to "Delek Holdings" refer collectively to Delek US Holdings, Inc. and any of its subsidiaries, other than the Partnership and its subsidiaries and its general partner. The Partnership announces material information to the public about the Partnership, its products and services and other matters through a variety of means, including filings with the Securities and Exchange Commission, press releases, public conference calls, the Partnership's website (www.deleklogistics.com), the investor relations section of the website (ir.deleklogistics.com), the news section of its website (www.deleklogistics.com/news), and/or social media, including its Twitter account (@DelekLogistics). The Partnership encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time. Forward-Looking Statements This 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 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 actions of members of the Organization of Petroleum Exporting Countries ("OPEC") and other leading oil producing countries (together with OPEC, "OPEC+") with respect to oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to: • our substantial dependence on Delek Holdings or its assignees and their support of and respective ability to pay us under our commercial agreements; • our future coverage, leverage, financial flexibility and growth, and our ability to improve performance and achieve distribution growth at any level or at all; • Delek Holdings' future growth, strategic priorities, financial performance, share repurchases, crude oil supply pricing and flexibility and product distribution; • industry dynamics, including Permian Basin growth, ownership concentration, efficiencies and takeaway capacity; • the age and condition of our assets and operating hazards and other risks incidental to transporting, storing and gathering crude oil, intermediate and refined products, including, but not limited to, costs, penalties, regulatory or legal actions and other effects related to spills, releases and tank failures; • changes in insurance markets impacting costs and the level and types of coverage available; • the timing and extent of changes in commodity prices and demand for refined products and the impact of the COVID-19 Pandemic on such demand; • the wholesale marketing margins we are able to obtain and the number of barrels of product we are able to purchase and sell in our West Texas wholesale business; • the suspension, reduction or termination of Delek Holdings' or its assignees' or third-party's obligations under our commercial agreements including the duration, fees or terms thereof; • the results of our investments in joint ventures; • the ability to secure commercial agreements with Delek Holdings or third parties upon expiration of existing agreements; 19 | Management's Discussion and Analysis • 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 a public health crisis; • 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 governmental fiscal policy or a public health crisis; • 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 a public heal; • significant operational, investment or other changes required by existing or future environmental statutes and regulations, including international agreements and national or regional societal, 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 complete acquisitions and integrate acquired businesses, and to achieve the anticipated benefits therefrom; • disruptions due to acts of God, natural disasters, casualty losses, severe weather patterns, such as freezing conditions, cyber or other attacks on our electronic systems, and other matters beyond our control which might cause damage to our pipelines, terminal facilities and other assets and could impact our operating results through increased costs and/or loss of revenue; • changes in the price of RINs could affect our results of operations; • future decisions by OPEC+ regarding production and pricing and disputes between OPEC+ regarding such; • changes or volatility in interest and inflation rates; • labor relations; • large customer defaults; • changes in tax status and regulations; • the effects of future litigation or environmental liabilities that are not covered by insurance; and • other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. Many of the foregoing risks and uncertainties are, and will be, exacerbated by any worsening of the global business and economic environment. In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. 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. 20 | Management's Discussion and Analysis Executive Summary: Management's View of Our Business and Strategic Overview Management's View of Our Business The Partnership primarily owns and operates crude oil, intermediate and refined products logistics and marketing assets as well as crude oil and natural gas gathering and water processing 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. In June 2022, we acquired 100% of the interest in 3 Bear Delaware Holding – NM, LLC ("3 Bear") (subsequently renamed to DKL Delaware Gathering - NM, LLC ("Delaware Gathering")), 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 (the “Delaware Gathering Business"). As we continue the process of integrating these operations into our existing businesses and assessing the long-term impact to our business, management (including the designated Chief Operating Decision Maker or “CODM”) has changed the way that the business is managed and reviewed, including from a financial reporting perspective. As a result, effective in the fourth quarter 2022, we have revised our reportable segments accordingly. The new reportable segments consist of Gathering and Processing, Wholesale Marketing and Terminalling, Storage and Transportation, and Investments in Pipeline Joint Ventures. The primary change in our segmentation as compared to prior presentations is that, now that we have substantially expanded our gathering activities, certain legacy gathering activities and operations are now managed as part of the Gathering and Processing segment. Additionally, 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. A substantial portion of our existing assets are both integral to and dependent upon the success of Delek Holdings' refining operations, as many of our pipeline usage and gathered crude oil barrels are contracted either primarily or exclusively to Delek Holdings in support of its Tyler, El Dorado and Big Spring refineries. The Partnership is not a taxable entity for federal income tax purposes or the income taxes of those states that follow the federal income tax treatment of partnerships. Instead, for purposes of such income taxes, each partner of the Partnership is required to take into account its share of items of income, gain, loss and deduction in computing its federal and state income tax liabilities, regardless of whether cash distributions are made to such partner by the Partnership. The taxable income reportable to each partner takes into account differences between the tax basis and the fair market value of our assets and financial reporting bases of assets and liabilities, the acquisition price of the partner's units and the taxable income allocation requirements under the Partnership's Second Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement"). Business and Economic Environment Overview During much of six months ended June 30, 2023, domestic markets have experienced an elevated hydrocarbon pricing environment that 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 as compared to the prior year. Additionally, the successful integration of Delaware Gathering further diversifies our logistics customer base to include significantly more third-party customers, and 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 Basin, the Partnership is well positioned to continue to add value through our gathering and processing services as a result of integrating our Delaware Gathering operations which complement our existing Midland 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. While we experienced a $2.4 million decrease in net income for the six months ended June 30, 2023, our EBITDA (as defined in "Non GAAP Measures" section below) increased $55.4 million in 2023 as compared to 2022. Our gathering and processing segment which had segment EBITDA of $108.1 million in 2023 compared to $70.6 million in 2022, benefited from additional EBITDA associated with the Delaware Gathering Acquisition as well new connections in our Midland Gathering operations. Our wholesale marketing and terminalling segment saw a $10.4 million increase in segment EBITDA. Segment EBITDA for our investments in pipeline joint ventures decreased by $0.5 million. See the “Results of Operations” section below for further discussion. Looking forward, concerns about inflation and a possible economic downturn as well as initiatives to reduce carbon footprints through energy transition to renewables have softened the forward demand expectations for hydrocarbons and natural gas. That said, 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. Furthermore, the Partnership will benefit from inflationary-linked rate increases effective July 1, 2023, as discussed further below. Additionally, 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 in the near term. Therefore, as we look forward to the second half of 2023, we expect that liquid transportation fuels will continue to be in high demand, and we expect to continue to leverage the strength of our cash flows and balance sheet in order to continue maximizing unitholder returns and the long-term prospects for return on investment. 21 | Management's Discussion and Analysis Contractual Rate Adjustments to Keep Pace with Inflation On July 1, 2023, 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 13.3%, which was the amount of the change in the FERC oil pipeline index. The tariff on FERC regulated system acquired from Delaware Gathering (formerly 3 Bear) will be adjusted as of January 1, 2023, but adjustments under agreement already in place will be capped at 3.0%. Under certain of our agreements with Delek Holdings and third parties, the fees that are subject to adjustments using the consumer price index increased 17.6% and the fees that are subject to adjustments using the producer price index increased approximately 18.9%. These adjustments allow us to maintain compliance with FERC regulations as well as to ensure that our results are reflective of current market conditions. 22 | Management's Discussion and Analysis Segment Overview 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, consisting primarily of general and administrative expenses, interest expense and depreciation and amortization. Gathering and Processing The operational assets in our gathering and processing segment, consist of assets acquired in connection with the Midland Gathering Assets Acquisition, including approximately 200 miles of gathering assets, approximately 65 tank battery connections, terminals with total storage capacity of approximately 650,000 barrels and applicable rights-of-way assets, as well as operational assets we acquired in connection with the Delaware Gathering 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 located primarily in the Delaware Basin (“Delaware Gathering Assets”). The Midland Gathering Assets support our crude oil gathering activities which primarily serves Delek Holdings refining needs throughout the Permian Basin. The Delaware Gathering Assets support our 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, and serving primarily third-party producers and customers. Finally, our gathering and processing assets are integrated with our pipeline assets, which we use to transport gathered crude oil as well as provide other crude oil, intermediate and refined products transportation in support of Delek Holdings' refining operations in Tyler, Texas, El Dorado, Arkansas and Big Spring, Texas, as well as to certain third parties. In providing these services, we do not take ownership of the refined products or crude oil that we transport. While we do not take ownership of gas that is gathered we sell the processed gas at a market price which we remit to the producer, net of our fees. Therefore, we are not directly exposed to changes in commodity prices with respect to this operating segment. The combination of these operational assets provides a comprehensive, integrated midstream service offering to producers and customers. Wholesale Marketing and Terminalling 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. Storage and Transportation The operational assets in our storage and transportation segment consist of tanks, offloading facilities, trucks and ancillary assets, which provide 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. 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 primarily in the Permian Basin and Gulf Coast regions and with strategic connections to Cushing, Midland and other key exchange points, which provide crude oil and refined product pipeline transportation to third parties and subsidiaries of Delek Holdings. Corporate and Other The corporate and other segment primarily consists of general and administrative expenses not allocated to a reportable segment, interest expense and depreciation and amortization. When applicable, it may also contain operating segments that are not reportable and do not meet the criteria for aggregation with any of our existing reportable segments. 23 | Management's Discussion and Analysis Strategic Overview Long-Term Strategic Objectives The Partnership’s Long-Term Strategic Objectives have been focused on maintaining stable cash flows and to grow the quarterly distributions paid to our unitholders over time. To that end, we have been focused on growing our asset base within our geographic area through acquisitions, project development, joint ventures, enhancing our existing systems and lowering our carbon footprint, as we continued to evaluate ways to provide Delek Holdings with logistics services and look for ways to reduce our reliance on Delek Holdings as our primary customer. 2023 Strategic Focus Areas In service to these overarching Long-Term Strategic Objectives, as we began 2023, we focused on the following Strategic Focus Areas : • Generate Stable Cash Flow. Continue to pursue opportunities to provide logistics, marketing and other services to Delek Holdings and third parties pursuant to long-term, fee-based contracts. In new service contracts, endeavor to include minimum volume throughput or other commitments, similar to those included in our current commercial agreements with Delek Holdings. • Focus on Growing Our Business. Continue to evaluate and pursue opportunities to grow our business through both strategic acquisitions and expansion and construction projects, both internally funded or in combination with potential external partners and through investments in joint ventures. Additionally, where possible, leverage our strong relationship with Delek Holdings to enhance our opportunities to grow our business. ◦ Pursue Acquisitions . Pursue strategic acquisitions that both complement our existing assets and provide attractive returns for our unitholders, with a focus on expanding our third-party business. Leverage our current asset base, and our knowledge of the regional markets in which we operate, to target and complete attractive third-party acquisitions. ◦ Investments in Joint Ventures. Continue to focus on leveraging and, when appropriate, expanding our investments in joint ventures, which have contributed to our initiative to grow our midstream business while increasing our crude oil sourcing flexibility. • Engage in Mutually Beneficial Transactions with Delek Holdings. Delek Holdings has granted us a right of first offer on certain logistics assets. We intend to review our right to purchase any such assets as they are offered to us under the terms of the right of first offer, from time to time. Delek Holdings is also required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek Holdings may acquire or construct in the future. Further, continue to evaluate additional growth opportunities through subsequent dropdowns of logistics assets acquired or developed by Delek Holdings, while factoring in associated impact on our capital structure and critically evaluating anticipated return on investment. • Pursue Attractive Expansion and Construction Opportunities. Continue to evaluate, and when appropriate in the context of our return on investment and risk assessment criteria, pursue organic growth opportunities that complement our existing businesses or that provide attractive returns within or outside our current geographic footprint. Continue to evaluate potential opportunities to make capital investments that will be used to expand our existing asset base through the expansion and construction of new logistics assets to support growth of any of our customers', including Delek Holdings', businesses and from increased third-party activity. These construction projects may be developed either through joint venture relationships or by us acting independently, depending on size and scale. • Optimize Our Existing Assets and Expand Our Customer Base. Continue seeking to enhance the profitability of our existing assets by adding incremental throughput volumes, improving operating efficiencies and increasing system-wide utilization. Additionally, continue to seek opportunities to further diversify our customer base by increasing third-party throughput volumes running through certain of our existing systems and expanding our existing asset portfolio to service more third-party customers. • Expand our ESG Consciousness and Lower Our Carbon Footprint. Continue to look for ways to grow our business whilst staying conscious of and minimizing the negative environmental impact, while also seeking opportunities to invest in innovative technologies that will reduce our carbon emissions as we achieve our growth objectives and sustainably improve unitholder returns. We expect to achieve this objective through ESG-Conscious Investments with Clear Value Propositions and Sustainable Returns. Commercial Agreements with Delek Holdings The Partnership has a number of long-term, fee-based commercial agreements with Delek Holdings under which we provide various services, including crude oil gathering, crude oil, intermediate and refined products transportation and storage services, and marketing, terminalling and offloading services to Delek Holdings, and Delek Holdings commits to provide us with minimum monthly throughput volumes of crude oil, intermediate and refined products. Generally, these agreements include minimum quarterly volume, revenue or throughput commitments and have tariffs or fees indexed to inflation-based indices, provided that the tariffs or fees will not be decreased below the initial amount. See our Annual Report on Form 10-K filed with the SEC on March 1, 2023 for a discussion of our material commercial agreements with Delek Holdings. 24 | Management's Discussion and Analysis Other Transactions The Partnership manages long-term capital projects on behalf of Delek Holdings pursuant to a construction management and operating agreement (the "DPG Management Agreement") for the construction of gathering systems in the Permian Basin (the "Delek Permian Gathering Project"). The majority of the gathering systems has been constructed, however, additional costs pertaining to a pipeline connection that was not acquired by the Partnership continue to be incurred and are still subject to the terms of the DPG Management Agreement. The Partnership is also considered the operator for the project and is responsible for the oversight of the project design, procurement and construction of project segments and for providing other related services. See Note 3 to our accompanying condensed consolidated financial statements for additional information on the DPG Management Agreement. How We Evaluate Our Operations We use a variety of financial and operating metrics to analyze our segment performance. These metrics are significant factors in assessing our operating results and profitability and include: ■ volumes (including pipeline throughput and terminal volumes) ■ operating and maintenance expenses ■ cost of materials and other ■ EBITDA and distributable cash flow (as such terms are defined below) ■ net income of joint ventures Volumes The amount of revenue we generate primarily depends on the volumes of crude oil and refined products that we handle in our pipeline, transportation, terminalling, storage and marketing operations. These volumes are primarily affected by the supply of and demand for crude oil, intermediate and refined products in the markets served directly or indirectly by our assets. Although Delek Holdings has committed to minimum volumes under certain of the commercial agreements, as described above, our results of operations will be impacted by: • Delek Holdings’ utilization of our assets in excess of its minimum volume commitments; • our ability to identify and execute acquisitions and organic expansion projects and capture incremental volume increases from Delek Holdings or third parties; • our ability to increase throughput volumes at our refined products terminals and provide additional ancillary services at those terminals; • our ability to identify and serve new customers in our marketing and trucking operations; and • our ability to make connections to third-party facilities and pipelines. Operating and Maintenance Expenses We seek to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses include the costs associated with the operation of owned terminals and pipelines and terminalling expenses at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business. These expenses generally remain relatively stable across broad ranges of throughput volumes, but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of said expenses. Additionally, compliance with federal, state and local laws and regulations relating to the protection of the environment, health and safety may require us to incur additional expenditures. We will seek to manage our maintenance expenditures on our pipelines and terminals by scheduling maintenance over time to avoid significant variability in our maintenance expenditures and minimize their impact on our cash flow. Cost of Materials and Other These costs include: (i) all costs of purchased refined products in our wholesale marketing and terminalling segment, as well as additives and related transportation of such products; (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance; (iii) the cost of pipeline capacity leased from any third parties; and (iv) gains and losses related to our commodity hedging activities. Financing The Partnership anticipates paying a cash distribution to its unitholders at a distribution rate of $1.035 per unit for the quarter ended June 30, 2023 ($4.140 per unit on an annualized basis). Our Partnership Agreement requires that the Partnership distribute all of its available cash (as 25 | Management's Discussion and Analysis defined in the Partnership Agreement) to its unitholders quarterly. As a result, the Partnership expects to fund future capital expenditures primarily from operating cash flows, borrowings under our revolving credit facility and any potential future issuances of equity and debt securities. See Note 7 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's Paline pipeline for access to Gulf Coast markets. It also has additional expansion optionality. 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 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 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. The charts on the following page provide historical commodity pricing statistics for crude oil, refined product and natural gas. 26 | Management's Discussion and Analysis 27 | Management's Discussion and Analysis Non-GAAP Measures Our management uses certain "non-GAAP" operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our financial information presented in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). These financial and operational non-GAAP measures include: • Earnings before interest, taxes, depreciation and amortization ("EBITDA") - calculated as net income before net interest expense, income tax expense, depreciation and amortization expense, including amortization of customer contract intangible assets, which is included as a component of net revenues in our accompanying condensed consolidated statements of income. • Distributable cash flow - calculated as net cash flow from operating activities plus or minus changes in assets and liabilities, less maintenance capital expenditures net of reimbursements and other adjustments not expected to settle in cash. The Partnership believes this is an appropriate reflection of a liquidity measure by which users of its financial statements can assess its ability to generate cash. EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: • our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods; • the ability of our assets to generate sufficient cash flow to make distributions to our unitholders; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. We believe that the presentation of EBITDA and distributable cash flow provide information useful to investors in assessing our financial condition and results of operations. EBITDA and distributable cash flow should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and distributable cash flow have important limitations as analytical tools, because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA and distributable cash flow may be defined differently by other partnerships in our industry, our definitions of EBITDA and distributable cash flow may not be comparable to similarly titled measures of other partnerships, thereby diminishing their utility. See below for a reconciliation of EBITDA and distributable cash flow to their most directly comparable GAAP financial measures. Non-GAAP Reconciliations The following table provides a reconciliation of EBITDA and distributable cash flow (which are defined above) to the most directly comparable GAAP measure, or net income and net cash from operating activities, respectively. Reconciliation of net income to EBITDA (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income $ 31,896 $ 32,164 $ 69,263 $ 71,678 Add: Income tax expense 256 305 558 406 Depreciation and amortization 23,727 13,422 44,832 23,757 Amortization of customer contract intangible assets 1,802 1,803 3,605 3,606 Interest expense, net 35,099 16,812 67,680 31,062 EBITDA $ 92,780 $ 64,506 $ 185,938 $ 130,509 Reconciliation of net cash from operating activities to distributable cash flow (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net cash provided by operating activities $ 34,612 $ 85,137 $ 63,802 $ 133,057 Changes in assets and liabilities 27,259 (26,920) 64,929 (20,908) Distributions from equity method investments in investing activities — 1,187 1,440 1,737 Non-cash lease expense (2,247) (9,686) (4,447) (11,484) Regulatory capital expenditures (1) 391 (233) (3,855) (1,040) Reimbursement from (refund to) Delek Holdings for capital expenditures (2) 674 1 1,011 (14) Accretion of asset retirement obligations (176) (123) (352) (247) Deferred income taxes (518) — (629) — Gain (loss) on disposal of assets 455 — 313 (12) Distributable cash flow $ 60,450 $ 49,363 $ 122,212 $ 101,089 28 | Management's Discussion and Analysis (1) Regulatory capital expenditures represent cash expenditures (including for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples include expenditures for the repair, refurbishment and replacement of pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. (2) For the three and six months ended June 30, 2023 and 2022, 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). 29 | 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 six months ended June 30, 2023 and 2022, 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Statement of Operations Data: Net revenues: Gathering and Processing $ 93,237 $ 64,826 $ 185,669 $ 106,870 Wholesale marketing and terminalling 118,827 165,540 231,136 296,316 Storage and transportation 34,847 36,384 73,631 70,145 Total 246,911 266,750 490,436 473,331 Operating costs and expenses: Cost of materials and other 128,125 176,360 254,221 302,554 Operating expenses (excluding depreciation and amortization) 28,476 20,284 52,691 37,827 Depreciation and amortization 22,469 12,948 42,233 22,809 Total cost of sales 179,070 209,592 349,145 363,190 Operating expenses related to wholesale business (excluding depreciation and amortization presented below) 480 705 1,005 1,269 General and administrative expenses 6,611 13,773 14,121 18,868 Depreciation and amortization 1,258 474 2,599 948 (Gain) loss on disposal of assets (455) — (313) 12 Total operating costs and expenses 186,964 224,544 366,557 384,287 Operating income 59,947 42,206 123,879 89,044 Interest expense, net 35,099 16,812 67,680 31,062 Income from equity method investments (7,285) (7,073) (13,601) (14,099) Other income, net (19) (2) (21) (3) Total non-operating costs and expenses 27,795 9,737 54,058 16,960 Income before income tax expense 32,152 32,469 69,821 72,084 Income tax expense 256 305 558 406 Net income attributable to partners 31,896 32,164 69,263 71,678 Comprehensive income attributable to partners $ 31,896 $ 32,164 $ 69,263 $ 71,678 EBITDA (1) $ 92,780 $ 64,506 $ 185,938 $ 130,509 Net income per limited partner unit: Basic $ 0.73 $ 0.74 $ 1.59 $ 1.65 Diluted $ 0.73 $ 0.74 $ 1.59 $ 1.65 Weighted average limited partner units outstanding: Basic 43,577,428 43,475,931 43,573,716 43,473,746 Diluted 43,597,282 43,502,983 43,591,726 43,491,796 (1) For a definition of EBITDA, please see "Non-GAAP Measures" above. 30 | Management's Discussion and Analysis Results of Operations A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations but should not serve as the only criteria for predicting our future performance. Effective in the fourth quarter 2022, we revised our reportable segments. The new reportable segments consist of Gathering and Processing, Wholesale Marketing and Terminalling, Storage and Transportation, and Investments in Pipeline Joint Ventures. The primary change in our segmentation as compared to prior presentations is that, now that we have substantially expanded our gathering activities, certain legacy gathering activities and operations are now managed as part of the Gathering and Processing segment. Additionally, 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. Consolidated Results of Operations — Comparison of the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 The table below presents a summary of our consolidated results of operations (in thousands). The discussion immediately following presents the consolidated results of operations. Consolidated Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net revenues: Affiliate $ 132,993 $ 124,366 $ 257,992 $ 248,120 Third-Party 113,918 142,384 232,444 225,211 Total Consolidated 246,911 266,750 490,436 473,331 Cost of materials and other 128,125 176,360 254,221 302,554 Operating expenses (excluding depreciation and amortization presented below) 28,956 20,989 53,696 39,096 General and administrative expenses 6,611 13,773 14,121 18,868 Depreciation and amortization 23,727 13,422 44,832 23,757 Other operating income, net (455) — (313) 12 Operating income $ 59,947 $ 42,206 $ 123,879 $ 89,044 Interest expense, net 35,099 16,812 67,680 31,062 Income from equity method investments (7,285) (7,073) (13,601) (14,099) Other expense, net (19) (2) (21) (3) Total non-operating expenses, net 27,795 9,737 54,058 16,960 Income before income tax expense 32,152 32,469 69,821 72,084 Income tax expense 256 305 558 406 Net income attributable to partners $ 31,896 $ 32,164 $ 69,263 $ 71,678 Net Revenues Q2 2023 vs. Q2 2022 Net revenues decreased by $19.8 million, or 7.4%, in the second quarter of 2023 compared to the second quarter of 2022, primarily driven by the following: • decreased revenue of $50.9 million in our West Texas marketing operations primarily driven by decreases in the average sales prices per gallon and the average volumes sold: ◦ the average sales prices per gallon of gasoline and diesel sold decreased by $0.93 per gallon and $1.53 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 0.6 million gallons and 1.5 million gallons, respectively. • partially offset by an increase in revenue as a result of our Delaware Gathering operations, which began in June 2022. YTD 2023 vs. YTD 2022 Net revenues increased by $17.1 million, or 3.6%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase was primarily driven by the following: • increase in revenue as a result of our Delaware Gathering operations, which began in June 2022; 31 | Management's Discussion and Analysis • increase in volumes associated with Midland Gathering operations due to new connections finalized during 2022; and • partially offset by decreased revenue of $66.3 million in our West Texas marketing operations primarily driven by decreases in the average sales prices per gallon and the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold decreased by $0.58 per gallon and $0.79 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 3.4 million gallons and 2.4 million gallons, respectively. Cost of Materials and Other Q2 2023 vs. Q2 2022 Cost of materials and other decreased by $48.2 million, or 27.4%, in the second quarter of 2023 compared to the second quarter of 2022, primarily driven by the following: • decrease in costs of materials and other of $53.2 million in our West Texas marketing operations primarily driven by decreases in the average cost per gallon and the average volumes of gasoline and diesel sold: ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.32 per gallon and $0.12 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 0.6 million gallons and 1.5 million gallons, respectively. • partially offset by increase in costs of materials and other as a result of our Delaware Gathering operations, which began in June 2022. YTD 2023 vs. YTD 2022 Cost of materials and other decreased by $48.3 million, or 16.0%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • decrease in costs of materials and other of $69.4 million in our West Texas marketing operations primarily driven by decreases in the average cost per gallon and the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.27 per gallon and $0.11 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 3.4 million gallons and 2.4 million gallons, respectively. • partially offset by increase in cost of materials and other as a result of our Delaware Gathering operations, which began in June 2022. Operating Expenses Q2 2023 vs. Q2 2022 Operating expenses increased by $8.0 million, or 38.0%, in the second quarter of 2023 compared to the second quarter of 2022, primarily driven by incremental expenses associated with our Delaware Gathering operations which began in June 2022. YTD 2023 vs. YTD 2022 Operating expenses increased by $14.6 million, or 37.3%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by incremental expenses associated with our Delaware Gathering operations which began in June 2022. General and Administrative Expenses Q2 2023 vs. Q2 2022 General and administrative expenses decreased by $7.2 million, or 52.0%, in the second quarter of 2023 compared to the second quarter of 2022 primarily due to higher outside services associated with the Delaware Gathering Acquisition in the prior year. YTD 2023 vs. YTD 2022 General and administrative expenses decreased by $4.7 million, or 25.2%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • higher outside services associated with the Delaware Gathering Acquisition in the prior year; and • partially offset by lower allocated employee related expenses. 32 | Management's Discussion and Analysis Depreciation and Amortization Q2 2023 vs. Q2 2022 Depreciation and amortization increased by $10.3 million, or 76.8%, in the second quarter of 2023 compared to the second quarter of 2022, primarily driven by the following: • depreciation amortization associated with assets acquired as part of the Delaware Gathering Acquisition; and • deprecation associated with new projects in-serviced during the period. YTD 2023 vs. YTD 2022 Depreciation and amortization increased by $21.1 million, or 88.7%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • the acquisition of property, plant and equipment and customer relationship intangible as part of the Delaware Gathering Acquisition; and • deprecation associated with new projects in-serviced during the period. Interest Expense Q2 2023 vs. Q2 2022 During the second quarter of 2023 we incurred $35.1 million of interest expense, compared to $16.8 million during the second quarter of 2022, an increase of $18.3 million, or 108.8%. This increase was primarily driven by the following: • increased borrowings under the DKL Credit Facility; and • higher floating interest rates applicable to the DKL Credit Facility. YTD 2023 vs. YTD 2022 During the six months ended June 30, 2023 we incurred $67.7 million of interest expense, compared to $31.1 million during the six months ended June 30, 2022, an increase of $36.6 million, or 117.9%. This increase was primarily driven by the following: • increased borrowings under the DKL Credit Facility to fund the Delaware Gathering Acquisition; and • higher floating interest rates applicable to the DKL Credit Facility. Results from Equity Method Investments Q2 2023 vs. Q2 2022 We recognized income of $7.3 million from equity method investments during the second quarter of 2023 compared to $7.1 million for the second quarter of 2022, an increase of $0.2 million, or 3.0%. This increase was primarily driven by the following: • increase in income from our Rio equity method investment due to higher throughput volumes and resulting revenue increases. YTD 2023 vs. YTD 2022 During the six months ended June 30, 2023 we recognized income of $13.6 million from equity method investments, compared to $14.1 million during the six months ended June 30, 2022, a decrease of $0.5 million, or 3.5%. This decrease was primarily driven by the following: • decrease in income from our Red River and CP LLC equity method investments; and • partially offset by an increase from our Andeavor Logistics equity method investment due to higher throughput volumes and resulting revenue increases. 33 | Management's Discussion and Analysis Operating Segments We review operating results in four reportable segments: (i) gathering and processing; (ii) wholesale marketing and terminalling; (iii) storage and transportation; and (iv) investments in pipeline joint ventures. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each reportable segment based on the segment EBITDA, except for the investments in pipeline joint ventures segment, which is measured based on net income. Segment reporting is discussed in more detail in Note 9 to our accompanying condensed consolidated financial statements. Gathering and Processing Segment Our gathering and processing segment assets provide crude oil gathering 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 Greenville-Mount Pleasant Pipeline • 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 acquired in the Big Spring Logistics Assets Acquisition • assets acquired in the Midland Gathering Assets Acquisition • assets acquired in the Delaware Gathering Acquisition The following tables and discussion present the results of operations and certain operating statistics of the gathering and processing segment for the three and six months ended June 30, 2023 and 2022: Gathering and Processing Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net Revenues $ 93,237 $ 64,826 $ 185,669 $ 106,870 Cost of materials and other $ 21,857 $ 15,207 $ 44,881 $ 16,481 Operating expenses (excluding depreciation and amortization) $ 20,631 $ 10,927 $ 34,853 $ 19,709 Segment EBITDA $ 52,663 $ 38,497 $ 108,108 $ 70,578 Throughputs (average bpd) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 El Dorado Assets: Crude pipelines (non-gathered) 61,260 84,699 62,131 78,818 Refined products pipelines to Enterprise Systems 44,966 64,821 49,957 62,186 El Dorado Gathering System 13,041 17,961 13,509 17,064 East Texas Crude Logistics System 30,666 19,942 26,690 18,010 Midland Gathering System 221,876 101,236 221,993 100,783 Plains Connection System 255,035 154,086 247,856 158,025 Delaware Gathering Assets Volumes Three Months Ended June 30, Six Months Ended June 30, 2023 2022 (1) 2023 2022 (1) Natural Gas Gathering and Processing (Mcfd (2) ) 73,309 51,292 74,008 51,292 Crude Oil Gathering (bpd (3) ) 117,017 78,011 110,408 78,011 Water Disposal and Recycling (bpd (3) ) 127,195 57,625 107,848 57,625 ( 1) Volumes for the three and six months ended June 30, 2022 are for period from June 1 through June 30, 2022 we owned Delaware Gathering Assets. (2) Mcfd - average thousand cubic feet per day. (3) bpd - average barrels per day. 34 | Management's Discussion and Analysis Comparison of the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 Net Revenues Q2 2023 vs. Q2 2022 Net revenues for the gathering and processing segment increased by $28.4 million, or 43.8%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • increase in revenue of $26.7 million as a result of our Delaware Gathering operations, which began in June 2022; and • increase in volumes associated with Midland Gathering operations due to new connections finalized during 2022. YTD 2023 vs. YTD 2022 Net revenues for the gathering and processing segment increased by $78.8 million, or 73.7%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, driven primarily by the following: • increase in revenue of $71.0 million as a result of our Delaware Gathering operations, which began in June 2022; and • increase in volumes associated with Midland Gathering operations due to new connections finalized during 2022. Cost of Materials and Other Q2 2023 vs. Q2 2022 Cost of materials and other for the gathering and processing segment increased by $6.7 million, or 43.7%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • increase in cost of materials and other as a result of our Delaware Gathering operations which began in June 2022. YTD 2023 vs. YTD 2022 Cost of materials and other for the gathering and processing segment increased by $28.4 million, or 172.3%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, driven primarily by the following: • increase in cost of materials and other as a result of our Delaware Gathering operations which began in June 2022. Operating Expenses Q2 2023 vs. Q2 2022 Operating expenses for the gathering and processing segment increased by $9.7 million, or 88.8%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • increase due to additional expenses associated with our Delaware Gathering operations, which began in June 2022. YTD 2023 vs. YTD 2022 Operating expenses for the gathering and processing segment increased by $15.1 million, or 76.8%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • increase due to additional expenses associated with our Delaware Gathering operations, which began in June 2022. EBITDA Q2 2023 vs. Q2 2022 EBITDA increased by $14.2 million, or 36.8%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • additional EBITDA associated with the Delaware Gathering operations, which began in June 2022; and • increase in throughput associated with new connections in our Midland Gathering operations. YTD 2023 vs. YTD 2022 EBITDA increased by $37.5 million, or 53.2%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • additional EBITDA associated with the Delaware Gathering operations, which began in June 2022; and 35 | Management's Discussion and Analysis • increase in throughput associated with new connections in our Midland Gathering operations. 36 | Management's Discussion and Analysis Wholesale Marketing and Terminalling Segment We use our wholesale marketing and terminalling assets to generate revenue by providing wholesale marketing and terminalling services to Delek Holdings’ refining operations and to independent third parties. The following tables and discussion present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three and six months ended June 30, 2023 and 2022: Wholesale Marketing and Terminalling Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net Revenues $ 118,827 $ 165,540 $ 231,136 $ 296,316 Cost of materials and other $ 88,910 $ 143,185 $ 176,392 $ 250,017 Operating expenses (excluding depreciation and amortization presented below) $ 3,848 $ 4,854 $ 8,456 $ 9,386 Segment EBITDA $ 27,983 $ 18,807 $ 49,937 $ 39,541 Operating Information Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 East Texas - Tyler Refinery sales volumes (average bpd) (1) 69,310 63,502 52,158 67,021 Big Spring marketing throughputs (average bpd) 75,164 78,634 76,763 77,100 West Texas marketing throughputs (average bpd) 9,985 10,073 9,454 9,994 West Texas marketing gross margin per barrel $ 3.23 $ 2.67 $ 2.89 $ 2.85 Terminalling throughputs (average bpd) (2) 134,323 130,002 113,926 136,808 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, our El Dorado and North Little Rock, Arkansas terminals and our Memphis and Nashville, Tennessee terminals. Comparison of the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 Net Revenues Q2 2023 vs. Q2 2022 Net revenues for the wholesale marketing and terminalling segment decreased by $46.7 million, or 28.2%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • decreased revenue of $50.9 million in our West Texas marketing operations primarily driven by decreases in the average sales prices per gallon and the average volumes sold: ◦ the average sales prices per gallon of gasoline and diesel sold decreased by $0.93 per gallon and $1.53 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 0.6 million gallons and 1.5 million gallons, respectively. YTD 2023 vs. YTD 2022 Net revenues for the wholesale marketing and terminalling segment decreased by $65.2 million, or 22.0%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • decreased revenue of $66.3 million in our West Texas marketing operations primarily driven by decreases in the average sales prices per gallon and the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold decreased by $0.58 per gallon and $0.79 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 3.4 million gallons and 2.4 million gallons, respectively. 37 | Management's Discussion and Analysis The following charts show summaries of the average sales prices per gallon of gasoline and diesel and refined products volume impacting our West Texas operations for the three and six months ended June 30, 2023 and 2022. Cost of Materials and Other Q2 2023 vs. Q2 2022 Cost of materials and other for the wholesale marketing and terminalling segment decreased by $54.3 million, or 37.9%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • decreased costs of materials and other of $53.2 million in our West Texas marketing operations primarily driven by decreases in the average cost per gallon and the average volumes of gasoline and diesel sold: ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.32 per gallon and $0.12 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 0.6 million gallons and 1.5 million gallons, respectively. YTD 2023 vs. YTD 2022 Cost of materials and other for the wholesale marketing and terminalling segment decreased by $73.6 million, or 29.4% , in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by the following: • decreased costs of materials and other of $69.4 million in our West Texas marketing operations primarily driven by decreases in the average cost per gallon and the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.27 per gallon and $0.11 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold decreased by 3.4 million gallons and 2.4 million gallons, respectively. 38 | Management's Discussion and Analysis The following chart shows a summary of the average prices per gallon of gasoline and diesel purchased in our West Texas operations for the three and six months ended June 30, 2023 and 2022. Refer to the Refined Products Volume - Gallons chart above for a summary of volumes impacting our West Texas operations. Operating Expenses Q2 2023 vs. Q2 2022 Operating expenses for the wholesale marketing and terminalling segment decreased by $1.0 million, or 20.7%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • decrease in outside service costs. YTD 2023 vs. YTD 2022 Operating expenses for the wholesale marketing and terminalling segment decreased by $0.9 million, or 9.9%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, driven primarily by the following: • decrease in allocated employee related costs. EBITDA Q2 2023 vs. Q2 2022 EBITDA increased by $9.2 million, or 48.8%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by the following: • Increase in terminalling throughputs and East Texas - Tyler refinery sales volumes; • increase in gross margin per barrel associated with our West Texas operations; and • partially offset by a decrease in volumes sold in our West Texas operations. YTD 2023 vs. YTD 2022 EBITDA for the wholesale marketing and terminalling segment increased by $10.4 million, or 26.3%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. • increase in gross margin per barrel associated with our West Texas operations; and • partially offset by a decrease in volumes sold in our West Texas operations. 39 | Management's Discussion and Analysis Storage and Transportation Segment Our storage and transportation segment assets provide transportation and storage services to Delek Holdings and third parties. These assets include: • El Dorado Rail Offloading Racks • the El Dorado Tank Assets • the Tyler Tank Assets and Tyler Crude Tank • storage assets acquired in the Big Spring Logistics Assets Acquisition • assets acquired in the Trucking Assets Acquisition • Greenville Storage Facility Additionally, we own or lease 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties. The following tables and discussion present the results of operations and certain operating statistics of the storage and transportation segment for the three and six months ended June 30, 2023 and 2022: Storage and Transportation Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net revenues $ 34,847 $ 36,384 $ 73,631 $ 70,145 Cost of materials and other $ 17,333 $ 17,233 $ 35,937 $ 35,561 Operating expenses (excluding depreciation and amortization presented below) $ 4,105 $ 4,766 $ 9,665 $ 8,942 Segment EBITDA $ 14,978 $ 14,529 $ 28,400 $ 25,637 Comparison of the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 Net Revenues Q2 2023 vs. Q2 2022 Net revenues for the storage and transportation segment decreased by $1.5 million, or 4.2%, in the second quarter of 2023 compared to the second quarter of 2022, primarily driven by the following: • Decrease in trucking revenue primarily as a result of lower production at Delek Holding's refineries; and • partially offset by an increase in storage revenue primarily due to rate increases. YTD 2023 vs. YTD 2022 Net revenues for the storage and transportation segment increased by $3.5 million, or 5.0%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, driven primarily by the following: • Increase in storage revenue primarily due to rate increases. Cost of Materials and Other Q2 2023 vs. Q2 2022 Cost of materials and other for the storage and transportation segment increased by $0.1 million, or 0.6%, in the second quarter of 2023 compared to the second quarter of 2022. YTD 2023 vs. YTD 2022 Cost of materials and other for the storage and transportation segment increased by $0.4 million, or 1.1%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. 40 | Management's Discussion and Analysis Operating Expenses Q2 2023 vs. Q2 2022 Operating expenses for the storage and transportation segment decreased by $0.7 million, or 13.9%, in the second quarter of 2023 compared to the second quarter of 2022, driven primarily by decrease in contract services. YTD 2023 vs. YTD 2022 Operating expenses for the storage and transportation segment increased by $0.7 million, or 8.1%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by an increase in repairs and maintenance costs. EBITDA Q2 2023 vs. Q2 2022 EBITDA increased by $0.4 million, or 3.1%, in the second quarter of 2023 compared to the second quarter of 2022. YTD 2023 vs. YTD 2022 EBITDA increased by $2.8 million, or 10.8%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by increase in storage revenue primarily due to rate increases. 41 | Management's Discussion and Analysis Investments in Pipeline Joint Ventures Segment The Investments in Pipeline Joint Ventures segment relates to strategic Joint Venture investments, accounted for as equity method investments, to 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. 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 8 to our accompanying condensed consolidated financial statements. Refer to Consolidated Results of Operations above for details and discussion of the investments in pipeline joint ventures segment for the three and six months ended June 30, 2023. Liquidity and Capital Resources Sources of Capital We consider the following when assessing our liquidity and capital resources: (i) cash generated from operations; (iv) potential issuance of additional debt securities; and (ii) borrowings under our revolving credit facility; (v) potential sale of assets. (iii) potential issuance of additional equity; At June 30, 2023 our total liquidity amounted to $96.7 million comprised of $89.0 million in unused credit commitments under the DKL Credit Facility and $7.7 million in cash and cash equivalents. We have the ability to increase the DKL Credit Facility to $1.0 billion subject to receiving increased or new commitments from lenders and meeting certain requirements under the credit facility. Historically, we have generated adequate cash from operations to fund ongoing working capital requirements, pay quarterly cash distributions and operational capital expenditures, and we expect the same to continue in the foreseeable future. Other funding sources, including the issuance of additional debt securities, have been utilized to fund growth capital projects such as dropdowns and other acquisitions. 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 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 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, 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. 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 these uncertainties. We believe we were in compliance with the covenants in all our debt facilities as of June 30, 2023. See Note 6 to our condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Cash Distributions On July 26, 2023, the board of directors of our general partner declared a distribution of $1.035 per common unit (the "Distribution"), which equates to approximately $45.1 million per quarter, or approximately $180.4 million per year, based on the number of common units outstanding as of August 7, 2023. The Distribution will be paid on August 14, 2023 to common unitholders of record on August 7, 2023 and represents a 5.1% increase over the second quarter 2022 distribution. 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. 42 | Management's Discussion and Analysis 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) March 31, 2022 $0.980 $42,604 June 30, 2022 $0.985 $42,832 March 31, 2023 $1.025 $44,664 June 30, 2023 $1.035 $45,112 Cash Flows The following table sets forth a summary of our consolidated cash flows for the six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 2022 Net cash provided by operating activities $ 63,802 $ 133,057 Net cash used in investing activities (54,893) (659,327) Net cash (used in) provided by financing activities (9,164) 535,788 Net (decrease) increase in cash and cash equivalents $ (255) $ 9,518 Operating Activities Net cash provided by operating activities decreased by $69.3 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The cash receipts from customer activities increased by $13.7 million and cash payments to suppliers and for allocations to Delek Holdings for salaries increased by $49.2 million. In addition, cash dividends received from equity method investments increased by $3.3 million and cash paid for debt interest increased by $37.1 million. Investing Activities Net cash used in investing activities decreased by $604.4 million during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily due to the Delaware Gathering Acquisition, effective June 1, 2022, which was partially financed through borrowings under the DKL Credit Facility amounting to $621.8 million. There were no acquisitions during the six months ended June 30, 2023. In addition, there was a $2.4 million decrease in purchases of intangibles. Such decrease was partially offset by purchases of property, plant and equipment increased by $19.9 million primarily associated with growth projects in our gathering and processing segment. Financing Activities Net cash provided by financing activities decreased by $545.0 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This decrease was primarily driven by net borrowings under the revolving credit facility which decreased by $532.4 million, primarily associated with financing of the Delaware Gathering Acquisition in the prior year. Also contributing to the decrease was an increase in net payments on the term loan of $7.5 million and a $4.1 million increase in cash distributions paid. Debt Overview As of June 30, 2023, we had total indebtedness of $1,753.5 million. The increase of $83.2 million in our long-term debt balance compared to the balance at December 31, 2022 resulted from the borrowings under the DKL Credit Facility during the six months ended June 30, 2023. As of June 30, 2023, our total indebtedness consisted of: • An aggregate principal amount of $811.0 million under the DKL Revolving Facility ("revolving credit facility"), due on October 13, 2027, with an average borrowing rate of 7.57%, which was amended and restated on October 13, 2022. • An aggregate principal amount of $292.5 million, under the DKL Term Facility, due on October 13, 2024, with an average borrowing rate of 8.41%. • An aggregate principal amount of $250.0 million, under the 2025 Notes (6.75% senior notes), due in 2025, with an effective interest rate of 7.17%. • An aggregate principal amount of $400.0 million, under the 2028 Notes (7.125% senior notes), due in 2028, with an effective interest rate of 7.39%. We believe we were in compliance with the covenants in all debt facilities as of June 30, 2023. See Note 6 to our condensed consolidated financial statements for a complete discussion of our third-party indebtedness. Agreements Governing Certain Indebtedness of Delek Holdings 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. 43 | Management's Discussion and Analysis 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 growth capital projects. These categories are described below: • Regulatory maintenance projects in the gathering and processing 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. • Sustaining 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 sustaining 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 4 to our accompanying consolidated financial statements). When not provided for under reimbursement agreements, such activities are generally funded by cash generated from operations. • Growth 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 six months ended June 30, 2023 and planned capital expenditures for the full year 2023 by segment and by major category: (in thousands) Full Year 2023 Forecast Six Months Ended June 30, 2023 Gathering and Processing Regulatory $ — $ — Sustaining — — Growth 59,975 51,666 Gathering and Processing Segment Total $ 59,975 $ 51,666 Wholesale Marketing and Terminalling Regulatory $ 9,375 $ 79 Sustaining — (925) Growth 6,125 1,250 Wholesale Marketing and Terminalling Segment Total $ 15,500 $ 404 Storage and Transportation Regulatory $ 3,600 $ 1,148 Sustaining 2,200 2,263 Growth — — Storage and Transportation Segment Total $ 5,800 $ 3,411 Total Capital Spending $ 81,275 $ 55,481 The amount of our capital expenditure budget is subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects. For example, we may experience increases in the cost of and/or timing to obtain necessary equipment required for our continued compliance with government regulations or to complete improvement projects. Additionally, the scope and cost of employee or contractor labor expense related to installation of that equipment could increase from our projections. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q.