Delek Logistics Partners, LP 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (''SEC'') on February 28, 2024 (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 X (formerly known as 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; 16 | 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. 17 | Management's Discussion and Analysis Executive Summary: Management's View of Our Business and Strategic Overview Management's View of Our Business 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 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 refineries in Tyler, Texas (the "Tyler Refinery"), El Dorado, Arkansas (the "El Dorado Refinery") and Big Spring, Texas (the "Big Spring Refinery"). Business and Economic Environment Overview During the three months ended March 31, 2024, 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, 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 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 Partnership system. While we experienced a $4.7 million decrease in net income for the three months ended March 31, 2024, our EBITDA (as defined in "Non GAAP Measures" section below) increased $8.3 million in 2024 as compared to 2023. Our gathering and processing segment saw a $2.3 million increase in segment EBITDA. Our wholesale marketing and terminalling segment saw a $3.3 million increase in segment EBITDA. Segment EBITDA for our investments in pipeline joint ventures increased by $2.2 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. 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, 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. See further discussion on macroeconomic factors and market trends, including the impact on 2024, in the ‘Market Trends’ section below. Other 2024 Developments Equity Offering On March 12, 2024, we completed a public offering of its common units in which it sold 3,584,416 common units (including an overallotment option of 467,532 common units) to the underwriters of the offering at a price to the public of $38.50 per unit. The proceeds received from this offering (net of underwriting discounts, commissions and expenses) were $132.3 million and were used to repay a portion of the outstanding borrowings under the DKL Revolving Facility. Underwriting discounts totaled $5.5 million. 2029 Notes On March 13, 2024, the Partnership sold $650.0 million in aggregate principal amount of 8.625% Senior Notes due 2029 (the “2029 Notes”), at par. Net proceeds were used to redeem the 2025 Notes including accrued interest, pay off the DKL Term Loan Facility including accrued interest and to repay a portion of the outstanding borrowings under the DKL Revolving Facility. On April 17, 2024, the Issuers sold $200.0 million in aggregate principal amount of additional 8.625% senior notes due 2029 (the “Additional 2029 Notes”), at 101.25%. The Additional 2029 Notes were issued under the same indenture as the 2029 Notes and formed a part of the same series of notes as the 2029 Notes. The net proceeds were used to repay a portion of the outstanding borrowings under the DKL Revolving Facility. 18 | Management's Discussion and Analysis DKL Revolving Credit Facility On March 29, 2024, the Partnership entered into a Fourth Amendment to the fourth amended and restated senior secured revolving credit agreement (the "DKL Revolving Facility") which among other things increased the U.S. Revolving Credit Commitments (as defined in the DKL Credit Facility) by an amount equal to $100.0 million resulting in aggregate lender commitments under the DKL Revolving Credit Facility in an amount of $1,150.0 million, including up to $146.9 million for letters of credit and $31.9 million in swing line loans. This facility has a maturity date of October 13, 2027. As a result of these transactions, our liquidity significantly improved, with an increase from approximately $300.0 million as of December 31, 2023, to approximately $800.0 million. The improvement in liquidity demonstrates the success of our financial strategies and the positive impact of our transactions, positioning us for future growth and strengthening our financial stability. 19 | Management's Discussion and Analysis Segment Overview 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 8 to our condensed consolidated statements of income in Item 1. to this Quarterly Report on Form 10-Q. Gathering and Processing The operational assets in our gathering and processing segment consist of Midland Gathering Assets and 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. 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 continue 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. 20 | Management's Discussion and Analysis 2024 Strategic Focus Areas We continue to believe that our strategic focus areas are the right ones. As such, we continue to refine our processes for evaluating risks and returns while maintaining a keen eye on our overarching Long-Term Strategic Objectives and our desire to create long-term operational sustainability. To that end, our 2024 Strategic Focus Areas are as follows: • 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, which will enhance our third-party revenues and margin, further diversifying our customer and product mix. ◦ 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 is required, under certain circumstances, to offer us the opportunity to purchase additional logistics assets that Delek Holdings may acquire or construct in the future. Further, we will 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. As certain of our commercial agreements with Delek Holdings have expired or are set to expire soon, we are currently engaged in negotiations to renew these contracts and ensure continued value for both ourselves and our sponsor. • 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. Market Trends Fluctuations in crude oil, natural gas and NGL 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. 21 | Management's Discussion and Analysis 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. 22 | 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 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 marketing contract intangible, which is included as a component of net revenues in our condensed consolidated statements of income in Item 1. to this Quarterly Report on Form 10-Q. • 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 condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess: • our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods; • the ability of our assets to generate sufficient cash flow to make distributions to our unitholders; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. We believe that the presentation of EBITDA and distributable cash flow provide information useful to investors in assessing our financial condition and results of operations. EBITDA and distributable cash flow should not be considered alternatives to net income, operating 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 March 31, 2024 2023 Net income $ 32,648 $ 37,367 Add: Income tax expense 326 302 Depreciation and amortization 26,495 21,105 Amortization of marketing contract intangible 1,803 1,803 Interest expense, net 40,229 32,581 EBITDA $ 101,501 $ 93,158 Reconciliation of net cash from operating activities to distributable cash flow (in thousands) Three Months Ended March 31, 2024 2023 Net cash provided by operating activities $ 43,858 $ 29,190 Changes in assets and liabilities 25,787 37,670 Distributions from equity method investments in investing activities 2,133 1,440 Non-cash lease expense (1,939) (2,200) Regulatory and sustaining capital expenditures not distributable (1) (1,279) (4,246) Reimbursement from Delek Holdings for capital expenditures (2) 286 337 Accretion of asset retirement obligations (187) (176) Deferred income taxes (101) (111) Loss on disposal of assets (567) (142) Distributable cash flow $ 67,991 $ 61,762 23 | Management's Discussion and Analysis (1) Regulatory and sustaining 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) Reimbursement from Delek Holdings for capital expenditures represents amounts for certain capital expenditures reimbursable to us from Delek Holdings pursuant to the terms of the Omnibus Agreement (as defined in Note 2 to our condensed consolidated financial statements in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q). 24 | 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 provides summary financial data (in thousands, except unit and per unit amounts): Summary Statement of Operations Data (1) Three Months Ended March 31, 2024 2023 Net revenues: Gathering and Processing $ 95,883 $ 92,432 Wholesale marketing and terminalling 119,270 112,309 Storage and transportation 36,922 38,784 Total 252,075 243,525 Cost of materials and other 123,692 126,096 Operating expenses (excluding depreciation and amortization presented below) 31,916 24,740 General and administrative expenses 4,863 7,510 Depreciation and amortization 26,495 21,105 Impairment of goodwill — — Loss on disposal of assets 567 142 Operating income $ 64,542 $ 63,932 Interest expense, net 40,229 32,581 Income from equity method investments (8,490) (6,316) Other income, net (171) (2) Total non-operating expenses, net 31,568 26,263 Income before income tax expense 32,974 37,669 Income tax expense 326 302 Net income attributable to partners $ 32,648 $ 37,367 Comprehensive income attributable to partners $ 32,648 $ 37,367 EBITDA (2) $ 101,501 $ 93,158 Net income per limited partner unit: Basic $ 0.74 $ 0.86 Diluted $ 0.73 $ 0.86 Weighted average limited partner units outstanding: Basic 44,406,356 43,569,963 Diluted 44,422,817 43,585,297 (1)This information is presented at a summary level for your reference. See the Condensed Consolidated Statements of Income for more detail regarding our results of operations. (2) For a definition of EBITDA, see "Non-GAAP Measures" above. We report operating results in four reportable segments: • Gathering and Processing • Wholesale Marketing and Terminalling • Storage and Transportation • 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 of its reportable segments based on the segment EBITDA. 25 | Management's Discussion and Analysis Results of Operations Consolidated Results of Operations — Comparison of the three months ended March 31, 2024 compared to the three months ended March 31, 2023 Net Revenues Q1 2024 vs. Q1 2023 Net revenues increased by $8.6 million, or 3.5%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily driven by the following: • increase in terminalling and marketing fees due to rate increases as well as higher volumes associated with Tyler Refinery operations which were negatively impacted in prior year as a result of turnaround activities. Such increases were partially offset by the following: • decreased revenue of $0.6 million in our West Texas marketing operations primarily driven by decreases in RIN prices. Cost of Materials and Other Q1 2024 vs. Q1 2023 Cost of materials and other decreased by $2.4 million, or 1.9%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by • decrease of $5.2 million in our gathering and processing segment driven primarily by lower natural gas costs. Such decrease was partially offset by the following: • increase in costs of materials and other of $1.8 million in our West Texas marketing operations primarily driven by increases in the average volumes of gasoline and diesel sold, partially offset by decreases in the average cost per gallon: ◦ the volumes of gasoline and diesel sold increased by 4.0 million and 0.5 million gallons, respectively; and ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.28 per gallon and $0.22 per gallon, respectively. Operating Expenses Q1 2024 vs. Q1 2023 Operating expenses increased by $7.2 million, or 29.0%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by an increase in contract services. General and Administrative Expenses Q1 2024 vs. Q1 2023 General and administrative expenses decreased by $2.6 million, or 35.2%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by a decrease in contract services. Depreciation and Amortization Q1 2024 vs. Q1 2023 Depreciation and amortization increased by $5.4 million, or 25.5%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by the following: • depreciation associated with new projects in-serviced during the period. 26 | Management's Discussion and Analysis Interest Expense Q1 2024 vs. Q1 2023 Interest expense increased by $7.6 million, or 23.5%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by the following: • debt extinguishment costs of $3.6 million associated with the payoff of the DKL Term Loan Facility and the 2025 Notes with proceeds from the 2029 Notes issued in March 2024; • interest of $2.8 million associated with the 2029 Notes; and • an increase in interest rates associated with the DKL Revolving Facility. Results from Equity Method Investments Q1 2024 vs. Q1 2023 Income from equity method investments increased by $2.2 million, or 34.4%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to increases in throughput at two of our joint ventures that were negatively impacted by the turnaround at the Tyler Refinery in prior year. 27 | Management's Discussion and Analysis Operating Segments Gathering and Processing Segment The following tables and discussion present the results of operations and certain operating statistics of the gathering and processing segment for the three months ended March 31, 2024 and 2023: Gathering and Processing Three Months Ended March 31, 2024 2023 Net Revenues $ 95,883 $ 92,432 Cost of materials and other $ 17,869 $ 23,024 Operating expenses (excluding depreciation and amortization) $ 19,692 $ 14,222 Segment EBITDA $ 57,772 $ 55,445 Throughputs (average bpd) Three Months Ended March 31, 2024 2023 El Dorado Assets: Crude pipelines (non-gathered) 73,011 63,528 Refined products pipelines to Enterprise Systems 63,234 55,003 El Dorado Gathering System 12,987 13,872 East Texas Crude Logistics System 19,702 22,670 Midland Gathering System 213,458 222,112 Plains Connection System 256,844 240,597 Delaware Gathering Assets Volumes Three Months Ended March 31, 2024 2023 Natural Gas Gathering and Processing (Mcfd (1) ) 76,322 74,716 Crude Oil Gathering (bpd (2) ) 123,509 103,725 Water Disposal and Recycling (bpd (2) ) 120,269 88,182 (1) Mcfd - average thousand cubic feet per day. (2) bpd - average barrels per day. Operational comparison of the three months ended March 31, 2024 compared to the three months ended March 31, 2023: Net Revenues Q1 2024 vs. Q1 2023 Net revenues for the gathering and processing segment increased by $3.5 million, or 3.7%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Cost of Materials and Other Q1 2024 vs. Q1 2023 Cost of materials and other for the gathering and processing segment decreased by $5.2 million, or 22.4%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, driven primarily by lower natural gas costs. Operating Expenses Q1 2024 vs. Q1 2023 Operating expenses for the gathering and processing segment increased by $5.5 million, or 38.5%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by increase in contract services. 28 | Management's Discussion and Analysis EBITDA Q1 2024 vs. Q1 2023 EBITDA increased by $2.3 million, or 4.2%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. 29 | Management's Discussion and Analysis Wholesale Marketing and Terminalling Segment The following tables and discussion present the results of operations and certain operating statistics of the wholesale marketing and terminalling segment for the three months ended March 31, 2024 and 2023: Wholesale Marketing and Terminalling Three Months Ended March 31, 2024 2023 Net Revenues $ 119,270 $ 112,309 Cost of materials and other $ 91,904 $ 87,482 Operating expenses (excluding depreciation and amortization presented below) $ 3,828 $ 4,608 Segment EBITDA $ 25,274 $ 21,954 Operating Information Three Months Ended March 31, 2024 2023 East Texas - Tyler Refinery sales volumes (average bpd) (1) 66,475 34,816 Big Spring marketing throughputs (average bpd) 76,615 78,380 West Texas marketing throughputs (average bpd) 9,976 8,696 West Texas marketing gross margin per barrel $ 2.15 $ 5.47 Terminalling throughputs (average bpd) (2) 136,614 93,305 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, our El Dorado and North Little Rock, Arkansas terminals and our Memphis and Nashville, Tennessee terminals. Operational comparison of the three months ended March 31, 2024 compared to the three months ended March 31, 2023: Net Revenues Q1 2024 vs. Q1 2023 Net revenues for the wholesale marketing and terminalling segment increased by $7.0 million, or 6.2%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by the following: • increase in terminalling and marketing fees due to rate increases as well as higher volumes associated with Tyler Refinery operations which were negatively impacted in prior year as a result of turnaround activities. Such increases were partially offset by the following: • decreased revenue of $0.6 million in our West Texas marketing operations primarily driven by decrease in RIN prices. 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 months ended March 31, 2024 and 2023. 30 | Management's Discussion and Analysis Cost of Materials and Other Q1 2024 vs. Q1 2023 Cost of materials and other for the wholesale marketing and terminalling segment increased by $4.4 million, or 5.1% , in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by the following: • increased costs of materials and other of $1.8 million in our West Texas marketing operations primarily driven by increases in the average volumes of gasoline and diesel sold, partially offset by decreased costs per gallon: ◦ the volumes of gasoline and diesel sold increased by 4.0 million and 0.5 million gallons, respectively; ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.28 per gallon and $0.22 per gallon, respectively. The following chart shows a summary of the average prices per gallon of gasoline and diesel purchased in our West Texas operations for the three months ended March 31, 2024 and 2023. Refer to the Refined Products Volume - Gallons chart above for a summary of volumes impacting our West Texas operations. Operating Expenses Q1 2024 vs. Q1 2023 Operating expenses for the wholesale marketing and terminalling segment decreased by $0.8 million, or 16.9%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. EBITDA Q1 2024 vs. Q1 2023 EBITDA increased by $3.3 million, or 15.1%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by the following: • increases in terminalling and marketing revenue, partially offset by lower wholesale margins. 31 | Management's Discussion and Analysis Storage and Transportation Segment The following tables and discussion present the results of operations and certain operating statistics of the storage and transportation segment for the three months ended March 31, 2024 and 2023: Storage and Transportation Three Months Ended March 31, 2024 2023 Net revenues $ 36,922 $ 38,784 Cost of materials and other $ 13,893 $ 18,604 Operating expenses (excluding depreciation and amortization presented below) $ 5,021 $ 5,560 Segment EBITDA $ 18,127 $ 13,422 Operation comparison of the three months ended March 31, 2024 compared to the three months ended March 31, 2023 Net Revenues Q1 2024 vs. Q1 2023 Net revenues for the storage and transportation segment decreased by $1.9 million, or 4.8%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Cost of Materials and Other Q1 2024 vs. Q1 2023 Cost of materials and other for the storage and transportation segment decreased by $4.7 million, or 25.3%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Operating Expenses Q1 2024 vs. Q1 2023 Operating expenses for the storage and transportation segment decreased by $0.5 million, or 9.7%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. EBITDA Q1 2024 vs. Q1 2023 EBITDA increased by $4.7 million, or 35.1%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by a decrease in operating costs. 32 | 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 7 of our condensed consolidated financial statements in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q. Refer to Consolidated Results of Operations above for details and discussion of the investments in pipeline joint ventures segment for the three months ended March 31, 2024. 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 March 31, 2024, our total liquidity amounted to $594.5 million comprised of $584.8 million in unused credit commitments under our third-party revolving credit facility (as discussed in Note 5 of our condensed consolidated financial statements in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q), and $9.7 million in cash and cash equivalents. 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. 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. 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 March 31, 2024. Cash Distributions On April 25, 2024, the board of directors of our general partner declared a distribution of $1.070 per common unit (the "Distribution"), which equates to approximately $50.5 million per quarter, or approximately $202,056 per year, based on the number of common units outstanding as of May 8, 2024. The Distribution will be paid on May 15, 2024 to common unitholders of record on May 8, 2024 and represents a 4.4% increase over the first quarter 2023 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. 33 | 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, 2023 $1.025 $44,664 June 30, 2023 $1.035 $45,112 September 30, 2023 $1.045 $45,558 December 31, 2023 $1.055 $46,010 March 31, 2024 $1.070 $50,514 Equity Offering On March 12, 2024, we completed a public offering of its common units in which it sold 3,584,416 common units (including an overallotment option of 467,532 common units) to the underwriters of the offering at a price to the public of $38.50 per unit. The proceeds received from this offering (net of underwriting discounts, commissions and expenses) were $132.3 million and were used to repay a portion of the outstanding borrowings under the DKL Revolving Facility. Underwriting discounts totaled $5.5 million. Cash Flows The following table sets forth a summary of our condensed consolidated cash flows for the three months ended March 31, 2024 and 2023 (in thousands): Three Months Ended March 31, 2024 2023 Net cash provided by operating activities $ 43,858 $ 29,190 Net cash used in investing activities (9,861) (26,979) Net cash (used in) provided by financing activities (28,080) 783 Net increase in cash and cash equivalents $ 5,917 $ 2,994 Operating Activities Net cash provided by operating activities increased by $14.7 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The cash receipts from customer activities decreased by $9.6 million and cash payments to suppliers and for allocations to Delek Holdings for salaries decreased by $32.3 million. In addition, cash dividends received from equity method investments increased by $0.3 million and cash paid for debt interest increased by $8.3 million. Investing Activities Net cash used in investing activities decreased by $17.1 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to decrease of $16.6 million in purchases of property, plant and equipment primarily associated with growth projects in our gathering and processing segment, a nd a $0.7 million increase in distributions from equity method investments. Financing Activities Net cash provided by financing activities decreased by $28.9 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This decrease was primarily driven by net payments under our revolving credit facility which increased by $265.4 million due to paydown in conjunction with the issuance of the 2029 Notes. Additionally contributing to this decrease was an increase in deferred financing costs paid of $10.5 million associated with the 2029 Note issuance and a $6.2 million increase in payments on other financing arrangements. Partially offsetting these decreases was an increase of $132.3 million due to proceeds from the equity issuance in March 2024, and an increase of $122.5 million in net proceeds from term debt primarily due to the issuance of the 2029 Notes. Debt Overview As of March 31, 2024, we had total indebtedness of $1,615.2 million. The decrease of $96.6 million in our long-term debt balance compared to the balance at December 31, 2023 resulted from the payments under the DKL Credit Facility and the 2025 Notes, which was partially offset by the issuance of the 2029 Notes during the three months ended March 31, 2024. As of March 31, 2024, our total indebtedness consisted of: • An aggregate principal amount of $565.2 million under the DKL Revolving Facility, due on October 13, 2027, with an average borrowing rate of 8.18%. • 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%. • An aggregate principal amount of $650.0 million, under the 2029 Notes (8.625% senior notes), due in 2029, with an effective interest rate of 8.81%. 34 | Management's Discussion and Analysis On April 17, 2024, the Issuers sold $200.0 million in aggregate principal amount of additional 8.625% senior notes due 2029 at 101.25% (the "Additional 2029 Notes"). The Additional 2029 Notes were issued under the same indenture as the 2029 Notes and formed a part of the same series of notes as the 2029 Notes. The net proceeds were used to repay a portion of the outstanding borrowings under the DKL Revolving Facility. On May 2, 2024, the Boards of Directors of Delek Holdings and our general partner authorized the termination of the intercompany loan agreement between Delek Holdings and the Partnership, with the termination expected to be effective on or around May 31, 2024. We believe we were in compliance with the covenants in all debt facilities as of March 31, 2024. See Note 5 of our condensed consolidated financial statements in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q 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. 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 2 to our accompanying condensed 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. 35 | Management's Discussion and Analysis 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 three months ended March 31, 2024: (in thousands) Full Year 2024 Forecast Three Months Ended March 31, 2024 Gathering and Processing Regulatory $ 750 $ — Sustaining 3,900 837 Growth 49,500 13,886 Gathering and Processing Segment Total $ 54,150 $ 14,723 Wholesale Marketing and Terminalling Regulatory $ 3,300 $ (72) Sustaining 2,379 (12) Growth — — Wholesale Marketing and Terminalling Segment Total $ 5,679 $ (84) Storage and Transportation Regulatory $ 1,500 $ — Sustaining 8,500 526 Growth — — Storage and Transportation Segment Total $ 10,000 $ 526 Total Capital Spending $ 69,829 $ 15,165 The amount of our capital expenditure forecast 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.