BUILT ON
DIVERSIFICATION.
POWERED BY
INNOVATION.
2 0 2 0 A N N U A L R E P O R T
About Us
Founded in 2001, Delek US Holdings, Inc. is a
LOGISTICS SEGMENT
diversified downstream energy company with
assets in petroleum refining, logistics, asphalt,
The logistics operations consist of Delek Logistics
Partners, LP (NYSE:DKL) (“Delek Logistics”). Delek US
renewable fuels and convenience store retailing.
and its affiliates also own the general partner and an
REFINING SEGMENT
approximate 80 percent limited partner interest in Delek
Logistics. Delek Logistics is a growth-oriented master
Delek US’ subsidiaries own and operate refineries
limited partnership focused on owning and operating
in Tyler and Big Spring, Texas, El Dorado, Arkansas
midstream energy infrastructure assets. Our logistics
and Krotz Springs, Louisiana with a combined
segment reflects 100 percent of the performance of
nameplate crude throughput capacity of 302,000
Delek Logistics Partners, LP. Adjustments for minority
barrels per day. Delek US’ refining system
interest are made on a consolidated basis.
processes primarily light crude oil sourced from
the Permian Basin, Cushing, Oklahoma, East
RETAIL SEGMENT
Texas, Gulf Coast and local production near the
refinery locations.
The convenience store retail business operates
approximately 253 convenience stores in central and
west Texas and New Mexico.
Financial Highlights
TOTAL REFINING THROUGHPUTS
SEGMENT CONTRIBUTION MARGIN
Barrels Per Day
2020
2019
2018
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
76,264
68,379
74,521 32,887
252,051
77,626
77,049
74,846
63,178
292,699
70,256
73,775
71,810
60,582
276,423
71,707
74,264 28,578 64,098 238,647
76,639
71,920
70,548
59,911
279,018
80,831
60,110
69,260
66,252
276,453
77,024
48,294 72,384
68,835
266,537
70,950
43,304 74,219
75,496
263,969
76,167
63,970
76,458
78,051
294,646
77,558
63,778
73,517
70,194
285,047
81,174
69,860
72,184
75,622
298,840
72,462
70,210
55,602 77,713
275,987
Tyler Refinery
El Dorado Refinery
Big Spring Refinery
Krotz Springs Refinery
Dollars in Millions
Refining
Logistics
Retail
$58.9
$169.8
$865.1
$58.5
$173.4
$777.9
8
1
0
2
9
1
0
2
Note: The challenging macro environment,
influenced by the pandemic, had a negative
impact on the refining industry and this area
of our business. Despite these challenges, our
company successfully navigated through the year
with an improved cash flow break-even profile.
$67.6
0
2
0
2
$238.1
($330.5)
ULSD 532 GULF COAST CRACK SPREAD
Dollars Per Barrel
7
6
6
$
.
9
4
7
$
.
3
8
7
$
.
.
9
1
4
1
$
.
1
8
6
1
$
.
5
0
6
1
$
.
4
9
3
1
$
.
6
0
5
1
$
.
4
7
7
1
$
.
2
0
6
1
$
.
7
2
4
1
$
.
4
7
0
1
$
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2018
2019
2020
Fellow
Shareholders
When the pandemic created unprecedented challenges in
2020, our company acted early and swiftly to protect our
employees, their families and the communities where we
operate. Safety is a core value at Delek, and we adopted
protocols that allowed us to maintain continuity in our
operations while safely delivering products and services to
our customers. We continue to utilize enhanced sanitation,
social distancing, remote work and other measures to
protect our employees, contractors and the public – and we
deeply appreciate our team’s commitment to safety and to
delivering for our clients in a very difficult environment.
EZRA UZI YEMIN
Chairman, President and
Chief Executive Officer
Despite macro headwinds, we continue to build for the future through diversification, powered
by innovation. Our successes last year included the drop-down of both the Big Spring Gathering
System and Trucking Assets to Delek Logistics Partners LP (DKL), providing strong EBITDA
growth and supporting our equity stake in DKL. We also divested the Bakersfield refinery,
creating a source of proceeds and cost savings. The Wink to Webster Pipeline JV announced the
startup of the main segment of the pipeline, and this asset is poised to deliver midstream EBITDA
contribution over the coming years. Within Delek Logistics, the Red River pipeline expansion was
completed, offering crude sourcing optionality and incremental EBITDA potential. Overall, our
asset diversification strategy provided stability, as the midstream and retail businesses delivered
strong performance in the face of COVID-19.
The company made significant strides in improving its cash flow profile with a combination of
cost reduction initiatives and capital spending reductions. We expect additional momentum in
efficiency and cost optimization over the medium to longer term, through ongoing innovation,
which is now one of our core values, and implementation of new technologies. Another success
in 2020 was the publishing of our updated sustainability report, which demonstrated our
commitment to innovation in environmental, social and governance (ESG) efforts and yielded
improved rankings from third parties.
2 0 2 0 A N N U A L R E P O R T | 1
Delek’s Commitment to ESG
Delek has long recognized our responsibility to
address environmental, social and governance
(ESG) topics, and the company formalized its
commitment through the publishing of its 2019-
2020 sustainability report. The report included
our first disclosure of company-wide Scope 1
& 2 emissions, refining business unit carbon
intensity measurements, a diversity, equity
and inclusion (DE&I) policy, our human rights
policy, supplier social standards, disclosure
of whistleblower statistics, and workforce
demographic disclosures. Our consecutive,
multi-year improvements in both DART and
TRIR metrics demonstrate that our dedication to
health and safety is producing tangible results
and that our goal of ZERO recordable injuries
is possible. In the area of governance, Delek’s
goal is to have no less than 30% of the board
of directors comprised of females or racially
diverse members by 2022. We are proud of what
we have accomplished and excited about where
our holistic ESG program will take Delek in the
future. Our full 2019-2020 ESG report can be
found at www.delekus.com/social-commitment/.
Priorities for 2021
As we move forward, we are increasingly
optimistic about our outlook, and we have
identified five strategic priorities for 2021:
maintain and enhance our safe operations;
improve EBITDA and cash flow; develop and
utilize systems, processes and technology
to improve operations; maintain an ongoing
commitment to ESG efforts; and lay the
foundation for future growth.
(cid:374) Maintain and Continue to Enhance Our Safe
(cid:374)
(cid:374)
Operations. We are proud of our commitment
to safety as a core value of the company, and
this commitment is reflected in our continuous
improvement in days away, restricted or transferred
(DART) and total recordable incident rate (TRIR)
metrics since 2016. According to the American
Fuel & Petrochemical Manufacturers trade
association, Delek ranks second overall in these
safety metrics among companies operating multiple
refineries. The retail business unit’s TRIR is half the
industry average.
Drive EBITDA and Cash Flow Improvement. In
2020, the company acted decisively by adapting to
the challenging macro environment and delivering
significant cost savings. We plan to maintain and
enhance our cost containment efforts in 2021.
Simultaneously, initiatives for margin improvements
through optimization are underway. The
combination of these improvements along with a
diverse asset base should lead to a lower cash flow
break-even profile in the future.
Develop and Utilize Systems, Processes and
Technology to Improve Operations. Recognizing
that the energy industry remains behind the
curve in terms of technological advancements,
and that Delek has a long history of being nimble,
we have added innovation to our core values.
Our vision is to use select technologies and
implement advanced systems and processes to
achieve further, more structural cost reductions,
operational improvements and asset optimization
over the medium to longer term. Through our
focus on innovation, we expect to enhance the
competitiveness of the portfolio within the industry.
2 BUILT ON DIVERSIFICATION. POWERED BY INNOVATION.
VISION
Creating long-term value through sustainable
energy solutions in an evolving world.
MISSION
We are a company led by innovation, committed to
safety leadership, diversity, and the pursuit of growth
and excellence for the benefit of all of our stakeholders.
OUR CORE VALUES UPDATE
Our values are core to what we do and how we do
it. They describe our desired culture and serve as
our behavioral compass. When Delek embarked on
its transformational journey, we realized that our
growth required a change in mindset. This led us to
review and refresh our core values. While the core
framework remains, we have made minor updates to
support a sharpened focus on innovation, learning,
organizational agility and the environment.
(cid:374)
Ongoing Commitment to ESG. At Delek, we understand the
importance of ESG and the growing role it plays with all
stakeholders, as well as within an investment management
framework. Therefore, we were pleased that the sustainability
report we published in 2020 was well-received, yielding
improved scoring from multiple rating agencies. However,
we are still relatively early in our ESG journey, and we are
striving for progressive improvements over time in terms of
underlying performance metrics and disclosure in all ESG
categories. We are taking a holistic approach to addressing
the evolving and challenging requirements of ESG by
gleaning fresh ideas and feedback from business leaders and
employees throughout the organization. One example is the
de-carbonization steering committee that involves members
of each business unit and attempts to generate leading-edge
solutions to improve our carbon footprint while maximizing
long-term returns on our capital investments. Additional ESG
highlights can be found in the sidebar of this report.
(cid:374)
Laying the Foundation for Future Growth. Delek was built
through a history of strategic acquisitions, with a strong
track record of seamless integration. We understand that
difficult macro environments often create acquisition
opportunities or prospects to pivot strategically. After
focusing mainly on improving our cash flow break-even
profile through reduced capital expenditures and operating
costs in 2020, we are emerging from this downturn with
an improved cost structure, a healthy balance sheet and
opportunities to pursue future growth. We are constantly
evaluating the optimal investment options available in our
various business units and comparing the potential returns
of both organic and inorganic opportunities. In the constantly
evolving energy landscape, Delek remains strong, nimble
and well-positioned to capture opportunities.
2 0 2 0 A N N U A L R E P O R T | 3
In conclusion, our company successfully navigated through
a difficult 2020 environment with safe operations, continuity
of products and services, and an improved cash flow break-
even profile. We are well-positioned to capture the benefits
of an improving macroeconomic backdrop with a laser focus
toward delivering on our strategic priorities. As always, I
would like to thank the employees of our company who
make Delek what it is today, as well as the board and our
shareholders for their trust and support in our team.
Sincerely,
EZRA UZI YEMIN
Chairman, President and Chief Executive Officer
Delek US Holdings, Inc.
OPERATIONS MAP
DELEK REFINERIES
DKL CRUDE PIPELINE
DKL TERMINAL
DKL JOINT VENTURE CRUDE PIPELINES
DELEK ASPHALT TERMINAL
THIRDPARTY CRUDE PIPELINES
DELEK RENEWABLES
THIRDPARTY PRODUCT PIPELINES
RETAIL CITIES
LONGVIEW, TEXAS
THIRDPARTY TERMINAL
CORPORATE HEADQUARTERS
4 BUILT ON DIVERSIFICATION. POWERED BY INNOVATION.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 18 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-38142
DELEK US HOLDINGS, INC.
(Exact nammee ooff rreeggiissttrraanntt aass ssppeecciiffiieedd iinn iits charter)
Delaware
(State or other jurisdiction of incorporation or organization)
35-2581557
(I.R.S. Employer Identification No.)
7102 Commerce Way
(Address of principal executive offices)
Breennttwwoooodd
TTeennnneessssee
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
37027
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(Former name, former address and former fiscal year, if changed since last report)
Title of each class
Common Stock, par value $0.01
Rights to Purchase Series A Junior Participating Preferred Stock, par value $0.01
Trading Symbol
DK
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 4262(b)) by the registered public accounting firm that prepared or issued its audit report.
☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the common stock held by non-affiliates as of June 30, 2020 was approximately $1,265,400,000, based upon the closing sale price of the registrant's
common stock on the New York Stock Exchange on that date. For purposes of this calculation only, all directors and officers subject to Section 16(b) of the Securities Exchange Act of
1934 are deemed to be affiliates.
At February 19, 2021, there were 73,781,666 shares of the registrant's common stock, $.01 par value, outstanding (excluding securities held by, or for the account of, the Company or its
subsidiaries).
Portions of the registrant's definitive Proxy Statement to be delivered to stockholders in connection with the 2021 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Documents incorporated by reference
Delek US Holdings, Inc.
Annual Report on Form 10-K
For the Annual Period Ending December 31, 2020
PART I
Items 1 & 2. Business and Properties
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Reserved
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item
9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Table of Contents
9
32
54
54
54
55
56
57
98
99
100
100
100
101
101
101
101
101
102
60
107
2 |
Delek US Holdings, Inc. is a registrant pursuant to the Securities Act of 1933 and is listed on the New York Stock Exchange ("NYSE" under the
ticker symbol "DK." Effective July 1, 2017, we acquired the outstanding common stock of Alon USA Energy, Inc. ("Alon" (the "Delek/Alon
Merger", as further discussed in Note 3 of the consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K, resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc.
Unless otherwise noted or the context requires otherwise, the terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer
to Delek US Holdings, Inc. and its consolidated subsidiaries for all periods presented. Our business consists of three operating segments:
refining, logistics and retail.
As of December 31, 2020, we owned an 80.0% limited partner interest as well as a non-economic general partner interest in Delek Logistics
Partners, LP ("Delek Logistics", a publicly-traded master limited partnership that we formed in April 2012. By virtue of the Delek/Alon Merger,
we acquired an 81.6% limited partner interest as well as a non-economic general partner interest in Alon USA Partners, LP (the "Alon
Partnership", then a publicly-traded limited partnership. On February 7, 2018, we acquired the remaining outstanding units in the Alon
Partnership.
Statements in this Annual Report on Form 10-K, other than purely historical information, including statements regarding our plans, strategies,
objectives, beliefs, expectations and intentions are forward-looking statements. 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 outbreak of
COVID-19 and its development into a pandemic in March 2020 (the "COVID-19 Pandemic" or the "Pandemic" and the actions of members of
the Organization of Petroleum Exporting Countries (“OPEC” and other leading oil producing countries (together with OPEC, “OPEC+” with
respect to oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning our
possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other
matters will or 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, and 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 are based on current expectations and assumptions that are subject to risks and uncertainties,
including those discussed below and in Item 1A. Risk Factors, which may cause actual results to differ materially from the forward-looking
statements. See also "Forward-Looking Statements" included in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Annual Report on Form 10-K.
See the “Glossary of Terms” beginning on page 4 of this Annual Report on Form 10-K for definitions of certain business and industry
terms used herein.
Available Information
Our Internet website address is www.DelekUS.com and Twitter account is @DelekUSHoldings. Information contained on our website is not part
of this Annual Report on Form 10-K. Our reports, proxy and information statements, and any amendments to such documents are filed
electronically with the Securities and Exchange Commission (“SEC” and are available on our Internet website in the “Investor Relations”
section (ir.delekus.com, free of charge, as soon as reasonably practicable after we file or furnish such material to the SEC. We also post our
Governance Guidelines, Code of Business Conduct & Ethics and the charters of our Board of Directors’ committees in the “Corporate
Governance” section of our website, accessible by navigating to the “About Us” section on our Internet website. We will provide any of these
documents to any stockholder that makes a written request to the Corporate Secretary, Delek US Holdings, Inc., 7102 Commerce Way,
Brentwood, Tennessee 37027.
3 |
Glossary of Terms
Glossary of Terms
The following are definitions of certain industry terms used in this Annual Report on Form 10-K:
Alkylation Unit - A refinery unit utilizing an acid catalyst to combine smaller hydrocarbon molecules to form larger molecules in the gasoline
boiling range to produce a high octane gasoline blendstock, which is referred to as alkylate.
Barrel - A unit of volumetric measurement equivalent to 42 U.S. gallons.
Biodiesel - A renewable fuel produced from vegetable oils or animal fats that can be blended with petroleum-derived diesel to produce
biodiesel blends for use in diesel engines. Pure biodiesel is referred to as B100, whereas blends of biodiesel are referenced by how much
biodiesel is in the blend (e.g., a B5 blend contains five volume percent biodiesel and 95 volume percent ULSD).
Blendstocks - Various products or intermediate streams that are combined with other components of similar type and distillation range to
produce finished gasoline, diesel fuel or other refined products. Blendstocks may include natural gasoline, hydrotreated Fluid Catalytic
Cracking Unit gasoline, alkylate, ethanol, reformate, butane, diesel, biodiesel, kerosene, light cycle oil or slurry, among others.
Bpd/bpd - Barrels per calendar day.
Brent Crude (Brent) - A light, sweet crude oil, though not as light as WTI. Brent is the leading global price benchmark for Atlantic basin crude
oil.
CBOB - Motor gasoline blending components intended for blending with oxygenates, such as ethanol, to produce finished conventional motor
gasoline.
CERCLA - Comprehensive Environmental Response, Compensation and Liability Act.
Colonial Pipeline - A pipeline owned and operated by the Colonial Pipeline Company that originates near Houston, Texas and terminates near
New York, New York, connecting the U.S. refinery region of the Gulf Coast with customers throughout the southern and eastern United States.
Complexity Index - A measure of secondary conversion capacity of a refinery relative to its primary distillation capacity used to quantify and
rank the complexity of various refineries. Generally, more complex refineries have a higher index number.
Contribution margin - Net revenues less costs of materials and other and operating expenses, excluding depreciation and amortization.
Crack spread - The crack spread is a measure of the difference between market prices for crude oil and refined products and is commonly
used proxy within the industry to estimate or identify trends in refining margins.
Crude Distillation Capacity, Nameplate Capacity or Production Capacity - The maximum sustainable capacity for a refinery or process unit
for a given feedstock quality and severity level, measured in barrels per day.
Cushing - Cushing, Oklahoma.
Delayed Coking Unit (Coker) - A refinery unit that processes ("cracks") heavy oils, such as the bottom cuts of crude oil from the crude or
vacuum units, to produce blendstocks for light transportation fuels or feedstocks for other units and petroleum coke.
Direct operating expenses - Operating expenses attributed to the respective segment.
EISA - Energy Independence and Security Act of 2007.
Enterprise Pipeline System - A major product pipeline transport system that reaches from the Gulf Coast into the northeastern United States.
EPA - The Environmental Protection Agency.
Ethanol - An oxygenated blendstock that is blended with sub-grade (CBOB) or conventional gasoline to produce a finished gasoline.
E-10 - A 90% gasoline-10% ethanol blend.
E-15 - An 85% gasoline-15% ethanol blend.
E-85 - A blend of gasoline and 70%-85% ethanol.
Feedstocks - Crude oil and petroleum products used as inputs in refining processes.
FERC - The Federal Energy Regulatory Commission.
FIFO - First-in, first-out inventory accounting method.
Fluid Catalytic Cracking Unit or FCC Unit - A refinery unit that uses fluidized catalyst at high temperatures to crack large hydrocarbon
molecules into smaller, higher-valued molecules (LPG, gasoline, LCO, etc.).
4 |
Glossary of Terms
Gulf Coast 2-1-1 crack spread - A crack spread, expressed in dollars per barrel, reflecting the approximate gross margin resulting from
processing, or "cracking", one barrel of crude oil into one-half barrel of gasoline and one-half barrel of high sulfur diesel, utilizing the market
prices of LLS crude oil, Gulf Coast Pipeline conventional gasoline and Gulf Coast Pipeline No. 2 Heating Oil.
Gulf Coast 3-2-1 crack spread - A crack spread, expressed in dollars per barrel, reflecting the approximate gross margin resulting from
processing, or "cracking", one barrel of crude oil into two-thirds barrel of gasoline and one-third barrel of ultra-low sulfur diesel, utilizing the
market prices of WTI crude oil, Gulf Coast Pipeline conventional gasoline and Gulf Coast Pipeline ultra-low sulfur diesel.
Gulf Coast 5-3-2 crack spread - A crack spread, expressed in dollars per barrel, reflecting the approximate gross margin resulting from
processing, or "cracking", one barrel of crude oil into three-fifths barrel of gasoline and two-fifths barrel of high sulfur diesel, utilizing the market
prices of WTI crude oil, Gulf Coast Pipeline CBOB and Gulf Coast Pipeline No. 2 Heating Oil.
Gulf Coast Pipeline CBOB - A grade of gasoline blendstock that must be blended with 10% biofuels in order to be marketed as Regular
Unleaded at retail locations.
Gulf Coast Pipeline No. 2 Heating Oil - A petroleum distillate that can be used as either a diesel fuel or a fuel oil. This is the standard by which
other Gulf Coast distillate products (such as ultra-low sulfur diesel) are priced.
Gulf Coast Region - Commonly referred to as PADD III, includes the states of Texas, Arkansas, Louisiana, Mississippi, Alabama and New
Mexico.
HLS - Heavy Louisiana Sweet crude oil; typical API gravity of 33° and sulfur content of 0.35%.
Hydrotreating Unit - A refinery unit that removes sulfur and other contaminants from hydrocarbons at high temperatures and moderate to high
pressure in the presence of catalysts and hydrogen. When used to process fuels, this unit reduces the sulfur dioxide emissions from these
fuels.
Isomerization Unit - A refinery unit altering the arrangement of a molecule in the presence of a catalyst and hydrogen to produce a more
valuable molecule, typically used to increase the octane of gasoline blendstocks.
Jobbers - Retail stations owned by third parties that sell products purchased from or through us.
LIFO - Last-in, first-out inventory accounting method.
Light/Medium/Heavy Crude Oil - Terms used to describe the relative densities of crude oil, normally represented by their API gravities. Light
crude oils (those having relatively high API gravities) may be refined into a greater number of valuable products and are typically more
expensive than a heavier crude oil.
LLS - Louisiana Light Sweet crude oil; typical API gravity of 38° and sulfur content of 0.34%.
LPG - Liquefied petroleum gas.
LSR - Light straight run naphtha.
Mid-Continent Region - Commonly referred to as PADD II, includes the states of North Dakota, South Dakota, Nebraska, Kansas, Oklahoma,
Minnesota, Iowa, Missouri, Wisconsin, Illinois, Michigan, Indiana, Ohio, Kentucky and Tennessee.
Midland - Midland, Texas.
MMBTU - One Million British Thermal Units.
MSCF/d - Abbreviation for a thousand standard cubic feet per day, a common measure for volume of natural gas.
Naphtha - A hydrocarbon fraction that is used as a gasoline blending component, a feedstock for reforming and as a petrochemical feedstock.
New York Mercantile Exchange (NYMEX) - A commodities futures exchange.
NGL - Natural gas liquids.
OSHA - The Occupational Safety and Health Administration.
Petroleum Administration for Defense District (PADD) - Any of five regions in the United States as set forth by the Department of Energy
and used throughout the oil industry for geographic reference. Our refineries operate in PADD III, commonly referred to as the Gulf Coast
Region.
Petroleum Coke - A coal-like substance produced as a byproduct during the Delayed Coking refining process.
Per barrel of sales - Calculated by dividing the applicable income statement line item (operating margin or operating expenses) by the total
barrels sold during the period.
PPB - Parts per billion.
5 |
Glossary of Terms
PPM - Parts per million.
RCRA - Resource Conservation and Recovery Act.
Refining margin, refined product margin - Refining margin or refined product margin is measured as the difference between net refining
revenues and total refining cost of materials and other and is used as a metric to assess a refinery's product margins against market crack
spread trends.
Reforming Unit - A refinery unit that uses high temperature, moderate pressure and catalyst to create petrochemical feedstocks, high octane
gasoline blendstocks and hydrogen.
Renewable Fuels Standard 2 (RFS-2) - An EPA regulation promulgated pursuant to the EISA, which requires most refineries to blend
increasing amounts of renewable fuels (including biodiesel and ethanol) with refined products.
Renewable Identification Number (RIN) - A renewable fuel credit used to satisfy requirements for blending renewable fuels under RFS-2.
Roofing flux - An asphalt-like product used to make roofing shingles for the housing industry.
Straight run - Product produced off of the crude or vacuum unit and not further processed.
Sweet/Sour crude oil - Terms used to describe the relative sulfur content of crude oil. Sweet crude oil is relatively low in sulfur content; sour
crude oil is relatively high in sulfur content. Sweet crude oil requires less processing to remove sulfur and is typically more expensive than sour
crude oil.
Throughput - The quantity of crude oil and feedstocks processed through a refinery or a refinery unit.
Turnaround - A periodic shutdown of refinery process units to perform routine maintenance to restore the operation of the equipment to its
former level of performance. Turnaround activities normally include cleaning, inspection, refurbishment, and repair and replacement of
equipment and piping.
It is also common to use turnaround periods to change catalysts or to implement capital project improvements.
Ultra-Low Sulfur Diesel (ULSD) - Diesel fuel produced with a lower sulfur content (15 ppm) to reduce sulfur dioxide emissions. ULSD is the
only diesel fuel that may be used for on-road and most other applications in the U.S.
UST - Underground storage tank.
Vacuum Distillation Unit - A refinery unit that distills heavy crude oils under deep vacuum to allow their separation without coking.
West Texas Intermediate Crude Oil (WTI) - A light, sweet crude oil characterized by an API gravity between 38° and 44° and a sulfur content
of less than 0.4 wt% that is used as a benchmark for other crude oil.
West Texas Sour Crude Oil (WTS) - A sour crude oil, characterized by an API gravity between 30° and 33° and a sulfur content of
approximately 1.28 wt% that is used as a benchmark for other sour crude.
6 |
Summary of Risk Factors
Summary of Risk Factors
An investment in us involves a high degree of risk. Numerous factors, including those discussed below in Item 1A. Risk Factors, may limit our
ability to successfully execute our business and growth strategies. You should carefully consider all of the information set forth and incorporated
by reference in this Annual Report in deciding whether to invest in the Company. Among these important risks are the following:
•
•
A substantial or extended decline in refining margins would reduce our operating results and cash flows and could materially and
adversely impact our future rate of growth and the carrying value of our assets.
The current COVID-19 Pandemic, any related subsequent waves of the COVID-19 Pandemic or an additional regional or global
disease outbreak, and certain developments in the global oil markets have had, may continue to have, or may have an adverse
impact on our business, our future results of operations and our overall financial performance.
• We have suspended our quarterly dividend and cannot assure you when we will declare dividends in the future.
• We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws,
thereby adversely affecting our
regulations and other requirements could significantly increase our costs of doing business,
profitability.
•
•
•
The availability and cost of RINs and other required credits could have a material adverse effect on our financial condition and results
of operations.
Increased supply of and demand for alternative transportation fuels, increased fuel economy standards and increased use of
alternative means of transportation could lead to a decrease in transportation fuel prices and/or a reduction in demand for petroleum-
based transportation fuels.
Competition in the industries and segments in which we do business is intense and an increase in competition, loss of market share,
or pressure to reduce prices could adversely affect our earnings and profitability.
• We may seek to diversify and expand our retail
fuel and convenience store operations, which may present operational and
competitive challenges.
•
•
•
•
Decreases in commodity prices may lessen our borrowing capacities, increase collateral requirements for derivative instruments or
cause a write-down of inventory.
A terrorist attack on our assets, or threats of war or actual war, may hinder or prevent us from conducting our business.
Legislative and regulatory measures to address climate change and GHG emissions could increase our operating costs or decrease
demand for our refined products.
Increasing attention to environmental, social and governance matters may impact our business, financial results or stock price.
• We are particularly vulnerable to disruptions to our refining operations because our refining operations are concentrated in four
facilities. Our operations are subject to business interruptions and casualty losses. Failure to manage risks associated with business
interruptions and casualty losses could adversely impact our operations, financial condition, results of operations and cash flows.
•
The costs, scope, timelines and benefits of our refining projects may deviate significantly from our original plans and estimates.
• We depend upon our logistics segment for a substantial portion of the crude oil supply and refined product distribution networks that
serve our Tyler, Big Spring and El Dorado refineries. Interruptions or limitations in the supply and delivery of crude oil, or the supply
and distribution of refined products, may negatively affect our refining operations and inhibit the growth of our refining operations.
• We are subject to risks associated with significant investments in the Permian Basin.
• We have made investments in joint ventures which subject us to additional risks, over which we do not have full control and which
have unique risks.
•
•
•
•
Our retail segment is dependent on fuel sales, which makes us susceptible to increases in the cost of gasoline and interruptions in
fuel supply.
General economic conditions may adversely affect our business, operating results and financial condition.
The termination or expiration of, or periodic price adjustment settlements in, the J. Aron & Company ("J. Aron") Supply and Offtake
Agreements could have a material adverse effect on our liquidity.
If there is negative publicity concerning our brand names or the brand names of our suppliers, fuel and merchandise sales in our retail
segment may suffer.
• Wholesale cost increases, vendor pricing programs and tax increases applicable to tobacco products, as well as campaigns to
discourage their use, could adversely impact our results of operations in our retail segment.
•
Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently
insure companies in the energy industry may cease to do so or substantially increase premiums.
• We may not be able to successfully execute our strategy of growth through acquisitions.
7 |
Summary of Risk Factors
•
•
Acquisitions involve risks that could cause our actual growth or operating results to differ adversely compared with our expectations.
Our future results will suffer if we do not effectively manage our expanded operations.
• We may incur significant costs and liabilities with respect to investigation and remediation of environmental conditions at our facilities.
• We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations
or otherwise comply with health, safety, environmental and other laws and regulations.
•
•
•
•
•
An increase in the price of feedstocks, or an increase in competition, and/or reduction in demand in the markets in which we purchase
feedstocks and sell our refined products, could increase our costs and/or lower prices and adversely affect our cost structure, sales
and profitability.
Compliance with and changes in tax laws could adversely affect our performance.
Adverse weather conditions or other unforeseen developments could damage our facilities, reduce customer traffic and impair our
ability to produce and deliver refined petroleum products or receive supplies for our retail fuel and convenience stores.
Our operating results are seasonal and generally lower in the first and fourth quarters of the year for our refining and logistics
segments and in the first quarter of the year for our retail segment. We depend on favorable weather conditions in the spring and
summer months.
A substantial portion of the workforce at our refineries is unionized, and we may face labor disruptions that would interfere with our
operations.
• We rely on information technology in our operations, and any material failure, inadequacy, interruption, cyber-attack or security failure
of that technology could harm our business.
•
•
•
•
•
•
If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted.
If we are, or become, a United States real property holding corporation, special tax rules may apply to a sale, exchange or other
disposition of common stock, and non-U.S. holders may be less inclined to invest in our stock, as they may be subject to United
States federal income tax in certain situations.
Loss of or reductions to tax incentives for biodiesel production may have a material adverse effect on earnings, profitability and cash
flows relating to our renewable fuels facilities.
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
Stockholder activism may negatively impact the price of our common stock, results of operations, financial conditions, and cash flows.
Future sales of shares of our common stock could depress the price of our common stock, and could result in substantial dilution to
our stockholders.
• We depend upon our subsidiaries for cash to meet our obligations and pay any dividends.
•
•
•
•
The stockholder rights plan adopted by our Board of Directors may impair an attempt to acquire control of Delek.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our
stockholders may consider in their best interests, which could negatively affect our stock price.
Changes in our credit profile could affect our relationships with our suppliers, which could have a material adverse effect on our
liquidity and our ability to operate our refineries at full capacity.
Our commodity and interest rate derivative activity may limit potential gains, increase potential losses, result in earnings volatility and
involve other risks.
• We are exposed to certain counterparty risks which may adversely impact our results of operations.
•
•
•
•
From time to time, our cash and credit needs may exceed our internally generated cash flow and available credit, and our business
could be materially and adversely affected if we are not able to obtain the necessary cash or credit from financing sources.
Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.
Our debt agreements contain operating and financial restrictions that might constrain our business and financing activities.
Fluctuations in interest rates could materially affect our financial results.
• We may refinance a significant amount of indebtedness and otherwise require additional financing; we cannot guarantee that we will
be able to obtain the necessary funds on favorable terms or at all.
• We recorded goodwill and other intangible assets that could become impaired and result in material non-cash charges to our results
of operations in the future.
8 |
Business and Properties
ITEMS 1 and 2. BUSINESS and PROPERTIES
Company Overview
PART I
We are an integrated downstream energy business focused on petroleum refining ("Refining" or our "refining segment"), the transportation,
storage and wholesale distribution of crude oil, intermediate and refined products ("Logistics" or our "logistics segment") and convenience store
retailing ("Retail" or our "retail segment"). Delek US Holdings, Inc., a Delaware corporation formed in 2016 (a successor to the original Delek US
Holdings, Inc. which was a Delaware corporation originally formed in 2001), operates through its consolidated subsidiaries, which include Delek
US Energy, Inc. (and its subsidiaries) ("Delek Energy") and Alon USA Energy, Inc. ("Alon" as previously defined) (and its subsidiaries).
The following map outlines the geography of our integrated downstream energy structure as of December 31, 2020:
Refining
Logistics
Retail
253 stores as of December 31, 2020
Southwest U.S. locations
Primary source of fuel is Big Spring, TX refinery
302,000 barrels per day ("bpd") total capacity:
Tyler, TX
El Dorado, AR
Big Spring, TX
Krotz Springs, LA
WTI primary crude oil supply - 260,000 bpd
Biodiesel facilities with 40 million gallons total annual
capacity:
Crossett, AR
Cleburne, TX
New Albany, MS
(1)
Includes approximately 240 miles of leased capacity.
10 terminals
Approximately 1,570 miles of pipeline (1)
10.2 million barrels of storage capacity
Crude oil pipeline joint ventures:
Red River Pipeline Company LLC
Caddo Pipeline LLC
Andeavor Logistics RIO Pipeline LLC
West Texas wholesale:
Sale of refined products through terminals
9 |
The principal activities of our refining, logistics and retail segments are described below:
Refining Segment
Inputs:
Products:
crude oil and other feedstocks
transportation motor fuels, including various grades of gasoline, diesel fuel and aviation
fuel, asphalt and other petroleum-based products
Business and Properties
Nameplate Capacity (bpd):
Primary Refinery Operations (and bpd capacity):
Tyler, Texas refinery (the "Tyler refinery")
El Dorado, Arkansas refinery (the "El Dorado refinery")
Big Spring, Texas refinery (the "Big Spring refinery")
302,000
75,000
80,000
73,000
Krotz Springs, Louisiana refinery (the "Krotz Springs refinery") 74,000
Other Refinery Operations/Assets:
Renewables facilities
Bakersfield, California refinery assets
Primary Distribution Channels:
Tyler refinery
El Dorado refinery
Big Spring refinery
Krotz Springs refinery
Logistics Segment
Primary Operations:
Fee-Based Revenue Sources:
approximately 40 million gallons of annual biodiesel production capacity across three
facilities located in Crossett, Arkansas, Cleburne, Texas and New Albany, Mississippi
non-operating
majority of production is distributed through a refined products terminal located at the
refinery that is owned and operated by our logistics segment to supply the local market
in the East Texas area
majority of production is shipped into the Enterprise Pipeline System and our logistics
segment's El Dorado Pipeline system to supply a combination of pipeline bulk sales and
wholesale rack sales at terminal locations along the pipeline in Louisiana, Arkansas,
Tennessee, Missouri and Indiana
signification portion of production is distributed across the refinery truck terminal into
local markets and by pipeline through various terminals to supply Delek or Alon
branded retail sites focused on Central and West Texas, Oklahoma, New Mexico and
Arizona
majority of production is distributed through pipeline and barge bulk sales and
wholesale rack sales at
terminals located on the Colonial Pipeline system in the
southeastern United States
owns and operates crude oil and refined products logistics and marketing assets for the use in
providing logistics and marketing services to customers; the primary customer is Delek and inter-
company revenues and costs are eliminated in consolidation
gathering, transporting and storing crude oil and for marketing, distributing, transporting and storing
intermediate and refined products in select regions of the southeastern United States and West Texas
for both our refining segment and third parties
Other Revenue Sources:
sales of wholesale products in the West Texas market
Owned or Leased Pipeline Capacities (in
approximate miles):
Crude oil transportation pipelines
Refined product pipelines
Crude oil gathering system (1)
Other Logistics Assets/Facilities:
Gathering system crude oil capacity, intermediate
and refined products storage tanks
Other storage tanks
Terminals
Joint venture investments
400
450
900
Approximately 10.2 million barrels of active shell capacity
various other storage tanks located at our terminals
operates ten light product distribution terminals located in Tennessee, Texas, Oklahoma and
Arkansas
strategic investments in pipelines/pipeline systems servicing various areas including the Permian
Basin
In addition to the 700-mile crude oil gathering system, our logistics segment is also managing construction of the approximately 250-mile gathering system in the Permian
Basin connecting to our Big Spring, Texas terminal and will operate the gathering system as it is completed. As of December 31, 2020, approximately 178 miles of the
gathering system were completed and operational. See further discussion in our 'Recent Strategic Developments' section below.
(1)
10 |
Retail Segment
Number of Stores at December 31, 2020 (owned
and leased):
Geographic Areas Served:
Branding:
Fuel Offerings at Retail Locations:
Merchandise Offerings at Convenience Store
Retail Locations:
Business and Properties
253
Central and West Texas and New Mexico
Delek (under "DK") and Alon branding on certain locations which will continue to increase as we re-
brand existing 7-Eleven locations (1)
various grades of gasoline and diesel under the DK or Alon brand name, primarily sourced by our Big
Spring refinery
food products,
merchandise as well as money orders
tobacco products, non-alcoholic and alcoholic beverages, general
food service,
(1)
In November 2018, we terminated a license agreement with 7-Eleven, Inc. and must remove all 7-Eleven branding on a store-by-store basis by December 31, 2023.
Merchandise at our convenience store sites will continue to be sold under the 7-Eleven brand name until 7-Eleven branding is removed at each convenience store site. As of
December 31, 2020, we had removed the 7-Eleven brand name at 57 of our store locations.
Significant Acquisitions and Dispositions
Historically, we have grown through acquisitions in all of our segments. Our business strategy has been focused on growing our integrated
business model that allows us to participate in all phases of the downstream production process, from transporting crude oil to our refineries for
processing into refined products to selling fuel to customers. This growth may come from acquisitions as well as investments in our existing
businesses, as we continue to broaden our existing geographic presence and integrated business model. Our strategy also includes evaluating
certain under-performing and non-core business lines and assets and divesting of those when doing so helps us achieve our strategic
objectives.
Significant Acquisitions
Effective July 1, 2017, we acquired all of the outstanding stock of Alon. See further discussion in Note 3 of our consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The Delek/Alon Merger
continues to have a significant impact on our revenue and profitability as well as earnings per share, our net asset position, our purchasing
position in the marketplace, our footprint in the refining industry, especially in the Gulf Coast Region and Permian Basin, and our ability to
secure financing.
Below is a tabular summary of our most recent significant acquisitions, including the Delek/Alon Merger:
Approximate Purchase
Price(1)
$530.7 million
$184.7 million
$124.7 million
Date
July 2017
February 2018
May 2019
July 2019
Acquired Company/Assets
Acquired From
Purchased the remaining approximately 53% ownership in Alon that
Delek did not already own, in an all-stock transaction.
Purchased the remaining 18.4% ownership in the Alon Partnership that
Delek did not already own, in an all-equity transaction.
Acquired a 33% membership interest
Venture.
Acquired a 15% membership interest in Wink to Webster ("WWP") Joint
Venture. (2)
in Red River Pipeline Joint
Shareholders of Alon USA
Energy, Inc.
LP unit holders of Alon USA
Partners, LP
Plains Pipeline, L.P.
Wink to Webster Pipeline LLC
$145.6 million
(1) Includes amounts paid through the date of this Annual Report on Form 10-K, excluding transaction costs. Excludes future commitments on the WWP Joint Venture, where total
capital investments are expected to be $340 million to $380 million by the time construction of the pipeline is completed.
(2) On February 21, 2020, we, through our wholly-owned direct subsidiary Delek Energy, entered into the W2W Holdings LLC Agreement ("HoldCo LLC Agreement") with MPLX
Operations LLC ("MPLX") (collectively, with its wholly-owned subsidiaries, the "WWP Project Financing Joint Venture" or the "WWP Project Financing JV"). In connection with
the arrangement, both Delek Energy and MPLX contributed their respective 15% ownership interests to the WWP Project Financing JV as collateral for and in service of the
related project financing. See further discussion in Note 7 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K.
Significant Dispositions
Sale of Bakersfield Non-Operating Refinery
On May 7, 2020, we sold our equity interests in Alon Bakersfield Property, Inc., an indirect wholly-owned subsidiary that owns our non-operating
refinery located in Bakersfield, California, to a subsidiary of Global Clean Energy Holdings, Inc. (“GCE”) for total cash consideration of $40.0
million. GCE intends to repurpose the refinery into a renewable diesel plant. As part of the transaction, GCE granted a call option to Delek to
acquire up to a 33 1/3% limited member interest in the acquiring subsidiary of GCE for $400 per unit (up to $13.3 million), subject to certain
adjustments. Such option is exercisable by Delek through the 90th day after GCE demonstrates commercial operations, as contractually
defined. See further discussion in Note 4 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
11 |
Business and Properties
Recent Strategic Developments
Midstream Investments
In 2019, we made the following strategic midstream investments in pipeline joint ventures, which provided for returns on completed and
operational segments and is expected to provide increasing returns in future years, as planned expansions and construction projects are
completed.
•
•
In May 2019, Delek Logistics acquired a 33% membership interest in Red River Pipeline Company LLC (the "Red River Pipeline
Joint Venture") which initially had pipeline capacity of 150,000 bpd, and which completed a planned expansion to 235,000 bpd with
operations commencing October 1, 2020.
Additionally, in July 2019, we acquired a 15% ownership interest in Wink to Webster Pipeline LLC (the "WWP Joint Venture"), which
we subsequently contributed to a non-recourse financing joint venture with MPLX (who likewise contributed their 15% interest in the
WWP Joint Venture) (the "WWP Project Financing JV") effective February 21, 2020, in exchange for a 50% interest in the WWP
Project Financing JV. The WWP Joint Venture is constructing and will operate a crude oil pipeline system from Wink, Texas to
Webster, Texas along with certain pipelines from Webster, Texas to other destinations in the Texas Gulf Coast area that are
expected to span approximately 650 miles at completion. Construction of the crude oil pipeline system remains on schedule, and the
main segment of the pipeline system commenced operations in the fourth quarter of 2020, with additional segments expected to be
placed in service throughout 2021.
See further discussion in Note 7 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
Additionally, since the Delek/Alon Merger and through 2019, we have also focused efforts on developing a 250-mile gathering system in the
Permian Basin with existing connectivity to our Big Spring, Texas refinery as well as a third party pipeline system accessing Colorado City and
future direct connectivity to Midland, Texas ("Midland") (the "Big Spring Gathering System"). This gathering system provides Delek with access
to crude directly from wellheads which we expect to provide improvement in refining performance and cost structure while also providing a
foundation for continuing to build new midstream income sources. As of December 31, 2019, approximately 178 miles of the gathering system
were completed and operational. Effective March 31, 2020, we sold the Big Spring Gathering System to Delek Logistics, which allowed us to
integrate the operation of the system into our logistics segment and enhance our return from our controlling ownership in Delek Logistics. See
further discussion in Note 6 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K.
Finally, on August 13, 2020, we completed a transaction with Delek Logistics to eliminate the incentive distribution rights ("IDRs") held by Delek
through our general partner interest, and convert our 2.0% economic general partner interest into a non-economic general partner interest in
exchange for total consideration consisting of $45.0 million cash and 14.0 million newly issued common limited partner units (the "IDR
Simplification"). In August 2020, Delek Logistics filed a shelf registration statement to register our 14.0 million newly issued common limited
partner units providing the option to divest them under the registration statement. These registered units provide another key potential source of
liquidity for Delek and provides us the opportunity to monetize our investment when strategic opportunities arise.
Asset Optimization
During 2020, we continued executing on our strategy of divesting non-strategic or underperforming assets. After making significant divestitures
of underperforming stores in Retail during 2019, in 2020 we focused on divesting our remaining non-operating refinery located in Bakersfield,
California. As a result, on May 7, 2020, we sold our equity interests in our non-operating refinery located in Bakersfield to a subsidiary of
Global Clean Energy Holdings, Inc. (“GCE”) for total cash consideration of $40.0 million and resulting in a realized gain on the sale of $56.8
million. Additionally, as part of the transaction, we received a call option to acquire up to a 33 1/3% limited member interest in GCE's acquiring
subsidiary, which intends to repurpose the refinery into a renewable diesel plant, for $400 per unit (up to $13.3 million), subject to certain
adjustments. Such option is exercisable by Delek through the 90th day after GCE demonstrates commercial operations, as contractually
defined. See further discussion in Note 4 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
Operating in the COVID-19 Pandemic Environment
During the year ended December 31, 2020, and without losing focus on our core business operations, managing risk and operational
challenges in the COVID-19 Pandemic economic environment became our most critical focus. Like others in our industry, Delek experienced
the impact on demand and pricing of these unprecedented conditions, most notably in our refining segment, and our 2020 results reflect the
impact of decreased demand combined with decreased crack spreads. Cost control and ensuring adequate and alternative available sources
of liquidity became paramount, and so one of our first areas of focus was to significantly cut back our original planned capital expenditures.
Shifting our focus away from capital growth projects also provided us with the opportunity to focus our team's considerable efforts and talent on
process improvement initiatives, cost control measures, and opportunities for innovation. As a result, we have implemented new technologies,
processes and other changes that are already having a positive effect on safety (e.g., we now have more structured safety protocols), our
costs (e.g., operating expenses significantly declined in the fourth quarter 2020 compared to the prior year quarter), and our operational
effectiveness (e.g., our cost and contractor management process and system improvements are positively impacting our ability to monitor and
manage our capital expenditures). Additionally, we expect these changes to continue helping us mitigate ongoing risks and economic impacts
12 |
of the Pandemic, and to provide a more solid operational foundation as we look forward to an economic recovery.
Additionally, the economic effects of the Pandemic on our sector and on the market in general has caused us to consider how we manage
liquidity and capital resources to ensure operational continuity and sustainability. Our ability to manage our liquidity and capital resources
successfully, and to instill confidence about our continued ability to do so, is of critical importance to our shareholders as they make investment
decisions, as well as to our other stakeholders, in this period of historical levels of uncertainty. For these reasons, more than ever, we are not
only very focused on liquidity and capital resources, we also are committed to transparency around our efforts and strategies in this area.
Some of our principal areas of focus during 2020 included the following:
Business and Properties
•
•
•
•
•
•
•
suspension of non-critical capital expenditures;
a comprehensive cost reduction initiative that involved significant process improvements;
continued focus on managing collections of receivables and monitoring the credit worthiness of customers;
completion of divestiture and dropdown transactions that generated cash and value;
suspension of our stock repurchase program and dividend payments;
pursuing extensions and expansions of available capital resources with existing lenders/partners; and
monitoring market conditions for other capital sources and opportunities including (but not limited to):
◦
◦
◦
◦
evaluating the potential sale of some of our interest in Delek Logistics common limited partner units;
asset monetization through product financings;
consideration of sale-leaseback opportunities; and
evaluating the potential for new debt and equity offerings.
As a result of our efforts, we believe we have maintained a strong cash position with capital resources flexibility that positions us well as we
look forward to an expected economic recovery from the Pandemic, where crack spread forecasts and forward curves indicate the market's
expectation for significant recovery in 2022 and stabilization by 2023.
See further discussion regarding our specific Strategic Goals and Recent Developments in the 'Executive Summary and Strategic Overview'
section located in Item 7. Management's Discussion and Analysis, of this Annual Report on Form 10-K. Additionally, see also our "Liquidity
and Capital Resources' section, also located in Item 7. Management's Discussion and Analysis, of this Annual Report on Form 10-K.
13 |
Information About Our Segments
Delek operates in three reportable operating segments: the refining segment, the logistics segment and the retail segment, which are discussed
below. Additional segment and financial information is contained in our segment results included in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations, and in Note 4, Segment Data, of our consolidated financial statements included in
Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Business and Properties
Refining Segment
Overview
We own and operate four independent refineries located in Tyler, Texas, El Dorado, Arkansas, Big Spring, Texas and Krotz Springs, Louisiana,
currently representing a combined 302,000 bpd of crude throughput capacity. Our refining system produces a variety of petroleum-based
products used in transportation and industrial markets, which are sold to a wide range of customers located principally in inland, domestic
markets and which comply with current Environmental Protection Agency ("EPA") clean fuels standards. All four of these refineries are located
in the U.S. Gulf Coast ("Gulf Coast") Region (PADD III), which is one of the five Petroleum Administration for Defense District ("PADD") regional
zones established by the U.S. Department of Energy where refined products are produced and sold. Refined product prices generally differ
among each of the five PADDs.
Our refining segment also includes three biodiesel facilities we own and operate that are engaged in the production of biodiesel fuels and
related activities, located in Crossett, Arkansas, Cleburne, Texas and New Albany, Mississippi.
Refining System Feedstock Purchases
We purchase more crude oil than our refineries process, generally through a combination of long-term acreage dedication agreements and
short-term crude oil purchase agreements. This provides us with the opportunity to optimize the supply cost to the refineries while also
maximizing the value of the volumes purchased directly from oil producers. The majority of the crude oil we purchase is sourced from inland
domestic sources, primarily in areas of Texas, Arkansas, and Louisiana, although we can also purchase crude delivered via rail from other
regions, including Oklahoma and Canada. Existing agreements with third-party pipelines and Delek Logistics allow us to deliver approximately
180,000 bpd of crude oil from West Texas (principally Midland) directly to our refineries. Typically, approximately 260,000 bpd of the crude oil
we deliver to our four operating refineries is priced as a differential to the price of West Texas Intermediate (“WTI”) crude oil. In most cases, the
differential is established in the month prior to the month in which the crude oil is delivered to the refineries for processing.
Refining System Production Slate
Our refining system processes a combination of light sweet and medium sour crude oil, which, when refined, results in a product mix consisting
principally of higher-value transportation fuels such as gasoline, distillate and jet fuel. A lesser portion of our overall production consists of
residual products, including paving asphalt, roofing flux and other products with industrial applications.
Refined Product Sales and Distribution
Our refineries sell products on a wholesale and branded basis to inter-company and third-party customers located in Texas, Oklahoma, New
Mexico, Arizona, Arkansas, Tennessee and the Ohio River Valley, including Gulf Coast markets and areas along the Enterprise Pipeline
System and the Colonial Pipeline System, through terminals and exchanges.
Refining Segment Seasonality
Demand for gasoline and asphalt products is generally higher during the summer months than during the winter months due to seasonal
increases in motor vehicle traffic and road and home construction. Varying vapor pressure requirements between the summer and winter
months also tighten summer gasoline supply. As a result, the operating results of our refining segment are generally lower for the first and
fourth quarters of the calendar year.
Refining Segment Competition
The refining industry is highly competitive and includes fully integrated national and multinational oil companies engaged in many segments of
the petroleum business, including exploration, production, transportation, refining, marketing and retail fuel and convenience stores, along with
independent refiners. Our principal competitors are petroleum refiners in the Mid-Continent and Gulf Coast Regions, in addition to wholesale
distributors operating in these markets.
The principal competitive factors affecting our refinery operations are crude oil and other feedstock costs, the differential in price between
various grades of crude oil, refinery product margins, refinery reliability and efficiency, refinery product mix, and distribution and transportation
costs.
14 |
Business and Properties
Tyler Refinery
Our Tyler refinery has a nameplate crude throughput capacity of 75,000 bpd, and is designed to process mainly light, sweet crude oil, which is
typically a higher quality of crude than heavier sour crude. Its property consists of approximately 600 contiguous acres of land that we own in
Tyler, Texas and adjacent areas, of which the main plant and associated tank farms adjacent to the refinery sit on approximately 100 acres.
Additionally, it has access to crude oil pipeline systems that allow us access to East Texas, West Texas and, to a limited extent, the Gulf of
Mexico and foreign crude oil. Most of the crude supplied to the Tyler refinery is delivered by third-party pipelines and through pipelines owned
by our logistics segment.
The charts below set forth information concerning crude oil received based on purchases at the Tyler refinery for the years ended December 31,
2020, 2019 and 2018:
2020
2019
East Texas crude
oil 8.0%
East Texas crude
oil: 11.0%
WTI crude oil 92.0%
WTI crude oil: 89.0%
2018
East Texas crude
oil: 16.3%
Other: 0.7%
WTI crude oil: 83.0%
Major processes at our Tyler refinery include crude distillation, vacuum distillation, naphtha reforming, naphtha and diesel hydrotreating, fluid
catalytic cracking, alkylation, and delayed coking. The Tyler refinery has a Complexity Index of 8.7.
The chart below sets forth information concerning the throughput at the Tyler refinery:
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
r
a
e
Y
2020
2019
2018
Tyler Refinery Throughput (BPD)
47,725
4,129
22,126
73,980
62,759
58,134
7,757
5,873
76,389
11,417
7,260
76,811
WTI crude oil
East Texas crude oil
Other crude and feedstocks
The Tyler refinery primarily produces two grades of gasoline (E10 premium 93 and E10 regular 87), as well as aviation gasoline, and also offers
both E-10 and biodiesel blended products.. Diesel and jet fuel products produced at the Tyler refinery include military specification jet fuel,
commercial
jet fuel and ultra-low sulfur diesel. In addition to higher-value gasoline and distillate fuels, the Tyler refinery produces small
quantities of propane, refinery grade propylene and butanes, petroleum coke, slurry oil, sulfur and other blendstocks. The Tyler refinery
produces both low-sulfur gasoline and ultra-low sulfur diesel fuel, both on-road and off-road, pursuant to the current EPA clean fuels standards.
15 |
Business and Properties
The chart below sets forth information concerning the Tyler refinery's production slate:
Tyler Refinery Production Slate (% of total)
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
r
a
e
Y
2020
2019
2018
54.5%
53.8%
55.2%
39.8%
5.8%
40.5%
5.7%
39.3%
5.5%
Gasoline
Diesel/jet
Petrochemicals, LPG, NGLs and Other
The Tyler refinery is currently the only major distributor of a full range of refined petroleum products within a radius of approximately 100 miles
of its location. The vast majority of our transportation fuels and other products produced at the Tyler refinery are sold directly from a refined
from lower
products terminal owned by Delek Logistics and located at
transportation costs compared to alternative sources. Our customers include major oil companies, independent refiners and marketers, jobbers,
distributors in the U.S. and Mexico, utility and transportation companies, the U.S. government and independent retail fuel operators.
the refinery. We believe this allows our customers to benefit
Taking into account the Tyler refinery's crude and refined product slate, as well as the refinery's location near the Gulf Coast Region, we apply
the Gulf Coast 5-3-2 crack spread to calculate the approximate refined product margin resulting from processing one barrel of crude oil into
three-fifths barrel of gasoline and two-fifths barrel of low sulfur diesel.
El Dorado Refinery
Our El Dorado refinery has a nameplate crude throughput capacity of 80,000 bpd, and is designed mainly to process a wide variety of crude oil,
ranging from light sweet to heavy sour. The refinery site consists of approximately 460 acres of land that we own in El Dorado, Arkansas, of
which the main plant and associated tank farms adjacent to the refinery sit on approximately 335 acres, and is the largest refinery in Arkansas,
representing more than 90% of state-wide refining capacity. The refinery receives crude by several delivery points, including from local sources
as well as other third-party pipelines that connect directly into Delek Logistics' El Dorado Pipeline System, which runs from Magnolia, Arkansas,
to the El Dorado refinery (the "El Dorado Pipeline System"), and rail at third-party terminals. We also purchase crude oil for the El Dorado
refinery from inland sources in East and West Texas, as well as in south Arkansas and north Louisiana through a crude oil gathering system
owned and operated by Delek Logistics (the "SALA Gathering System").
The charts below set forth information concerning crude oil received at the El Dorado refinery for the years ended December 31, 2020, 2019
and 2018:
2020
Other 29.9%
Arkansas crude
oil 17.8%
2019
Arkansas crude
oil: 23.1%
Other: 37.6%
WTI crude oil 52.3%
WTI crude oil: 39.3%
2018
Other: 20.2%
Arkansas crude
oil: 21.2%
WTI crude oil: 58.6%
16 |
Business and Properties
Major processes at our El Dorado refinery include crude distillation, vacuum distillation, naphtha isomerization and reforming, naphtha and
diesel hydrotreating, gas oil hydrotreating, fluid catalytic cracking and alkylation. The El Dorado refinery has a Complexity Index of 10.2.
The chart below sets forth information concerning the throughput at the El Dorado refinery:
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
r
a
e
Y
2020
2019
2018
El Dorado Refinery Throughput (BPD)
36,811
12,528
24,024
73,363
21,387
12,571
22,038
55,997
38,450
13,910
14,567
66,927
66,927
WTI crude
Local Arkansas crude
Other crude and feedstocks
The El Dorado refinery produces a wide range of refined products, from multiple grades (E-10 premium 93 and E-10 regular 87) of gasoline and
ultra-low sulfur diesel fuels, liquefied petroleum gas ("LPG"), refinery grade propylene and a variety of asphalt products, including paving grade
asphalt and roofing flux. The El Dorado refinery offers both E-10 and biodiesel blended products. The El Dorado refinery produces both low-
sulfur gasoline and ultra-low sulfur diesel fuel, both on-road and off-road, pursuant to the current EPA clean fuels standards.
The chart below sets forth information concerning the El Dorado refinery's production slate:
El Dorado Refinery Production Slate (% of total)
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
r
a
e
Y
2020
2019
2018
48.5%
49.8%
51.5%
38.9%
37.3%
9.1%
3.5%
10.0%
2.9%
37.6%
7.9%
3.0%
Gasoline
Diesel
Asphalt
Petrochemicals, LPG, NGLs and Other
Products manufactured at the El Dorado refinery are sold to wholesalers and retailers through spot sales, commercial sales contracts and
exchange agreements in markets in Arkansas, Memphis, Tennessee and north into the Ohio River Valley region as well as in Mexico. The El
Dorado refinery connection via the logistics segment to the Enterprise Pipeline System is a key means of product distribution for the refinery,
because it provides access to third-party terminals in multiple Mid-Continent markets located adjacent to the system, including Shreveport,
Louisiana, North Little Rock, Arkansas, Memphis, Tennessee, and Cape Girardeau, Missouri. The El Dorado refinery also supplies products to
these markets through product exchanges on the Colonial Pipeline.
The crude oil and product slate flexibility of the El Dorado refinery allows us to take advantage of changes in the crude oil and product markets;
therefore, we anticipate that the quantities and varieties of crude oil processed and products manufactured at the El Dorado refinery will
continue to vary. While there is variability in the crude slate and the product output at the El Dorado refinery, we compare our per barrel refined
product margin to the Gulf Coast 5-3-2 crack spread because we believe it to be the most closely aligned benchmark.
17 |
Business and Properties
Big Spring Refinery
Our Big Spring refinery has a nameplate crude throughput capacity of 73,000 bpd and is located on 1,306 acres of land that we own in the
Permian Basin in West Texas. The main plant and associated tank farms adjacent to the refinery sit on approximately 330 acres. It is the
closest refinery to Midland, which allows us to efficiently source West Texas Sour ("WTS") and WTI Midland crude. Additionally, the Big Spring
refinery has the ability to source locally-trucked crude as well as crude locally gathered from our own developing gathering system, which
enables us to better control quality and eliminate the cost of transporting the crude supply from Midland.
The Big Spring refinery is designed to process a variety of crude, ranging from light sweet to medium sour, with the flexibility to convert its
production to one or the other based on market pricing conditions. Our Big Spring refinery receives WTS and WTI crude by truck from local
gathering systems and regional common carrier pipelines. Other feedstocks, including butane, isobutane and asphalt blending components, are
delivered by truck and railcar. A majority of the natural gas we use to run the refinery is delivered by a pipeline in which we own a majority
interest.
The charts below set forth information concerning crude oil received at the Big Spring refinery for the years ended December 31, 2020, 2019
and 2018:
2020
2019
WTS crude oil 33.0%
WTS crude oil 24.5%
WTI crude oil 67.0%
WTI crude oil 75.5%
2018
WTS crude oil 26.2%
WTI crude oil 73.8%
Major processes at our Big Spring refinery include crude distillation, vacuum distillation, naphtha reforming, naphtha and diesel hydrotreating,
aromatic extraction, propane de-asphalting, fluid catalytic cracking, and alkylation. The Big Spring refinery has a Complexity Index of 10.5.
The chart below sets forth information concerning the throughput at the Big Spring refinery for the years ended December 31, 2020, 2019 and
2018:
Big Spring Refinery Throughput (BPD)
41,137
20,290
1,078
62,506
(453)
54,404
17,636
71,587
71,587
50,168
17,810
1,533
69,511
69,511
WTI crude oil
WTS crude oil
Other feedstocks
2020
2019
2018
18 |
Business and Properties
The Big Spring refinery primarily produces two grades of gasoline (E10 premium 91 and E10 regular 87). Diesel and jet fuel products produced
jet fuel and ultra-low sulfur diesel. We also produce propane,
at the Big Spring refinery include military specification jet fuel, commercial
propylene, certain aromatics, specialty solvents and benzene for use as petrochemical feedstocks, and asphalt along with other by-products
such as sulfur and carbon black oil. The Big Spring refinery produces both low-sulfur gasoline and ultra-low sulfur diesel fuel, both on-road and
off-road, pursuant to current EPA clean fuels standards, and certain boutique fuels supplied to the El Paso, Texas, and Phoenix, Arizona,
markets.
The chart below sets forth information concerning the Big Spring refinery's production slate for the year ended December 31, 2020, 2019 and
2018:
Big Spring Refinery Production Slate (% of total)
2020
2019
2018
52.5%
51.3%
52.2%
37.8%
38.9%
38.0%
2.7%
7.0%
2.6%
7.2%
2.6%
7.1%
Gasoline
Diesel/Jet
Asphalt
Petrochemicals, LPG, NGLs and Other
Our Big Spring refinery sells products in both the wholesale rack and bulk markets. We sell motor fuels under both the Alon brand and on an
unbranded basis through various terminals to supply numerous locations, including the convenience stores in Delek's retail segment. We sell
transportation fuel production in excess of our branded and unbranded marketing needs through bulk sales and exchange channels entered into
with various oil companies and trading companies which are transported through a product pipeline network or truck deliveries, depending on
location, and through terminals located in Texas (Abilene, Wichita Falls, El Paso), Arizona (Tucson, Phoenix), and New Mexico (Albuquerque,
Moriarty).
For our Big Spring refinery, we compare our per barrel refined product margin to the Gulf Coast 3-2-1 crack spread, which is the approximate
refined product margin resulting from processing one barrel of crude oil into two-thirds barrel of gasoline and one-third barrel of ultra low sulfur
diesel. Our Big Spring refinery is capable of processing substantial volumes of both sour crude oil or sweet crude oil, which we optimize based
on price differentials. We measure the cost advantage of refining sour crude oil by calculating the difference between the price of WTI Cushing
crude oil and the price of WTS, a medium, sour crude oil, taking into account differences in production yield. We refer to this differential as the
WTI Cushing/WTS, or sweet/sour, spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring
refinery. The WTI Cushing less WTI Midland spread represents the differential between the average per barrel price of WTI Cushing crude oil
and the average per barrel price of WTI Midland crude oil.
Krotz Springs Refinery
Our Krotz Springs refinery has a nameplate crude throughput capacity of 74,000 bpd, and is located on 381 acres of land that we own on the
Atchafalaya River in central Louisiana. The main plant and associated tank farms adjacent to the refinery sit on approximately 250 acres. This
location provides access to crude from barge, pipeline, railcar and truck. This combination of logistics assets provides us with diversified access
to locally-sourced, domestic and foreign crude.
The Krotz Springs refinery is designed mainly to process light sweet crude oil. We are capable of receiving WTI Midland, Louisiana Light Sweet
(“LLS”), Heavy Louisiana Sweet (“HLS”) and foreign crude from the EMPCo Northline System (the "Northline System") and the Crimson
Pipeline. The Northline System delivers LLS, HLS and foreign crude oil from the St. James, Louisiana, crude oil terminalling complex. The
Crimson Pipeline connects the Krotz Spring refinery to the Baton Rouge, Louisiana area. Additionally, the Krotz Springs refinery has the ability
to receive crude oil sourced from West Texas. WTI crude oil
is transported through the Energy Transfer Amdel pipeline to the Nederland
terminal located near the Gulf Coast and from there is transported to the Krotz Springs refinery by barge via the Intracoastal Canal and the
Atchafalaya River. The Krotz Springs refinery also receives approximately 20% of its crude by barge and truck from inland Louisiana and
Mississippi and other locations.
19 |
The charts below set forth information concerning crude oil received at the Krotz Springs refinery for the years ended December 31, 2020, 2019
and 2018:
2020
2019
Business and Properties
WTI crude oil 70.1%
Other 0.8%
US Gulf Coast
crude oil 29.1%
WTI crude oil 72.0%
US Gulf Coast
crude oil 28.0%
2018
WTI crude oil 61.3%
US Gulf Coast
crude oil 38.7%
Major processes at the Krotz Springs refinery include crude distillation, vacuum distillation, naphtha hydrotreating, naphtha isomerization and
reforming, and gas oil/residual catalytic cracking to minimize low quality black oil production and to produce higher light product yields. The
Krotz Springs refinery has a Complexity Index of 8.8. Additionally, in April 2019, the Krotz Springs refinery completed construction of an
alkylation unit with anticipated 6,000-bpd capacity that is designed to combine isobutane and butylene into alkylate and enable multiple grades
of gasoline to be produced, including premium octane gasoline.
The chart below sets forth information concerning the throughput at the Krotz Springs refinery for the years ended December 31, 2020, 2019
and 2018:
2020
2019
2018
Krotz Springs Refinery Throughput (BPD)
15,671
37,765
4,565
58,001
58,001
(366)
19,012
48,931
67,577
28,317
44,854
2,211
75,382
US Gulf Coast crude oil
WTI crude oil
Other crude and feedstocks
The Krotz Springs refinery produces CBOB 84 grade gasoline as well as high sulfur diesel, light cycle oil, jet fuel, petrochemical feedstocks,
LPG and slurry oil. The Krotz Springs refinery produces low-sulfur gasoline, pursuant to the current EPA clean fuels standards.
20 |
The chart below sets forth information concerning the Krotz Springs refinery's production slate for the years ended December 31, 2020, 2019
and 2018:
Business and Properties
Krotz Springs Refinery Production Slate (% of total)
2020
2019
2018
36.0%
35.7%
0.7%
27.5%
50.9%
47.9%
40.7%
1.6%
6.7%
41.1%
1.6%
9.4%
Gasoline
Distillate/Jet
Heavy Oils
Petrochemicals, LPG, NGLs and Other
The Krotz Springs refinery markets transportation fuel substantially through bulk sales and exchange channels. These bulk sales and exchange
arrangements are entered into with various oil companies and trading companies and are transported to markets on the Mississippi River and
the Atchafalaya River as well as to the Colonial Pipeline.
For our Krotz Springs refinery, we compare our per barrel refined product margin to the Gulf Coast 2-1-1 high sulfur diesel crack spread, which
is the approximate refined product margin calculated assuming that one barrel of LLS crude oil is converted into one-half barrel of Gulf Coast
conventional gasoline and one-half barrel of Gulf Coast high sulfur diesel. The Krotz Springs refinery has the capability to process substantial
volumes of sweet crude oil to produce a high percentage of refined light products.
Logistics Segment
Overview
Our logistics segment consists of Delek Logistics, a publicly-traded master limited partnership, and its subsidiaries. Our consolidated financial
statements include its consolidated financial results. As of December 31, 2020, we owned an 80.0% limited partner interest in Delek Logistics,
consisting of 34,745,868 common limited partner units, and the non-economic general partner interest. Delek Logistics is a variable interest
entity as defined under United States generally accepted accounting principles ("GAAP"). Intercompany transactions with Delek Logistics and
its subsidiaries are eliminated in our consolidated financial statements.
21 |
Business and Properties
Our logistics segment generates revenue by charging fees for gathering, transporting, offloading and storing crude oil; for storing intermediate
products and feedstocks; for distributing, transporting and storing refined products; and for wholesale marketing. A majority of Logistics' existing
assets are both integral to and dependent on the successful operation of Refining's assets, as our logistics segment gathers, transports and
stores crude oil, and markets, distributes, transports and stores refined products in select regions of the southeastern United States and East
Texas primarily in support of the Tyler and El Dorado refineries, and in Central and West Texas and New Mexico, primarily in support of the Big
Spring refinery. In addition, the logistics segment also provides crude oil, intermediate and refined products transportation services for, and
terminalling and marketing services to, third parties primarily in Texas, New Mexico, Tennessee and Arkansas.
The following provides an overview of our logistics segment assets and operations:
The logistics segment network includes the following locations/properties:
Terminal Locations
Pipelines (owned or leased)
Storage Tanks Locations
Tennessee
Nashville
Memphis
Texas
Tyler
Big Sandy
San Angelo
Abilene
Mount Pleasant
Arkansas
North Little Rock
El Dorado
Oklahoma
Duncan
Louisiana and Arkansas
SALA Gathering System
El Dorado Pipeline System
Magnolia Pipeline System
Tennessee
Memphis Pipeline
Texas
Paline Pipeline System
McMurrey Pipeline System
Nettleton Pipeline
Tyler-Big Sandy Product Pipeline
Greenville-Mount Pleasant Pipeline
Tennessee
Nashville
Memphis
Arkansas
North Little Rock
El Dorado
Texas
Tyler
Greenville
Big Sandy
Big Spring
San Angelo
Big Spring Pipeline (and adjacent pipelines)
Abilene
Mount Pleasant
22 |
Business and Properties
All of the above properties/assets are located on real property owned by Delek. Additionally, all of the pipeline systems set forth above run
across fee owned land, leased land, easements and rights-of-way. The logistics segment also owns a fleet of trucks and trailers used to
transport crude oil, asphalt and other hydrocarbon products.
Logistics Segment - Wholesale Marketing and Terminalling
The logistics segment's wholesale marketing and terminalling business provides wholesale marketing and terminalling services to the refining
segment and to independent third parties from whom it receives fees for marketing, transporting, storing and terminalling refined products and
to whom it wholesale markets refined products.
It generates revenue by (i) providing marketing services for the refined products output of the
Tyler and Big Spring refineries, (ii) engaging in wholesale activity at owned terminals in Abilene and San Angelo, Texas, as well as at terminals
owned by third parties in Texas, whereby it purchases light products for sale and exchange to third parties, and (iii) providing terminalling
services to independent third parties and the refining segment. Three terminals, located in El Dorado, Arkansas, Memphis, Tennessee and
North Little Rock, Arkansas, throughput refined product produced at the El Dorado refinery. Three terminals, located in Tyler, Big Sandy and
Mount Pleasant Texas, throughput refined product produced at the Tyler refinery.
Logistics Segment - Pipelines and Transportation
The logistics segment's pipelines and transportation business owns or leases capacity on approximately 400 miles of operable crude oil
transportation pipelines, approximately 450 miles of refined product pipelines, an approximately 900-mile crude oil gathering system and
associated crude oil storage tanks with an aggregate of approximately 10.2 million barrels of active shell capacity. These assets are primarily
divided into the following operating systems:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the El Dorado Pipeline System, which transports crude oil to, and refined products from the El Dorado Pipeline System;
the SALA Gathering System, which gathers and transports crude oil production in southern Arkansas and northern Louisiana, primarily for the El
Dorado refinery;
the Paline Pipeline System, which primarily transports crude oil from Longview, Texas to third-party facilities in Nederland, Texas;
the East Texas Crude Logistics System, which currently transports a portion of the crude oil delivered to the Tyler refinery (the "East Texas Crude
Logistics System");
the Tyler-Big Sandy Product Pipeline, which is a pipeline between the Tyler refinery and the Big Sandy Terminal;
the Tyler Tanks;
the El Dorado Tanks;
the Greenville-Mount Pleasant Pipeline and Greenville Storage Facility;
the North Little Rock Tanks;
the El Dorado Rail Offloading Racks;
the Tyler Crude Tank;
the Memphis Pipeline;
the Big Spring Pipeline;
Big Spring Truck Unloading Station;
Big Spring Tanks; and
Big Spring Gathering Assets
In addition to these operating systems, the logistics segment owns or leases approximately 264 tractors and 353 trailers used to haul primarily
crude oil and other products for related and third parties.
Joint Ventures
The logistics segment owns a portion of three joint ventures (accounted for as equity method investments) that have logistics assets, which
serve third parties and the refining segment. These assets include the following:
23 |
Business and Properties
JV Name
Ownership Interest
Description
RIO Pipeline
Caddo Pipeline
Red River Pipeline
33%
50%
33%
Joint venture operates a 109-mile crude oil pipeline with a capacity of
120,000 bpd, that originates in north Loving County, Texas near the Texas-
New Mexico border and terminates in Midland, Texas ("RIO Pipeline")
Joint venture operates an 80-mile crude oil pipeline with a capacity of
80,000 bpd that originates in Longview, Texas, with destinations in the
Shreveport, Louisiana area ("Caddo Pipeline")
Joint venture operates a 16-inch crude oil pipeline between Cushing,
Oklahoma and Longview, Texas with prior capacity of 150,000 bpd and
increased capacity of
the expansion
project in October 2020 ("Red River Pipeline")
235,000 bpd after completion of
Logistics Segment Supply Agreement
As of January 1, 2018, Delek Logistics purchased products from Delek and third parties at our Abilene and San Angelo terminals. To facilitate
these purchases, Delek Logistics constructed a pipeline into our Abilene Terminal to receive product from the pipeline owned by Holly Energy
Partners, L.P. (NYSE: HEP) through which Delek shipped product that was produced at the Big Spring Refinery. Delek Logistics is currently
constructing a connection to a Magellan Midstream Partners, L.P. ("Magellan") pipeline that will allow Magellan to supply our Abilene and San
Angelo terminals with product transported from the Gulf Coast. Delek Logistics also has active connections to the Magellan Orion Pipeline that
enable us to ship product to our terminals and to acquire product from other shippers. Products purchased from Delek are generally based on
daily market prices at the time of purchase limiting exposure to fluctuating prices. Products purchased from third parties are generally based on
market prices at the time of purchase requiring price hedging risk management activities between the time of purchase and sale. Existing price
risk hedging programs have been adjusted to correspond to the volume of product purchased from third parties.
Logistics Segment Operating Agreements With Delek
Delek Logistics has a number of long-term, fee-based commercial agreements with Delek and its subsidiaries that, among other things,
establish fees for certain administrative and operational services provided by Delek and its subsidiaries to Delek Logistics, provide certain
indemnification obligations and establish terms for fee-based commercial agreements for Delek Logistics to provide certain pipeline
transportation, terminal throughput, finished product marketing and storage services to Delek. Most of these agreements have an initial term
ranging from five to ten years, which may be extended for various renewal terms at the option of Delek. The current terms for agreements
effective in November 2012 extend through March 2024. In the case of the marketing agreement with Delek, the initial term has been extended
through 2026. Each of these agreements requires Delek or a Delek subsidiary to pay for certain minimum volume commitments or certain
minimum storage capacities. Delek Logistics also entered into an agreement to manage the construction of the 250-mile gathering system in
the Permian Basin connecting to our Big Spring, Texas terminal and to operate the gathering system as it is completed. The majority of the
gathering system has been constructed, however, additional costs pertaining to a pipeline connection continue to be incurred and are still
subject to the terms of the agreement. That agreement extends through December 2022.
Logistics Segment Customers
In addition to certain of our subsidiaries, our logistics segment has various types of customers, including major oil companies, independent
refiners and marketers, jobbers, distributors, utility and transportation companies and independent retail fuel operators.
Logistics Segment Seasonality
The volume and throughput of crude oil and refined products transported through our pipelines and sold through our terminals and to third
parties is directly affected by the level of supply and demand for all of such products in the markets served directly or indirectly by our assets.
Supply and demand for such products fluctuates during the calendar year. Demand for gasoline, for example, is generally higher during the
summer months than during the winter months due to seasonal increases in motor vehicle traffic. Varying vapor pressure requirements between
In addition, our refining segment often performs planned maintenance
the summer and winter months also tighten summer gasoline supply.
during the winter, when demand for their products is lower. Accordingly, these factors can diminish the demand for crude oil or finished products
by our customers, and therefore limit our volumes or throughput during these periods, and we expect that our operating results will generally be
lower during the first and fourth quarters of the calendar year.
Logistics Segment Competition
Our logistics segment faces competition for the transportation of crude oil from other pipeline owners whose pipelines (i) may have a location
advantage over our pipelines, (ii) may be able to transport more desirable crude oil to third parties, (iii) may be able to transport crude oil or
In addition, the wholesale marketing and
finished product at a lower tariff, or (iv) may be able to store more crude oil or finished product.
terminalling business in general is also very competitive. Our owned refined product terminals, as well as the other third-party terminals we use
to sell refined products, compete with other independent terminal operators as well as integrated oil companies on the basis of terminal location,
price, versatility and services provided. The costs associated with transporting products from a loading terminal to end users limit the
geographic size of the market that can be competitively served by any terminal.
24 |
Logistics Segment Activity
The following table summarizes our activity in the wholesale marketing and terminalling portion of our logistics segment:
Business and Properties
Wholesale Marketing and Terminalling
Operating Information: Throughputs (average bpd)
West Texas marketing
Terminalling(1)
East Texas marketing
Big Spring marketing(2)
Year Ended December 31,
2020
2019
2018
11,264
147,251
71,182
76,345
11,075
160,075
74,206
82,695
13,323
161,284
77,487
81,117
(1)
(2)
Consists of terminalling throughputs at our Tyler, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville, Tennessee
terminals.
Throughputs for the year ended December 31, 2018 are for the 306 days we marketed certain finished products produced at or sold from the Big Spring Refinery following the
execution of the Big Spring Marketing Agreement, effective March 1, 2018.
The following table summarizes our most significant activity in the pipelines and transportation portion of our logistics segment:
Pipelines and Transportation
Operating Information: Throughputs (average bpd)
Lion Pipeline System:
Crude pipelines (non-gathered)
Refined products pipelines to Enterprise Pipelines Systems
SALA Gathering System
East Texas Crude Logistics System
Big Spring Gathering System (1)
Plains Connection System (1)
(1)
Year Ended December 31,
2020
2019
2018
74,179
53,702
13,466
15,960
82,817
104,770
49,485
37,716
15,325
19,927
—
—
51,992
45,728
16,571
15,696
—
—
Throughputs for the Big Spring Gathering System and the Plains Connection System are for approximately 275 days we owned the assets following the Big Spring Gathering
Assets Acquisition effective March 31, 2020.
Retail Segment
Overview
Delek's retail segment includes the operations of owned and leased convenience store sites as described below:
Retail Segment Properties/Locations
Number of Stores (owned and leased) (1)
Number of Leased Locations (1)
Minimum Lease Payments Due 2021 (in millions) (1)
Fuel Offerings
Merchandise Offerings
Convenience Store Branding (2)
Locations
253
112
$7.2
Various grades of gasoline and diesel under the DK or Alon brand names
Food service, tobacco products, non-alcoholic and alcoholic beverages,
general merchandise as well as money orders to the public
Delek (under "DK") and Alon branding on certain locations which will
continue to increase as we re-brand existing 7-Eleven locations
Central and West Texas and New Mexico
(1) As of December 31, 2020.
(2) In November 2018, we terminated a license agreement with 7-Eleven, Inc. and must remove all 7-Eleven branding on a store-by-store basis by
December 31, 2023. See further discussion below.
25 |
Business and Properties
We believe that we have established strong market presence in the major retail markets in which we operate. Our retail strategy employs
localized marketing tactics that account for the unique demographic characteristics of each region that we serve. We introduce customized
product offerings and promotional strategies to address the unique tastes and preferences of our customers on a market-by-market basis.
Furthermore, we are actively implementing strategic initiatives to optimize our performance across our retail stores and reduce our reliance on
external brand recognition, while developing and optimizing the use of our own brands and evaluating retail opportunities in current and
emerging geographic and strategic markets. As a result of these efforts, in November 2018, we terminated a license agreement with 7-Eleven,
Inc. This agreement was amended in January 2021 to extend the date required for the removal of all 7-Eleven branding on a store-by-store
basis to December 31, 2023. Merchandise sales at our convenience store sites will continue to be sold under the 7-Eleven brand name until 7-
Eleven branding is removed pursuant to the termination. As of December 31, 2020, we had removed the 7-Eleven brand name at 57 of our
store locations. Additionally, we closed or sold 46 under-performing or non-strategic store locations since our initiative began in fourth quarter
2018.
Fuel Operations
For the year ended December 31, 2020 fuel revenues were 52.5% of total net sales for our retail segment.
The following table highlights certain information regarding our fuel operations for the years ended December 31, 2020, 2019 and 2018:
Fuel Operations
Number of fuel stores (end of period)
Average number of fuel stores (during period)
Total fuel revenue (in thousands)
Retail fuel revenues (thousands of gallons)
Average retail gallons per store (based on average number of stores) (thousands of
gallons)
Retail fuel margin ($ per gallon)
Year Ended
December 31, 2020
Year Ended
December 31, 2019
Year Ended
December 31, 2018
248
248
247
259
357,878
$
524,866
$
176,924
214,094
715
0.35
$
827
0.28
$
271
271
571,596
217,118
801
0.24
$
$
Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery, which is transferred to the retail segment
at prices substantially determined by reference to recent published commodity pricing information.
Merchandise Operations
For the year ended December 31, 2020, our merchandise revenues were 47.5% of total net sales for our retail segment.
The following table highlights certain information regarding our merchandise operations for the years ended December 31, 2020, 2019 and
2018:
Merchandise Operations
Number of merchandise stores (end of period)
Average number of merchandise stores (during period)
Merchandise margin percentage
Total merchandise revenues (in thousands)
Average merchandise sales per store (in thousands)
Retail Segment Seasonality
Year Ended
December 31, 2020
Year Ended
December 31, 2019
Year Ended
December 31, 2018
253
253
31.0 %
252
266
30.8 %
279
295
30.9 %
$
$
323,801
1,282
$
$
313,100
1,177
$
$
339,000
1,149
Demand for gasoline and convenience merchandise is generally higher during the summer months than during the winter months due to
seasonal increases in motor vehicle traffic. As a result, the operating results of our retail segment are generally lower for the first quarter of the
calendar year. Weather conditions in our operating area also have a significant effect on our operating results. Customers are more likely to
purchase higher profit margin items at our retail fuel and convenience stores, such as fast foods, fountain drinks and other beverages, as well
as additional gasoline, during the spring and summer months.
Retail Segment Competition
The retail fuel and convenience store business is highly competitive. We compete on a store-by-store basis with other independent convenience
store chains,
independent owner-operators, major petroleum companies, supermarkets, drug stores, discount stores, club stores, mass
merchants, fast food operations and other retail outlets. Major competitive factors affecting us include location, ease of access, pricing, timely
deliveries, product and service selections, customer service, fuel brands, store appearance, cleanliness and safety. We believe we are able to
26 |
Business and Properties
compete effectively in the markets in which we operate because our geographic concentration allows us to improve buying power with our
vendors. Our retail segment strategy centers on operating a high concentration of sites in a similar geographic region to promote operational
efficiencies. Finally, we believe that leveraging the integration between our retail and refining segments provides advantageous fuel supply to
our retail stores. Our major retail competitors include Chevron, Murphy USA, Sunoco LP (Stripes® brand), Alimentation Couche-Tard Inc.
(Circle K® brand and CST brand), Marathon Petroleum and various other independent operators.
Information Technology
In 2020, we continued our efforts to improve several areas of information technology ("IT"), including infrastructure, security, and enterprise
software systems. Much of the effort was dictated by the transition to a remote work operating model due to the COVID-19 Pandemic, resulting
in a shift in worker locations and usage patterns. We also worked to improve our business continuity to reduce both recovery time objectives
and recovery point objectives. In addition, significant steps were made to consolidate and move toward a consistent, scalable security
architecture. We have continued to enhance our cybersecurity posture within both of our IT and Operating Technology and Control Network
environments. These efforts, coupled with actions to reduce the number and complexity of systems, are expected to enable growth, maximize
our IT investment, and improve our overall security posture in these “new normal” times. Also in 2020, we continued development of an
Enterprise Information Management and Master Data Governance vision, intended to increase the efficiency, security, and effectiveness of our
data use as a company. Additionally, we continued to leverage our retail experience to improve data assurance and compliance with payment
card industry requirements, while adding new functionality to support enhanced store performance reporting and use of advanced retail
technologies. Finally, we continued to consistently evaluate and improve the confidentiality, integrity, and availability of our information and
technology assets.
Governmental Regulation and Environmental Matters
Rate Regulation of Petroleum Pipelines
The rates and terms and conditions of service on certain of our pipelines are subject to regulation by the Federal Energy Regulatory
Commission ("FERC"), under the Interstate Commerce Act (the “ICA”), and by the state regulatory commissions in the states in which we
transport crude oil, intermediate and refined products. Certain of our pipeline systems are subject to such regulation and have filed tariffs with
the appropriate authorities. We also comply with the reporting requirements for these pipelines. Some of our other pipeline systems have
received a waiver from application of the FERC's tariff requirements, but comply with other applicable regulatory requirements
The FERC regulates interstate transportation under the ICA, the Energy Policy Act of 1992 and the rules and regulations promulgated under
those laws. The ICA, and its implementing regulations, require that tariff rates for interstate service on oil pipelines, including pipelines that
transport crude oil, intermediate and refined products in interstate commerce, be just and reasonable and non-discriminatory, and that such
rates and terms and conditions of service be filed with the FERC. Under the ICA, shippers may challenge new or existing rates or services.
The FERC is authorized to suspend the effectiveness of a challenged rate for up to seven months, though rates are typically not suspended for
the maximum allowable period. Our tariff rates are typically contractually subject to increase or decrease on July 1 of each year, by the amount
of any change in various inflation-based indices, including the FERC oil pipeline index, the consumer price index and the producer price index;
provided, however, that in no event will the fees be adjusted below the amount initially set forth in the applicable agreement.
Environmental Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the
EPA, the United States Department of Transportation (the "DOT"), and the Occupational Safety and Health Administration ("OSHA"), as well as
numerous state, regional and local environmental, safety and pipeline agencies.
These laws and regulations govern the discharge of materials into the environment, waste management practices, pollution prevention
measures and the composition of the fuels we produce, as well as the safe operation of our plants, pipelines and trucks, and the safety of our
workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our
refineries, renewable fuel facilities, terminals, pipelines, underground storage tanks, trucks, rail cars and related operations, and may be subject
to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters, which could include
injury and property damage allegedly caused by substances which we manufactured,
soil and water contamination, air pollution, personal
handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We
believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have
been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities,
including notices of violations, citations and other enforcement actions, some of which have resulted, or may result in, changes to operating
procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate
that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and
new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations. We anticipate that
compliance with environmental, health and safety regulations will require us to make nominal capital investments in 2021 and 2022. These
estimates do not include amounts related to capital investments that management has deemed to be strategic investments. These amounts
could materially change as a result of governmental and regulatory actions.
27 |
Business and Properties
We generate wastes that may be subject to the Resource Conservation and Recovery Act ("RCRA") and comparable state and local
requirements. The EPA and various state agencies have limited the approved methods of managing, transporting, recycling and disposal of
hazardous and certain non-hazardous wastes. Our refineries are large quantity generators of hazardous waste and require hazardous waste
permits issued by the EPA or state agencies. Our other facilities, such as terminals and renewable fuel plants, generate lesser quantities of
hazardous wastes.
The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as Superfund, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be responsible for the release of a
hazardous substance into the environment. Analogous state laws impose similar responsibilities and liabilities on responsible parties. In the
course of our ordinary operations, our various businesses generate waste, some of which falls within the statutory definition of a hazardous
substance and some of which may have been disposed of at sites that may require future cleanup under Superfund. At this time, our El Dorado
refinery has been named as a minor potentially responsible party at one Superfund site, for which we believe future costs will not be material.
As of December 31, 2020, we have recorded an environmental
liability of approximately $112.6 million, primarily related to the estimated
probable costs of remediating, or otherwise addressing, certain environmental issues of a non-capital nature at the Tyler, El Dorado, Big Spring
and Krotz Springs refineries as well as terminals, some of which we no longer own. This liability includes estimated costs for ongoing
investigation and remediation efforts, which were already being performed by the former operators of the refineries and terminals prior to our
acquisition of those facilities, for known contamination of soil and groundwater, as well as estimated costs for additional issues which have been
identified subsequent to the acquisitions.
Approximately $5.2 million of the total liability is expected to be expended over the next 12 months, with most of the balance expended by 2032,
although some costs may extend up to 30 years.
In the future, we could be required to extend the expected remediation period or undertake
additional investigations of our refineries, pipelines and terminal facilities, which could result in additional remediation liabilities.
Our operations are subject to certain requirements of the Federal Clean Air Act (“CAA”), as well as related state and local laws and regulations
governing air emission. Certain CAA regulatory programs applicable to our refineries,
terminals and other operations require capital
expenditures for the installation of air pollution control devices, operational procedures to minimize emissions and monitoring and reporting of
emissions. A consent decree was entered in the United States District Court for the Northern District of Texas in June 2019 resolving alleged
historical violations of the CAA at our Big Spring refinery. In addition to a civil penalty of $0.5 million that we paid in June 2019, the Company
will be required to expend capital for pollution control equipment that may be significant over the next 10 years.
In 2015, EPA finalized reductions in the National Ambient Air Quality Standard ("NAAQS") for ozone, from 75 ppb to 70 ppb. Our Tyler refinery
is located in an area that had the potential to be reclassified as non-attainment with the new standard. However, this area has not been
classified as non-attainment with the new standard, so we do not anticipate an impact at our Tyler refinery.
If air quality near our facilities
worsens in the future or the EPA further reduces the NAAQS levels, it is possible that these area(s) could be reclassified as non-attainment for
the new ozone standard which could require Delek to install additional air pollution control equipment for ozone forming emissions in the future.
Additionally, the new standard could change the formulation of gasoline we make for use in some areas. We do not believe such capital
expenditures, or the changes in our operation, will result in a material adverse effect on our business, financial condition or results of operations.
In December 2020, the EPA designated a portion of Howard County, Texas surrounding the Delek Big Spring Refinery and a neighboring
carbon black plant as non-attainment for the sulfur dioxide (SO2) 1-hour primary NAAQS of 75 ppb. The Texas Commission on Environmental
Quality (TCEQ) must take steps to control SO2 emissions from industrial facilities in the non-attainment area to bring the area into compliance
with the SO2 NAAAS by 2025. The TCEQ has 18 months after the effective date of final non-attainment designation to develop and submit a
State Implementation Plan (SIP) to the EPA which demonstrates how they will meet the SO2 standard by 2025. Although, SO2 emissions from
the carbon black plant are significantly greater than from the Big Spring Refinery and are the primary cause of SO2 non-attainment, the SIP
may require that additional SO2 emission controls are installed at the Big Spring Refinery. Additionally, non-attainment areas are subject to
Nonattainment New Source Review (NNSR) which is a permitting program for industrial facilities to ensure that new and modified sources of
SO2 emissions do not impede progress toward cleaner air. Delek does not anticipate that SO2 NNSR will significantly impact the Big Spring
Refinery.
On December 1, 2015, the EPA published final rules under the Risk and Technology Review provisions of the Clean Air Act to further regulate
refinery air emissions through additional New Source Performance Standard ("NSPS") and Maximum Achievable Control Technology
requirements. Refineries have up to three years from the effective date of the final rule to come into compliance with certain requirements of the
rule, while other aspects of the rule require compliance to be achieved at an earlier date. Additionally, the new rules will require changes to the
way we operate, shut-down, start-up and maintain some process units. These rules also require that we monitor property line benzene
concentrations beginning in January 2018 and provide the results to the EPA quarterly, which will make the results available to the public
beginning in 2019. Even though the concentrations are not expected to exceed regulatory or health-based standards, the availability of such
data may increase the likelihood of lawsuits against our refineries by the local public or organized public interest groups. We have obtained 1-
year compliance extensions to certain provisions of the rule. These rules require capital expenditures for additional controls at our refineries’
relief systems, flares, tanks, other sources at our refineries, and a coker located at the Tyler refinery. Most of the capital cost needed to comply
with these new rules has already been spent. We do not anticipate that any additional capital costs or future operating costs will be material,
and do not believe compliance will affect our production capacities or have a material adverse effect upon our business, financial condition or
results of operations.
28 |
Business and Properties
The EPA missed the statutory deadline on November 30, 2020 to finalize the renewable fuel obligation for 2021, with the exception of the
biomass-based diesel volumes which were set on December 19, 2019. Therefore the 2021 renewable fuel obligation is unknown at this time.
The required ethanol volumes exceed the 10% ethanol “blendwall”, requiring increased usage of higher ethanol blends such as E15 and E85.
We are unable to blend sufficient quantities of ethanol and biodiesel to meet our renewable fuel obligations ("RINs Obligation") and have to
purchase renewable identification numbers ("RINs"), primarily for our El Dorado and Krotz Springs refineries. In March 2018, the El Dorado and
Krotz Springs refineries both received approval from the EPA exempting them from the requirements of the renewable fuel standard ("RIN
Waivers") for the 2017 calendar year. During the first quarter 2019, the Tyler and Big Spring refineries received RIN Waivers for the 2017
calendar year, which had an immaterial impact on our results of operations. During the third quarter of 2019, the Tyler, El Dorado and Krotz
Springs refineries received approval from the EPA for RIN Waivers for the 2018 calendar year. There were no RIN Waivers obtained for 2020.
In the past,
The EPA issued final rules for gasoline formulation that required the reduction of annual average benzene content by July 1, 2012.
it has been necessary for us to purchase credits to fully comply with these content requirements for the Tyler refinery. However, with the
addition of the Big Spring and Krotz Springs refineries, we believe we will self-generate most, if not all, credits that are required.
The EPA finalized Tier 3 gasoline sulfur standards in March 2014. The final Tier 3 rule required a reduction in annual average gasoline sulfur
content from 30 ppm to 10 ppm while retaining the maximum per-gallon sulfur content of 80 ppm. Refineries were required to comply with the
10 ppm sulfur standard by January 1, 2017, but the final rule provided a three-year waiver period, to January 1, 2020, for small volume
refineries that processed less than 75,000 bpd of crude oil in 2012. In April 2016, EPA issued a revised rule requiring small volume refineries
that increase their annual average crude oil processing above the 75,000 barrel per day level to comply with the Tier 3 requirements within 30
months from the time that processing level was exceeded. We have not exceeded the 75,000 barrel per day crude oil processing level at any of
our refineries during this period, and all of our refineries met the criteria for the waiver for its full duration. We have spent $12.9 million through
the end of 2020 in order to comply with the Tier 3 regulations. Compliance is not expected to have a material adverse effect on our business,
financial condition, or results of operations.
Our operations are also subject to the Federal Clean Water Act (“CWA”), the Oil Pollution Act of 1990 (“OPA-90”) and comparable state and
local requirements. The CWA, and similar laws, prohibit any discharge into surface waters, ground waters, injection wells and publicly-owned
treatment works, except as allowed by pre-treatment permits and National Pollutant Discharge Elimination System (“NPDES”) permits issued by
federal, state and local governmental agencies. The OPA-90 prohibits the discharge of oil into "Waters of the U.S." and requires that affected
facilities have plans in place to respond to spills and other discharges. The CWA also regulates filling or discharges to wetlands and other
"Waters of the U.S." In 2015, the EPA, in conjunction with the Army Corps of Engineers, issued a final rule expanding the definition of “Waters
of the U.S.” The rule, which was subject to litigation, and judicial stays, was repealed in December 2019. On April 21, 2020 the EPA and U.S.
Army Corps of Engineers published the Navigable Waters Protection Rule to finalize a revised definition of “Waters of the U.S.,” and the rule
became effective on June 22, 2020 resulting in a more streamlined definition which narrows regulatory reach. However, legal challenges
continue and the ultimate resolution is uncertain at this time. To date, these rules have not materially impacted our business, however, if the
scope of the CWA’s jurisdiction is expanded through new regulatory amendments or legal challenges, we could face increased operating costs
or other impediments that could alter the way we conduct our business, which could in turn have a material adverse effect on our business,
financial condition and results of operations.
In recent years, various legislative and regulatory measures to address climate change and greenhouse gas ("GHG") emissions (including
carbon dioxide, methane and nitrous oxides) have been discussed or implemented. They include proposed and enacted federal regulation and
state actions to develop statewide, regional or nationwide programs designed to control and reduce GHG emissions from fixed sources, such as
our refineries, power plants and oil and gas production operations, as well as mobile transportation sources and fuels. EPA rules require us to
report GHG emissions from our refinery operations and use of fuel products produced at our refineries on an annual basis. While the cost of
compliance with the reporting rule is not material, data gathered under the rule may be used in the future to support additional regulation of
GHG. Moreover, the EPA directly regulates GHG emissions from refineries and other major sources through the Prevention of Significant
Deterioration (“PSD”) and Federal Operating Permit programs and may require Best Available Control Technology for GHG emissions above a
certain threshold if emissions of other pollutants would otherwise require PSD permitting.
The Pipeline and Hazardous Materials Safety Administration ("PHMSA") of the DOT regulates the design, construction, testing, operation,
maintenance, reporting and emergency response of crude oil, petroleum product and other hazardous liquids pipelines and other facilities,
including certain tank facilities used in the transportation of such liquids. These requirements are complex, subject to change and, in certain
cases, can be costly to comply with. We believe our operations are in substantial compliance with these regulations, but we cannot be certain
that substantial expenditures will not be required to remain in compliance. Moreover, certain of these rules are difficult to insure adequately,
and we cannot assure that we will have adequate insurance to address costs and damages from any noncompliance.
The United States Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (“Pipeline Safety Act”), finalized in January 2012,
increased the maximum civil penalties for certain violations from $100,000 to $200,000 per violation per day and from a total cap of $1 million to
$2 million. A number of the provisions of the Pipeline Safety Act have the potential to cause owners and operators of pipeline facilities to incur
significant capital expenditures and/or operating costs.
imposes additional
responsibilities concerning the operation, maintenance, and inspection of hazardous liquid pipelines; the reporting of pipeline incidents;
reference standards for in-line pipeline inspection and the direct assessment of stress corrosion cracking; and other requirements. Additional
potential new regulations of pipelines have been proposed by PHMSA and we are monitoring these developments to the extent applicable to
our operations. The DOT has issued guidelines with respect to securing regulated facilities such as our bulk terminals against terrorist attack.
In January 2017, PHMSA finalized a new regulation that
29 |
Business and Properties
We have instituted security measures and procedures in accordance with such guidelines to enhance the protection of certain of our facilities.
We cannot provide any assurance that these security measures would fully protect our facilities from an attack.
The Federal Motor Carrier Safety Administration of the DOT regulates safety standards and monitors drivers and equipment of commercial
motor carrier fleets. Such standards include vehicle and maintenance inspection requirements, limitations on the number of hours drivers may
operate vehicles and financial responsibility requirements. We believe that the operations of our fleet of crude oil and finished products truck
transports are substantially in compliance with these regulations and safety requirements.
We have experienced several crude oil releases from pipelines owned by our logistics segment, including, but not limited to, a release at one of
our pipelines near Sulphur Springs, Texas.
involving one of our pipelines occurred near Sulphur Springs, Texas (the "Sulphur Springs
On October 3, 2019, a release of diesel fuel
Release"). Cleanup operations and site maintenance and remediation on this release have been substantially completed and costs related to
the release totaled $7.1 million during 2019. Booms were removed from the site in the fourth quarter of 2020. Ground water wells for monitoring
activities were installed in the third quarter of 2020 and will be monitored quarterly until the site is closed. Additionally, during the third quarter of
2020 we conducted creek bed sediment sampling and the results indicated no issues with the groundwater. In the fourth quarter of 2020 we
submitted an actual property assessment report ("APAR") that assessed site conditions and recommends closure of the site. We filed suit in
January 2020 against a third party contractor, seeking damages related to this release. As of the date of this filing, we have not received
notification that any legal action with respect to fines and penalties will be pursued by the regulatory agencies.
Human Capital Management
As of December 31, 2020, we had 3,532 employees, 15.3% of which (540 employees) were subject to a collective bargaining agreement. We
recognize that the key to a successful future for Delek depends on the success of our employees. We are committed to providing a safe and
healthy working environment for our employees, and have adopted a number of policies and programs to support and advance our human
capital resources as discussed below.
Diversity and Inclusion
Delek is committed to fostering, cultivating and preserving a culture of diversity, equity and inclusion, as described in our Diversity, Equity and
Inclusion Policy, Code of Business Conduct and Ethics, Employee Handbook, and Human Rights Policy. In 2021, we expect that over 600
people leaders in our organization will complete unconscious bias training provided by Delek to help foster a more inclusive and diverse
environment for all of our employees. We recognize that a diverse, extensive talent pool provides the best opportunity to acquire unique
perspectives, experiences, ideas and solutions to drive our business forward. We have implemented a number of initiatives directed specifically
to fostering relationships and providing support among our diverse talent, including employee resource groups for Delek Millennials, Delek
Veterans, Delek Female Leadership, and, expected to launch in the third quarter of 2021, Delek LGBTQ.
We provide an Executive Leadership Mentor Program that gives access to executive-level mentorship for ethnically and culturally diverse
employees. This program provides diverse Delek employees with a mentor from executive leadership, fostering their opportunities for growth at
Delek. It also improves our business by expanding options for executive succession planning. Additionally, our 2021 Talent Acquisition Strategy
identifies colleges and universities with a high percentage of minority students focusing on education programs that match our required hiring
qualifications to build influential relationships and recruit more diverse talent.
Turnover and Talent Management
Delek recognizes the importance of attracting and retaining the best employees to make the most of its assets. While there is great talent in the
current pool of industry workers, Delek sees the value in tapping into the potential of recent graduates within the region as well. In recent years,
Delek has gone to great lengths to establish relationships with local colleges and universities, increasing interest in our organization and
industry among upcoming graduates, and Delek will continue to foster these relationships through our 2021 Talent Acquisition Strategy.
The continued success of Delek is not only contingent upon seeking out the best possible candidates but retaining and developing the talent
that lies within the organization as well. Delek is proud to offer opportunities for employees to improve their skills to achieve their career goals.
Delek strives to maintain a work environment in which people are treated with dignity, decency and respect, which is why we have a
commitment to a discrimination-free work environment, as described in our Sexual Harassment Policy, Code of Business Conduct and Ethics,
and Employee Handbook. Delek also has a variety of programs dedicated to ensuring our employees are appropriately trained and aligned on
expectations regarding safety and environmental performance. These programs utilize behavior-based techniques which embrace a partnership
among management, employees and the contract workforce to continually focus attention and actions on daily safety behavior. This is
accomplished through an evergreen approach with constant evaluation and adaptation for employee, safety and business needs.
Benefits and Wellness Programs
Delek promotes a lifestyle of wellness — physically, financially, emotionally, and socially. Our benefits package and employee programs are
designed to create a healthy balance of work and life. We offer a benefits package designed to promote the health and wellness of our
employees, which includes employer-contributions for medical coverage, and a 30% rebate of paid health premiums for completing annual
preventative screening. Other physical health benefits include the telemedicine program, tobacco cessation program, access to onsite or local
fitness centers, and active outings and step challenges.
30 |
Delek also recognizes the importance of our employees’ financial health and provides competitive base salaries. We also offer a long-term
equity plan, life insurance and AD&D insurance, disability insurance, a tuition reimbursement program, dependent scholarship program,
financial planning resources, professional and leadership development, and employee service awards.
Delek believes in a healthy balance between work and life and offers a variety of programs and resources to ensure every team member can be
at their best. We provide a variety of programs to promote this balance such as paid time off and holidays, parental leave, dependent care
flexible spending accounts, the employee assistance program, and the Delek Employee Care Fund. We also believe in investing in our
employees’ social and community health. To foster a better community for our employees, we provide programs such as at-work socials, after-
hours company sponsored recreation events, the Delek Day of Caring, which provides community volunteer opportunities, and the Delek Fund
for Hope, which supports 501(c)(3) non-profits in the communities where our employees live and work.
Health and Safety Initiatives
Delek is committed to creating a safe work environment through programs in personal safety, process safety, health and wellness programs,
and facility and employee security. In 2018, we launched the “I Own It” program to emphasize the importance of individual responsibility and
accountability for a safe workplace. Under this program, every employee at every level is encouraged to sign on to four tiers of commitment: 1.
Act Safe, Be Safe (commitment to self), 2. See Something, Say Something (commitment to others), 3. Enable and Support Safety (commitment
to direct reports) and 4. Support the Safety Culture (commitment to the company). Participation in these safety initiatives is incentivized by
Delek incorporating Health and Safety metrics as part of our bonus structure. We continuously strive to improve our safety performance with the
goal of preventing all environmental spills and releases,
injuries and illnesses, and other accidents. We use sound
fires, explosions,
maintenance and work practices, safe design, employee training, and incident investigations to minimize risks to our employees and our
communities. We train our employees how to respond effectively to safety issues at our facilities and our retail outlets. Delek adheres to
OSHA’s process safety management standards, the EPA’s Risk Management Program, as well as other government and industry safety
standards such as those published by the American Petroleum Institute.
Fundamentally, daily safety meetings, job safety analyses and empowerment to stop work foster a culture of health, safety, and environmental
laborers and retail employees to management and executive
awareness and accountability embraced at all
leadership. In addition to our culture and continual assessment, Delek expects all employees and leadership to meet safety expectations and
Delek empowers our employees to make adjustments or stop work as needed in order to correct, or prevent, adverse safety or environmental
conditions. Delek expects all of our contract workforce to meet the training requirements outlined by OSHA and other governing agencies. The
safety content is published on the corporate website to allow service providers constant access to Delek’s message of empowerment and
accountability.
levels of Delek; from manual
Additionally, emergency response plans are developed for all Delek locations and operations. The plans are reviewed for effectiveness regularly
and are communicated to affected employees through safety meetings and training. Drills and emergency exercises are conducted to ensure all
employees understand their roles and responsibilities during an actual event. Delek works with local municipalities and emergency responders
to ensure they are fluent in our plan and procedures. This proactive approach gives emergency responders the opportunity to ask questions and
understand Delek protocols so they are prepared in the case of an emergency.
In line with our commitment to creating a healthy and safe working environment, amidst the COVID-19 Pandemic, we have adopted remote
working where possible and, in addition to regular site cleaning and disinfecting, have mandated masks and social distance protocols where on-
site operations are required.
Community Relations
Delek operates a 501(c)(3) non-profit called the Delek Fund for Hope that supports nonprofits alongside our employees and business partners
in the communities where we live and work. Employees are able to give a portion of their paycheck to the Fund for Hope and/or complete
volunteer hours within their local community. The Delek Day of Caring encourages employees to take paid and after hour time to volunteer with
their local nonprofits. See further discussion in Note 23 of our consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
Corporate Headquarters
We lease our corporate headquarters at 7102 Commerce Way, Brentwood, Tennessee. The lease is for 54,000 square feet of office space.
The lease term expires in May 2022.
Liens and Encumbrances
The majority of the assets described in this Form 10-K are pledged and encumbered under certain of our debt facilities. See Note 11 of the
consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for
further information.
31 |
Risk Factors
ITEM 1A. RISK FACTORS
We are subject to numerous known and unknown risks, many of which are presented below and elsewhere in this Annual Report on Form 10-K.
You should carefully consider each of the following risks and all of the other information contained in this Annual Report on Form 10-K in
evaluating us and our common stock. Any of the risk factors described below, or additional risks and uncertainties not presently known to us, or
that we currently deem immaterial, could have a material adverse effect on our business, financial condition, cash flows and results of
operations. The headings provided in this Item 1A are for convenience and reference purposes only and shall not limit or otherwise affect the
extent or interpretation of the risk factors.
Risks Relating to Our Industries
The current COVID-19 Pandemic, any related subsequent waves of the COVID-19 Pandemic or an additional regional or global disease
outbreak, and certain developments in the global oil markets have had, may continue to have, or may have an adverse impact on our
business, our future results of operations and our overall financial performance.
The COVID-19 Pandemic could materially adversely affect our business and operations beyond 2020. In early 2020, global health care systems
and economies began to experience strain from the spread of the COVID-19 Pandemic. As the virus spread, global economic activity began to
slow and future economic activity was forecast to slow with a resulting forecast of a decline in oil and gas demand. The global pandemic has
resulted in a dramatic reduction in airline flights and has reduced the number of vehicles on the road. Governmental actions in response to the
COVID-19 Pandemic have resulted in significant business and operational disruptions, including business closures, supply chain disruptions,
travel restrictions, stay-at-home orders, and limitations on the availability and effectiveness of the workforce. These impacts have negatively
impacted and will likely continue to negatively impact worldwide economic and commercial activity, financial markets, and demand for and
prices of oil and gas products for the foreseeable future. These impacts may also precipitate a prolonged economic slowdown and recession.
In response to the decline in demand, OPEC participating countries agreed to adjust downwards their overall production of crude oil through
April 30, 2022, with the agreement to be reassessed in December 2021. The impact of the declines in demand have been exacerbated by a
production dispute between Russia and the members of OPEC, particularly Saudi Arabia, and the subsequent actions taken by such countries
as a result thereof. Despite an expected rise in global crude oil demand in 2021, there remains considerable tension in the OPEC-Russia
relationship and uncertainty in the global oil markets. A sustained reduction in crude oil production will potentially affect the global supply of oil
and the prices of oil and refined products in our market. Additionally, a significant reduction or freeze in crude oil production in the United States
will adversely affect our suppliers and source of crude oil.
Global economic growth drives demand for energy from all sources, including fossil fuels. Should the U.S. and global economies experience
weakness, demand for energy may decline. Similarly, should growth in global energy production outstrip demand, excess supplies may arise.
Declines in demand and excess supplies may result in accompanying declines in commodity prices and deterioration of our financial position
along with our ability to operate profitably and our ability to obtain financing to support operations. With respect to our business, we have
experienced periodic declines in demand thought to be associated with slowing economic growth in certain markets, including the effects of the
COVID-19 Pandemic, coupled with new oil and gas supplies coming on line and other circumstances beyond our control that resulted in oil and
gas supply exceeding global demand which, in turn, resulted in steep declines in prices of oil and natural gas. There can be no assurance as to
how long the current price decline will persist or that a recurrence of price weakness will not arise in the future.
The COVID-19 Pandemic has resulted in modifications to our business practices, including limiting employee and contractor presence at certain
work locations, limiting travel, and reducing capital expenditures. We may take further actions as required by government authorities or that we
determine are in the best interests of our employees, contractors, customers, suppliers and communities. However, there is no assurance that
such measures will be sufficient to mitigate the risks posed by the virus, and our ability to successfully execute our business operations could be
adversely impacted. In addition, while we have recorded goodwill impairment of $126.0 million to date, the continued effects of the COVID-19
Pandemic could result in additional impairments of long-lived or indefinite-lived assets, including goodwill, at some point in the future. Such
impairment charges could be material.
The full impact of the ongoing COVID-19 Pandemic is unknown and continues to rapidly evolve. It is difficult to predict how significant the impact
of the COVID-19 Pandemic, any related subsequent waves of the COVID-19 Pandemic, an additional regional or global disease outbreak, and
any responses to such events, will be on the United States and global economies and our business or for how long disruptions are likely to
continue. The extent of such impact will depend on future developments and factors outside of our control, including new information which may
emerge concerning the severity or duration of the COVID-19 Pandemic, the evolving governmental and private sector actions to contain the
pandemic or treat its health, economic, and other impacts, and the timing and effectiveness of the ongoing rollout of currently available
vaccines.
The ultimate extent of the impact of the volatile conditions in the oil and gas industry on our business, financial condition, results of operation
and liquidity will also depend largely on future developments, including the extent and duration of any price reductions, any additional decisions
by OPEC and disputes between the members of OPEC+.
To the extent COVID-19 and the developments in the global oil markets adversely affects our business, financial condition, results of operation
and liquidity, they may also have the effect of heightening many of the other risks described below.
32 |
A substantial or extended decline in refining margins would reduce our operating results and cash flows and could materially and
adversely impact our future rate of growth and the carrying value of our assets.
Our earnings, cash flow and profitability from our refining operations are substantially determined by the difference between the market price of
refined products and the market price of crude oil, which often move independently of each other and are referred to as the crack spread,
refining margin or refined products margin. Refining margins historically have been volatile, and we believe they will continue to be volatile.
Although we monitor our refinery operating margins and seek to optimize results by adjusting throughput volumes, throughput types and product
slates, there are inherent limitations on our ability to offset the effects of adverse market conditions.
Many of the factors influencing changes in crack spreads and refining margins are beyond our control. These factors include:
Risk Factors
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in global and local economic conditions, e.g., as a result of the outbreak of the COVID-19 Pandemic;
domestic and foreign supply and demand for crude oil and refined products;
the level of foreign and domestic production of crude oil and refined petroleum products;
increased regulation of feedstock production activities, such as hydraulic fracturing;
infrastructure limitations that restrict, or events that disrupt, the distribution of crude oil, other feedstocks and refined petroleum products;
excess or overbuilt infrastructure;
an increase or decrease of infrastructure limitations (or the perception that such an increase or decrease could occur) on the distribution of
crude oil, other feedstocks or refined products;
investor speculation in commodities;
worldwide political conditions, particularly in significant oil producing regions such as the Middle East, Africa, the former Soviet Union and
South America;
the ability or inability of the members of OPEC to maintain oil price and production controls;
pricing and other actions taken by competitors that impact the market;
the level of crude oil, other feedstocks and refined petroleum products imported into and exported out of the United States;
excess capacity and utilization rates of refineries worldwide;
development and marketing of alternative and competing fuels, such as ethanol and biodiesel;
changes in fuel specifications required by environmental and other laws, particularly with respect to oxygenates and sulfur content;
local factors, including market conditions, adverse weather conditions and the level of operations of other refineries and pipelines in our
markets;
volatility in the costs of natural gas and electricity used by our refineries;
accidents,
shutdowns or otherwise adversely affect our refineries or the supply and delivery of crude oil from third parties; and
inclement weather or other events,
interruptions in transportation,
including cyber-attacks,
that can cause unscheduled
United States government regulations.
Some of these factors can vary by region and may change quickly, adding to market volatility, while others may have longer-term effects. The
long-term effects of these and other factors on prices for crude oil, refinery feedstocks and refined products could be substantial.
The crude oil we purchase, and the refined products we sell, are commodities whose prices are mainly determined by market forces beyond our
control. While an increase or decrease in the price of crude oil will often result in a corresponding increase or decrease in the wholesale price
of refined products, a change in the price of one commodity does not always result in a corresponding change in the other. A substantial or
prolonged increase in crude oil prices without a corresponding increase in refined product prices, or a substantial or prolonged decrease in
refined product prices without a corresponding decrease in crude oil prices, could also have a significant negative effect on our results of
operations and cash flows. This is especially true for non-transportation refined products, such as asphalt, butane, coke, sulfur, propane and
slurry, whose prices are less likely to correlate to fluctuations in the price of crude oil, all of which we produce at our refineries.
Also, the price for a significant portion of the crude oil processed at our refineries is based upon the WTI benchmark for such oil rather than the
Brent benchmark. While the prices for WTI and Brent historically correlate to one another, elevated supply of WTI-priced crude oil in the Mid-
Continent region has caused WTI prices to fall significantly below Brent prices at different points in time in recent years. During the years ended
December 31, 2019 and December 31, 2020, this daily differential ranged from highs of $10.99 and $9.81, respectively, to lows of $3.53 and
$(0.16), respectively. Our ability to purchase and process favorably priced crude oil has allowed us to achieve higher net income and cash flow
in recent years; however, we cannot assure that these favorable conditions will continue.
The narrowing, and in some cases inversion, in the price differential between WTI and Brent benchmarks in 2020 and 2019 has negatively
impacted our results of operations. Continued narrowing or inversion in the price differential between the WTI and Brent benchmarks for any
reason, including, without limitation, increased crude oil distribution capacity from the Permian Basin, crude oil exports from the United States or
33 |
Risk Factors
actual or perceived reductions in Mid-Continent crude oil inventories, could further negatively impact our earnings and cash flows, which could
have a material adverse effect on our business, financial condition and results of operations. In addition, because the premium or discount we
pay for a portion of the crude oil processed at our refineries is established based upon this differential during the month prior to the month in
which the crude oil is processed, rapid decreases in the differential may negatively affect our results of operations and cash flows.
Additionally, governmental and regulatory actions, including continued resolutions by OPEC to restrict crude oil production levels and executive
actions by the immediately past U.S. presidential administration to advance certain energy infrastructure projects may continue to impact crude
oil prices and crude oil differentials. Any increase in crude oil prices or unfavorable movements in crude oil differentials due to such actions or
changing regulatory environment may negatively impact our ability to acquire crude oil at economical prices and could have a material adverse
effect on our business, financial condition and results of operations.
We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws,
regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our
profitability.
Our industry is subject to extensive laws, regulations, permits and other requirements including, but not limited to, those relating to the
environment, fuel composition, safety, transportation, pipeline tariffs, employment, labor, immigration, minimum wages, overtime pay, health
care benefits, working conditions, public accessibility, retail fuel pricing, the sale of alcohol and tobacco and other requirements. These permits,
laws and regulations are enforced by federal agencies including the EPA, DOT, PHMSA, Federal Motor Carrier Safety Administration
("FMCSA"), Federal Railroad Administration ("FRA"), OSHA, National Labor Relations Board ("NLRB"), Equal Employment Opportunity
Commission ("EEOC"), Federal Trade Commission ("FTC") and the FERC, and numerous other state and federal agencies. We anticipate that
compliance with environmental, health and safety regulations could require us to spend significant amounts in capital costs during the next five
years. These estimates do not include amounts related to capital investments that management has deemed to be strategic investments.
These amounts could materially change as a result of governmental and regulatory actions.
Various permits, licenses, registrations and other authorizations are required under these laws for the operation of our refineries, biodiesel
facilities, terminals, pipelines, retail locations and related operations, and these permits are subject to renewal and modification that may require
operational changes involving significant costs.
If key permits cannot be renewed or are revoked, the ability to continue operation of the
affected facilities could be threatened.
Ongoing compliance with, or violation of, laws, regulations and other requirements could also have a material adverse effect on our business,
financial condition and results of operations. We face potential exposure to future claims and lawsuits involving environmental matters,
including, but not limited to, soil, groundwater and waterway contamination, air pollution, personal injury and property damage allegedly caused
by substances we manufactured, handled, used, released or disposed. We are, and have been, the subject of various state, federal and private
proceedings relating to environmental regulations, conditions and inquiries.
In addition, new legal requirements, new interpretations of existing legal requirements,
increased legislative activity and governmental
enforcement and other developments could require us to make additional unforeseen expenditures. Companies in the petroleum industry, such
as us, are often the target of activist and regulatory activity regarding pricing, safety, environmental compliance, derivatives trading and other
business practices, which could result in price controls, fines, increased taxes or other actions affecting the conduct of our business. The
specific impact of laws and regulations or other actions may vary depending on a number of factors, including the age and location of operating
facilities, marketing areas, crude oil and feedstock sources and production processes.
We generate wastes that may be subject to RCRA and comparable state and local requirements. The EPA and various state agencies have
limited the approved methods of managing, transporting, recycling and disposal of hazardous and certain non-hazardous wastes. Our refineries
are large quantity generators of hazardous waste and require hazardous waste permits issued by the EPA or state agencies. Additionally,
certain of our other facilities, such as terminals and biodiesel plants, generate lesser quantities of hazardous wastes.
Under RCRA, CERCLA and other federal, state and local environmental laws, as the owner or operator of refineries, biodiesel plants, bulk
terminals, pipelines, tank farms, rail cars, trucks and retail locations, we may be liable for the costs of removal or remediation of contamination
at our existing or former locations, whether we knew of, or were responsible for, the presence of such contamination. We have incurred such
liability in the past, and several of our current and former locations are the subject of ongoing remediation projects. The failure to timely report
and properly remediate contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent our property or
to borrow money using our property as collateral. Additionally, persons who arrange for the disposal or treatment of hazardous substances also
may be liable for the costs of removal or remediation of these substances at sites where they are located, regardless of whether the site is
owned or operated by that person. We typically arrange for the treatment or disposal of hazardous substances generated by our refining and
other operations. Therefore, we may be liable for removal or remediation costs associated with releases of these substances at third party
locations, as well as other related costs, including fines, penalties and damages resulting from injuries to persons, property and natural
resources. Our El Dorado refinery is a minor potentially responsible party at a Superfund site, for which we expect our costs to be non-material.
In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not been discovered at our
current or former locations or locations that we may acquire or at third party sites where hazardous substances from these locations have been
treated or disposed.
34 |
Risk Factors
Our operations are subject to certain requirements of the CAA, as well as related state and local laws and regulations governing air emissions.
Certain CAA regulatory programs applicable to our refineries, terminals and other operations require capital expenditures for the installation of
air pollution control devices, operational procedures to minimize emissions and monitoring and reporting of emissions.
A consent decree was entered in the United States District Court for the Northern District of Texas in June 2019 resolving alleged historical
violations of the CAA at our Big Spring refinery. In addition to a civil penalty of $0.5 million that we paid in June 2019, we will be required to
expend capital for pollution control equipment that may be significant over the next 10 years. According to the EPA, approximately 95% of the
nation's refining capacity has entered into "global" settlements under the EPA National Refinery Initiative.
In 2015, the EPA finalized reductions in the NAAQS for ozone, from 75 ppb to 70 ppb. Our Tyler refinery is located near areas classified as
being in non-attainment with the new standard. However, the refinery area has not been classified as being in non-attainment with the new
standard.
If air quality near our facilities worsens in the future, it is possible that these area(s) could be reclassified as being in non-attainment
for the new ozone standard which could require us to install additional air pollution control equipment for ozone forming emissions in the future.
We do not believe such capital expenditures, or the changes in our operation, will result in a material adverse effect on our business, financial
condition or results of operations.
In late 2015, the EPA finalized additional rules regulating refinery air emissions from a variety of sources (such as cokers, flares, tanks and
other process units) through additional NSPS and National Emission Standards for Hazardous Air Pollutants and changing the way emissions
from startup, shutdown and malfunction operations are regulated (the "Refinery Risk and Technology Review Rules" or “RTR”). The RTR rule
also requires that we monitor property line benzene concentrations at our refineries, and report those concentrations quarterly to the EPA,
which will make the results available to the public. Even though the concentrations are not expected to exceed regulatory or health-based
standards, the availability of such data may increase the likelihood of lawsuits against our refineries by the local public or organized public
interest groups.
In addition to our operations, many of the fuel products we manufacture are subject to requirements of the CAA, as well as related state and
local laws and regulations. The EPA has the authority, under the CAA, to modify the formulation of the refined transportation fuel products we
manufacture, in order to limit the emissions associated with their final use.
In 2007, the EPA issued final Mobile Source Air Toxic II rules for
gasoline formulation that required the reduction of annual average benzene content by July 1, 2012. We have purchased credits in the past to
comply with these content requirements for two of our refineries. Although credits have been readily available, there can be no assurance that
such credits will continue to be available for purchase at reasonable prices, or at all, and we could have to implement capital projects in the
future to reduce benzene levels.
Our operations are also subject to the CWA, the OPA-90 and comparable state and local requirements. The CWA, and similar laws, prohibit
any discharge into surface waters, ground waters, injection wells and publicly-owned treatment works, except as allowed by pre-treatment
permits and NPDES permits issued by federal, state and local governmental agencies. The OPA-90 prohibits the discharge of oil into "Waters
of the U.S." and requires that affected facilities have plans in place to respond to spills and other discharges. The CWA also regulates filling or
discharges to wetlands and other "Waters of the U.S." In 2015, the EPA, in conjunction with the Army Corps of Engineers, issued a final rule
expanding the definition of “Waters of the U.S.” The rule, which was subject to litigation and judicial stays, was repealed in December 2019. On
April 21, 2020 the EPA and U.S. Army Corps of Engineers published the Navigable Waters Protection Rule to finalize a revised definition of
“Waters of the U.S.,” and the rule became effective on June 22, 2020 resulting in a more streamlined definition which narrows regulatory reach.
However, legal challenges continue and the ultimate resolution is uncertain at this time. To the extent a final rule expands the scope of the
CWA’s jurisdiction, we could face increased operating costs or other impediments that could alter the way we conduct our business, which
could in turn have a material adverse effect on our business, financial condition and results of operations.
We are subject to regulation by the DOT and various state agencies in connection with our pipeline, trucking and rail transportation operations.
These regulatory authorities exercise broad powers, governing activities such as the authorization to operate hazardous materials pipelines and
engage in motor carrier operations. There are additional regulations specifically relating to the transportation industry, including integrity
management of pipelines, testing and specification of equipment, product handling and labeling requirements and personnel qualifications. The
transportation industry is subject to possible regulatory and legislative changes that may affect the economics of our business by requiring
changes in operating practices or pipeline construction or by changing the demand for common or contract carrier services or the cost of
providing trucking services. Possible changes include, among other things,
increased
frequency and stringency for testing and repairing pipelines, replacement of older pipelines, changes in the hours of service regulations that
govern the amount of time a driver may drive in any specific period, on-board black box recorder devices or limits on vehicle weight and size
and properties of the materials that can be shipped. Required changes to the specifications governing rail cars carrying crude oil will eliminate
the most commonly used tank cars or require that such cars be upgraded.
In January 2017, PHMSA announced they were considering limits
on the volatility of crude oil that could be shipped by rail and other modes of transportation. On May 20, 2020, PHMSA withdrew its advance
notice of proposed rulemaking ("ANPRM") relating to the January 18, 2017 ANPRM concerning vapor pressure for crude oil transported by rail.
Additionally, the PHMSA announced that it is no longer considering vapor pressure limits for the transportation of crude oil, other unrefined
petroleum-based products, and Class 3 flammables products, by rail or any other mode.
In addition to the substantial remediation costs that
could be caused by leaks or spills from our pipelines, regulators could prohibit our use of affected portions of the pipeline for extended periods,
thereby interrupting the delivery of crude oil to, or the distribution of refined products from, our refineries.
increasingly stringent environmental regulations,
35 |
Risk Factors
In addition, the DOT has issued guidelines with respect to securing regulated facilities such as our bulk terminals against terrorist attack. We
have instituted security measures and procedures in accordance with such guidelines to enhance the protection of certain of our facilities. We
cannot provide any assurance that these security measures would fully protect our facilities from an attack.
Our operations are subject to various laws and regulations relating to occupational health and safety and process safety administered by OSHA,
the EPA and various state equivalent agencies. We maintain safety, training, design standards, mechanical
integrity and maintenance
programs as part of our ongoing efforts to ensure compliance with applicable laws and regulations and to protect the safety of our workers and
the public. More stringent laws or regulations or adverse changes in the interpretation of existing laws or regulations by government agencies
could have an adverse effect on our financial position and the results of our operations and could require substantial expenditures for the
installation and operation of systems and equipment.
Health and safety legislation and regulations change frequently. We cannot predict what additional health and safety legislation or regulations
will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to
our operations. Compliance with applicable health and safety laws and regulations has required, and continues to require, substantial
expenditures. Future process safety rules could also mandate changes to the way we operate, the processes and chemicals we use and the
materials from which our process units are constructed. Such regulations could have a significant negative effect on our operations and
profitability. In January 2017, the EPA finalized changes to process safety requirements in its Risk Management Program rules that require
evaluation of safer alternatives and technologies, expanded routine audits, independent third-party audits following certain process safety
events and increased sharing of information with the public and emergency response organizations. In January 2017, OSHA announced
changes to its National Emphasis Program, and specifically identified oil refineries as facilities for increased inspections. The changes also
instruct inspectors to use data gathered from EPA Risk Management Plan inspections to identify refiners for additional Process Safety
Management inspections.
Environmental regulations are becoming more stringent, and new environmental and safety laws and regulations are continuously being
enacted or proposed. Compliance with any future legislation or regulation of our produced fuels, including renewable fuel or carbon content;
GHG emissions; sulfur, benzene or other toxic content; vapor pressure; octane; or other fuel characteristics, may result in increased capital and
operating costs and may have a material adverse effect on our business, financial conditions or results of operations. While it is impractical to
predict the impact that potential regulatory and activist activity may have, such future activity may result in increased costs to operate and
maintain our facilities, as well as increased capital outlays to improve our facilities. Such future activity could also adversely affect our ability to
expand production, result in damaging publicity about us, or reduce demand for our products. Our need to incur costs associated with
complying with any resulting new legal or regulatory requirements that are substantial and not adequately provided for, could have a material
adverse effect on our business, financial condition and results of operations.
Our operating responsibility for bulk product terminals and refined product pipelines includes responsibility to ensure the quality and purity of the
products loaded at our loading racks. If our quality control measures were to fail, we may have contaminated or off-specification products in
pipelines and storage tanks or off-specification product could be sent to public gasoline stations. These types of incidents could result in product
liability claims from our customers, as well as negative publicity. Product liability is a significant commercial risk. Substantial damage awards
have been made in certain jurisdictions against manufacturers and resellers based upon claims for injuries caused by the use of or exposure to
various products. There can be no assurance that product liability claims against us would not have a material adverse effect on our business or
results of operations or our ability to maintain existing customers or retain new customers.
The availability and cost of RINs and other required credits could have an adverse effect on our financial condition and results of
operations.
Pursuant to the 2007 Energy Independence and Security Act, the EPA promulgated the RFS-2 regulations reflecting the increased volume of
renewable fuels mandated to be blended into the nation's fuel supply. The regulations, in part, require refiners to add annually increasing
amounts of “renewable fuels” to their petroleum products or purchase credits, known as "RINs" in lieu of such blending. While we are able to
obtain many of the RINs required for compliance by blending renewable fuels manufactured by third parties or by our own biodiesel plants, we
must also purchase RINs on the open market in order to comply with the quantity of renewable fuels we are required to blend under the RFS-2
regulations. Since the EPA first began mandating biofuels in excess of the “blend wall” (the 10% ethanol limit prescribed by most automobile
warranties), the price of RINs has been extremely volatile. While we cannot predict the future prices of RINs, the costs to obtain the necessary
number of RINs could be material. If we are unable to pass the costs of compliance with the RFS-2 regulations on to our customers, if
sufficient RINs are unavailable for purchase, if we have to pay a significantly higher price for RINs or if we are otherwise unable to meet the
RFS-2 mandates, our financial condition and results of operations could be adversely affected.
In the past, we have received small refinery exemptions under the RFS-2 program for certain of our refineries. However, there is no assurance
that such an exemption will be obtained for any of our refineries in future years. For example, the EPA has recently indicated it plans to more
closely align the agency’s criteria for granting small refinery exemptions with the recommendation of the Department of Energy, which could
result in fewer such exemptions being granted. The failure to obtain such exemptions for certain of our refineries could result in the need to
purchase more RINs than we currently have estimated and accrued for in our consolidated financial statements. The EPA recently promulgated
new Renewable Fuel Standards regulations that could require the agency to increase the volume of renewable fuel or RINs that refiners are
required to purchase if the agency anticipates it will grant small refinery exemptions. This could also increase the number of RINs we need to
purchase. Additionally, recent decisions by the U.S. Court of Appeals for the 10th Circuit have vacated small refinery exemptions granted in
36 |
Risk Factors
past years for other refiners. On January 24, 2021, the U.S. Supreme Court agreed to hear the appeal. Arguments are expected in April 2021
and a decision as soon as June 2021. It is not clear at this time what steps the EPA will take with respect to those vacated small refinery
exemptions, or how the case will impact small refinery exemptions granted to other refineries or future small refinery exemptions.
In addition, the RFS-2 regulations are highly complex and evolving, requiring us to periodically update our compliance systems. The RFS-2
regulations require the EPA to determine and publish the applicable annual volume and percentage standards for each compliance year by
November 30 for the forthcoming year, and such blending percentages could be higher or lower than amounts estimated and accrued for in our
consolidated financial statements. The future cost of RINs is difficult to estimate until such time as the EPA finalizes the applicable standards for
the forthcoming compliance year. Moreover, in addition to increased price volatility in the RINs market, there have been multiple instances
of RINs fraud occurring in the marketplace over the past several years. The EPA has initiated several enforcement actions against refiners who
purchase fraudulent RINs, resulting in substantial costs to the refiner. While the EPA promulgated a rule in June 2019 aiming to improve
transparency in the market for RINs, we cannot predict with certainty our exposure to increased RINs costs in the future, nor can we predict the
extent by which costs associated with RFS-2 regulations will impact our future results of operations.
Increased supply of and demand for alternative transportation fuels, increased fuel economy standards and increased use of
alternative means of transportation could lead to a decrease in transportation fuel prices and/or a reduction in demand for petroleum-
based transportation fuels.
In addition, as regulatory initiatives have required an increase in the consumption of renewable transportation fuels, such as ethanol and
biodiesel, consumer acceptance of electric, hybrid and other alternative vehicles is increasing.
Increased use of renewable fuels and alternative
Increased use of renewable fuels may also result in an
vehicles may result in a decrease in demand for petroleum-based transportation fuels.
increase in transportation fuel supply relative to decreased demand and a corresponding decrease in margins. A significant decrease in
transportation fuel margins or demand for petroleum-based transportation fuels could have an adverse impact on our financial results. As
described above, RFS-2 requires replacement of increasing amounts of petroleum-based transportation fuels with biofuels through 2022. RFS-2
and widespread use of E-15 or E-85 could cause decreased crude runs and materially affect our profitability, unless fuel demand rises at a
comparable rate or other outlets are found for the displaced petroleum products.
In 2012, the EPA and the National Highway Traffic Safety Administration finalized rules raising the required Corporate Average Fuel Economy
and GHG standards for passenger vehicles beginning with 2017 model year vehicles and increasing to the equivalent of 54.5 mpg by 2025.
These standards were reaffirmed by the EPA in January 2017, but that action was subsequently withdrawn on April 13, 2018. Additional
increases in fuel efficiency standards for medium and heavy-duty vehicles were finalized in 2016. Such increases in fuel economy standards
and potential electrification of the vehicle fleet, along with mandated increases in use of renewable fuels discussed above, could result in
decreasing demand for petroleum fuels, which, in turn, could materially affect profitability at our refineries.
To meet higher fuel efficiency and GHG emission standards for passenger vehicles, automobile manufacturers are increasingly using
technologies, such as turbocharging, direct injection and higher compression ratios that require high octane gasoline. Many auto manufacturers
have expressed a desire that only a high-octane grade of gasoline be allowed in order to maximize fuel efficiency, rather than the three octane
grades common now. Regulatory changes allowing only one high-octane grade, or significant increases in market demand for high-octane fuel,
could result in a shift to high-octane ethanol blends containing 25% - 30% ethanol, the need for capital expenditures at our refineries to increase
octane or reduced demand for petroleum fuels, which could materially affect profitability of our refineries.
Competition in the refining and logistics industry is intense, and an increase in competition in the markets in which we sell our
products could adversely affect our earnings and profitability.
We compete with a broad range of companies in our refining and petroleum product marketing operations. Many of these competitors are
integrated, multinational oil companies that are substantially larger than us. Because of their diversity, integration of operations, larger
capitalization, larger and more complex refineries and greater resources, these companies may be better able to withstand volatile market
conditions relating to crude oil and refined product pricing, to compete on the basis of price and to obtain crude oil in times of shortage.
We do not engage in petroleum exploration or production, and therefore do not produce any of our crude oil feedstocks. Certain of our
competitors, however, obtain a portion of their feedstocks from company-owned production activities. Competitors that have their own crude oil
production are at times able to offset losses from refining operations with profits from producing operations and may be better positioned to
withstand periods of depressed refining margins or feedstock shortages.
If we are unable to compete effectively with these competitors, there
could be a material adverse effect on our business, financial condition and results of operations.
Our retail segment is subject to loss of market share or pressure to reduce prices in order to compete effectively with a changing
group of competitors in a fragmented retail industry.
The markets in which we operate our retail fuel and convenience stores are highly competitive and characterized by ease of entry and constant
change in the number and type of retailers offering the products and services found in our stores. We compete with other convenience store
chains, gas stations, supermarkets, drug stores, discount stores, dollar stores, club stores, mass merchants, fast food operations, independent
owner-operators and other retail outlets. In some of our markets, our competitors have been in existence longer and have greater financial,
marketing and other resources than us. In addition, independent owner-operators can generally operate stores with lower overhead costs than
ours. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry.
37 |
Risk Factors
fuel business and/or selling merchandise traditionally found in convenience stores. Many of
Several non-traditional retailers, such as supermarkets, club stores and mass merchants, have affected the convenience store industry by
these competitors are
entering the retail
substantially larger than we are. Because of their diversity, integration of operations and greater resources, these companies may be better able
to withstand volatile market conditions or levels of low or no profitability. In addition, these retailers may use promotional pricing or discounts,
both at the pump and in the store, to encourage in-store merchandise sales. These activities by our competitors could adversely affect our profit
margins. Additionally, our convenience stores could lose market share, relating to both gasoline and merchandise, to these and other retailers,
which could adversely affect our business, results of operations and cash flows. Our convenience stores compete in large part based on their
ability to offer convenience to customers. Consequently, changes in traffic patterns and the type, number and location of competing stores could
result in the loss of customers and reduced sales and profitability at affected stores. These non-traditional gasoline and/or convenience
merchandise retailers may obtain a significant share of the retail fuels market, may obtain a significant share of the convenience store
merchandise market and their market share in each market is expected to grow.
We may seek to diversify and expand our retail fuel and convenience store operations, which may present operational and
competitive challenges.
We may seek to grow by selectively operating stores in geographic areas other than those in which we currently operate, or in which we
currently have a relatively small number of stores. This growth strategy would present numerous operational and competitive challenges to our
senior management and employees and would place significant pressure on our operating systems. In addition, we cannot assure that
consumers located in the regions in which we may expand our operations would be as receptive to our stores as consumers in our existing
markets. The success of any such growth plans will depend in part upon our ability to:
•
•
•
•
•
•
•
select, and compete successfully in, new markets;
obtain suitable sites at acceptable costs;
realize an acceptable return on the capital invested in new facilities;
hire, train, and retain qualified personnel;
integrate new retail fuel and convenience stores into our existing distribution, inventory control, and information systems;
expand relationships with our suppliers or develop relationships with new suppliers; and
secure adequate financing, to the extent required.
We cannot assure that we will achieve our development goals, manage our growth effectively, or operate our existing and new retail fuel and
convenience stores profitability. The failure to achieve any of the foregoing could have a material adverse effect on our business, financial
condition and results of operations.
Decreases in commodity prices may lessen our borrowing capacities, increase collateral requirements for derivative instruments or
cause a write-down of inventory.
The nature of our business requires us to maintain substantial quantities of crude oil, refined petroleum product and blendstock inventories.
Because these inventories are commodities, we have no control over their changing market value. For example, reductions in the value of our
inventories or accounts receivable as a result of lower commodity prices could result in a reduction in our borrowing base calculations and a
reduction in the amount of financial resources available to meet the refineries' credit requirements. Further, if at any time our availability under
certain of our revolving credit facilities falls below certain thresholds, we may be required to take steps to reduce our utilization under those
credit facilities. In addition, changes in commodity prices may require us to utilize substantial amounts of cash to settle or cash collateralize
some or all of our existing commodity hedges. Finally, because our inventory is valued at the lower of cost or market value, we would record a
write-down of inventory and a non-cash charge to cost of sales if the market value of the inventory were to decline to an amount below our cost.
A terrorist attack on our assets, or threats of war or actual war, may hinder or prevent us from conducting our business.
Terrorist attacks (including cyber-attacks) in the United States, as well as events occurring in response to or in connection with them, including
political instability in significant oil producing regions such as the Middle East, Africa, the former Soviet Union and South America, may harm our
business. Energy-related assets (which could include refineries, pipelines and terminals such as ours) may be at greater risk of future terrorist
attacks than other possible targets in the United States.
A direct attack on our assets, or the assets of others used by us, could have a material adverse effect on our business, financial condition and
results of operations. Uncertainty surrounding continued global hostilities or other sustained military campaigns, and the possibility that
infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror, may affect our operations in unpredictable ways,
including disruptions of crude oil supplies and markets for refined products. In addition, any terrorist attack or political instability in significant oil
producing regions such as the Middle East, Africa, the former Soviet Union and South America could have an adverse impact on energy prices,
including prices for crude oil, other feedstocks and refined petroleum products, and an adverse impact on the margins from our refining and
petroleum product marketing operations. The long-term impacts of terrorist attacks and the threat of future terrorist on the energy transportation
industry in general, and on us in particular, are unknown. Increased security measures taken by us as a precaution against possible terrorist
attacks or vandalism could result in increased costs to our business. In addition, disruption or significant increases in energy prices could result
38 |
Risk Factors
in government-imposed price controls. Any one of, or a combination of, these occurrences could have a material adverse effect on our
business, financial condition and results of operations.
Legislative and regulatory measures to address climate change and GHG emissions could increase our operating costs or decrease
demand for our refined products.
Various legislative and regulatory measures to address climate change and GHG emissions (including carbon dioxide, methane and nitrous
oxides) are in various phases of discussion or implementation and could affect our operations. They include proposed and enacted federal
regulation and state actions to develop statewide, regional or nationwide programs designed to control and reduce GHG emissions from fixed
sources, such as our refineries, coal-fired power plants and oil and gas production operations, as well as mobile transportation sources and
fuels. Many states and regions have implemented, or are in the process of implementing, measures to reduce emissions of GHGs, primarily
through cap and trade programs or low carbon fuel standards.
In December 2009, the EPA published its findings that emissions of GHGs present a danger to public health and the environment because
emissions of such gases are, according to the EPA, contributing to the warming of the Earth’s atmosphere and other climatic conditions. Based
on these findings, the EPA adopted two sets of regulations that restrict emissions of GHGs under existing provisions of the federal CAA,
including one that requires a reduction in emissions of GHGs from motor vehicles and another that regulates GHG emissions from certain large
stationary sources under the PSD and Title V permitting programs. Congress has also from time to time considered legislation to reduce
emissions of GHGs. Efforts have been made, and continue to be made, in the international community toward the adoption of international
treaties or protocols that would address global climate change issues.
In April 2016, the United States became a signatory to the 2015 United
Nations Conference on Climate Change, which led to the creation of the Paris Agreement. The Paris Agreement, which became effective by its
terms on November 4, 2016, will require countries to review and "represent a progression" in their intended nationally determined contributions,
which set GHG emission reduction goals, every five years, beginning in 2020. On August 4, 2017, the United States formally communicated to
the United Nations its intent to withdraw from participating in the Paris Agreement, which entails a four-year process. In response to the
announced withdrawal plan, a number of state and local governments in the United States have expressed intentions to take GHG-related
actions. In December 2020, President-elect Biden announced plans for the U.S. to rejoin the Paris Agreement. Effective as of February 19,
2021, the U. S. rejoined the Paris Agreement.
Although it is not possible to predict the requirements of any GHG legislation that may be enacted, any laws or regulations that have been or
may be adopted to restrict or reduce GHG emissions will likely require us to incur increased operating and capital costs and/or increased taxes
on GHG emissions and petroleum fuels, and any increase in the prices of refined products resulting from such increased costs, GHG cap and
trade programs or taxes on GHGs, could result in reduced demand for our petroleum fuels.
If we are unable to maintain sales of our refined
products at a price that reflects such increased costs, there could be a material adverse effect on our business, financial condition and results of
operations. GHG regulation, including taxes on the GHG content of fuels, could also impact the consumption of refined products, thereby
affecting our refinery operations.
Increasing attention to environmental, social and governance matters may impact our business, financial results or stock price.
In recent years, increasing attention has been given to corporate activities related to environmental, social and governance (“ESG”) matters in
public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for
governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting
practices of investment advisers, public pension funds, universities and other members of the investing community. These activities include
increasing attention and demands for action related to climate change, promoting the use of substitutes to fossil fuel products, and encouraging
the divestment of companies in the fossil fuel industry. These activities could reduce demand for our products, reduce our profits, increase the
potential for investigations and litigation, impair our brand and have negative impacts on our stock price and access to capital markets.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for
evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting
decisions. Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of
investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital.
Risks Relating to Our Business
We are particularly vulnerable to disruptions to our refining operations because our refining operations are concentrated in four
facilities.
Because all of our refining operations are concentrated in the Tyler, El Dorado, Big Spring and Krotz Springs refineries, significant disruptions at
one of these facilities could have a material adverse effect on our consolidated financial results.
Our refineries consist of many processing units, a number of which have been in operation for many years. These processing units undergo
periodic shutdowns, known as turnarounds, during which routine maintenance is performed to restore the operation of the equipment to a higher
level of performance. Depending on which units are affected, all or a portion of a refinery's production may be halted or disrupted during a
maintenance turnaround. In March 2019, we completed a shortened maintenance turnaround at our El Dorado refinery that allowed work to be
completed on the majority of the process units, and a maintenance turnaround is scheduled to begin March 1, 2021. We completed a
maintenance turnaround at our Tyler refinery in 2015. In addition, we began our planned maintenance turnaround for our Big Spring refinery
39 |
Risk Factors
January 1, 2020 which was completed during 2020, and we began our Krotz Springs maintenance turnaround in the fourth quarter of 2020. We
are also subject to unscheduled down time for unanticipated maintenance or repairs.
Refinery operations may also be disrupted by external factors, such as a suspension of feedstock deliveries, cyber-attacks, or an interruption of
electricity, natural gas, water treatment or other utilities or a global pandemic such as the outbreak of the COVID-Pandemic. A large number of
positive COVID-19 cases at one or more of our refineries could substantially impact our business, financial condition, results of operations and
liquidity. Other potentially disruptive factors include natural disasters, severe weather conditions, workplace or environmental accidents,
interruptions of supply, work stoppages, losses of permits or authorizations or acts of terrorism.
Our operations are subject to business interruptions and casualty losses. Failure to manage risks associated with business
interruptions could adversely impact our operations, financial condition, results of operations and cash flows.
Our refining and logistics operations are subject to significant hazards and risks inherent in transporting, storing and processing crude oil and
intermediate and finished petroleum products. These hazards and risks include, but are not limited to, natural or weather-related disasters,
fires, explosions, pipeline ruptures and spills, trucking accidents, train derailments, third-party interference, mechanical failure of equipment and
other events beyond our control. The occurrence of any of these events could result in production and distribution difficulties and disruptions,
personal injury or death, environmental pollution and other damage to our properties and the properties of others.
If any facility were to experience an interruption in operations, earnings from the facility could be materially adversely affected (to the extent not
recoverable through insurance, if insured) because of lost production and repair costs. A significant interruption in one or more of our facilities
could also lead to increased volatility in prices for feedstocks and refined products and could increase instability in the financial and insurance
markets, making it more difficult for us to access capital and to obtain insurance coverage that we consider adequate.
Because of these inherent dangers, our refining and logistics operations are subject to various laws and regulations relating to occupational
health and safety, process and operating safety, environmental protection and transportation safety. Continued efforts to comply with applicable
laws and regulations related to health, safety and the environment, or a finding of non-compliance with current regulations, could result in
additional capital expenditures or operating expenses, as well as fines and penalties.
In addition, our refineries, pipelines and terminals are located in populated areas and any release of hazardous material, or catastrophic event,
could affect our employees and contractors, as well as persons and property outside our property. Our pipelines, trucks and rail cars carry
flammable and toxic materials on public railways and roads and across populated and/or environmentally sensitive areas and waterways that
could be severely impacted in the event of a release. An accident could result in significant personal injuries and/or cause a release that results
It could also affect deliveries of crude oil to our refineries, resulting in a
in damage to occupied areas, as well as damage to natural resources.
curtailment of operations. The costs to remediate such an accidental release and address other potential
liabilities, as well as the costs
associated with any interruption of operations, could be substantial. Although we maintain significant insurance coverage for such events, it
may not cover all potential losses or liabilities.
In the event that personal injuries or deaths result from such events, or there are natural resource damages, we would likely incur substantial
legal costs and liabilities. The extent of these costs and liabilities could exceed the limits of our available insurance. As a result, any such event
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The costs, scope, timelines and benefits of our refining projects may deviate significantly from our original plans and estimates.
We may experience unanticipated increases in the cost, scope and completion time for our improvement, maintenance and repair projects at
our refineries. Refinery projects are generally initiated to increase the yields of higher-value products, increase our ability to process a variety of
crude oil, increase production capacity, meet new regulatory requirements or maintain the safe and reliable operations of our existing assets.
Equipment that we require to complete these projects may be unavailable to us at expected costs or within expected time periods. Additionally,
employee or contractor labor expense may exceed our expectations. Due to these or other factors beyond our control, we may be unable to
complete these projects within anticipated cost parameters and timelines.
In addition, the benefits we realize from completed projects may take longer to achieve and/or be less than we anticipated. Large-scale capital
projects are typically undertaken in anticipation of achieving an acceptable level of return on the capital to be employed in the project. We base
these forecasted project economics on our best estimate of future market conditions that are not within our control. Most large-scale projects
take many years to complete, and during this multi-year period, market and other business conditions can change from those we forecast. Our
inability to complete, and/or realize the benefits of refinery projects in a cost-efficient and timely manner, could have a material adverse effect on
our business, financial condition and results of operations.
We depend upon our logistics segment for a substantial portion of the crude oil supply and refined product distribution networks that
serve our Tyler, Big Spring and El Dorado refineries.
Our logistics segment consists of Delek Logistics, a publicly-traded master limited partnership, and our consolidated financial statements
include its consolidated financial results. As of December 31, 2020, we owned an 80.0% limited partner interest in Delek Logistics, consisting of
34,745,868 common limited partner units and the non-economic general partner interest. Delek Logistics operates a system of crude oil and
refined product pipelines, distribution terminals and tankage in Arkansas, Louisiana, Tennessee and Texas. Delek Logistics generates revenues
by charging tariffs for transporting crude oil and refined products through its pipelines, by leasing pipeline capacity to third parties, by charging
fees for terminalling refined products and other hydrocarbons and storing and providing other services at its terminals.
40 |
Risk Factors
Our Tyler, El Dorado and Big Spring refineries are substantially dependent upon Delek Logistics' assets and services under several long-term
pipeline and terminal, tankage and throughput agreements expiring in 2024 through 2033. Delek Logistics is subject to its own operating and
regulatory risks, including, but not limited to:
•
•
•
•
•
•
•
•
•
•
•
its reliance on significant customers, including us;
macroeconomic factors, such as commodity price volatility that could affect its customers' utilization of its assets;
its reliance on us for near-term growth;
sufficiency of cash flow for required distributions;
counterparty risks, such as creditworthiness and force majeure;
competition from third-party pipelines and terminals and other competitors in the transportation and marketing industries;
environmental regulations;
operational hazards and risks;
pipeline tariff regulations;
limitations on additional borrowings and other restrictions in its debt agreements; and
other financial, operational and legal risks.
The occurrence of any of these factors could directly or indirectly affect Delek Logistics' financial condition, results of operations and cash flows.
Because Delek Logistics is our consolidated subsidiary, the occurrence of any of these risks could also affect our financial condition, results of
operations and cash flows. Additionally, if any of these risks affect Delek Logistics' viability, its ability to serve our supply and distribution needs
may be jeopardized.
For additional information about Delek Logistics, see "Logistics Segment" under Item 1 & 2. Business and Properties, of this Annual Report on
Form 10-K.
Interruptions or limitations in the supply and delivery of crude oil, or the supply and distribution of refined products, may negatively
affect our refining operations and inhibit the growth of our refining operations.
We rely on Delek Logistics and third-party transportation systems for the delivery of crude oil to our refineries. For example, during the year
ended December 31, 2020, we relied upon the West Texas Gulf pipeline for the delivery of approximately 74.4% of the crude oil processed by
our Tyler and El Dorado refineries. We could experience an interruption or reduction of supply and delivery, or an increased cost of receiving
crude oil, if the ability of these systems to transport crude oil is disrupted because of accidents, adverse weather conditions, governmental
regulation, terrorism, maintenance or failure of pipelines or other delivery systems, other third-party action or other events beyond our control.
The unavailability for our use, for a prolonged period of time, of any system of delivery of crude oil could have a material adverse effect on our
business, financial condition and results of operations. Pipeline suspensions like these could require us to operate at reduced throughput rates.
Moreover, interruptions in delivery or limitations in delivery capacity may not allow our refining operations to draw sufficient crude oil to support
current refinery production or increases in refining output.
In order to maintain or materially increase refining output, existing crude delivery
systems may require upgrades or supplementation, which may require substantial additional capital expenditures.
In addition, the El Dorado, Big Spring and Krotz Springs refineries distribute most of their light product production through a third-party pipeline
system. An interruption to, or change in, the operation of the third-party pipeline system may result in a material restriction to our distribution
channels. Because demand in the local markets is limited, a material restriction to each of the refinery's distribution channels may cause us to
reduce production and may have a material adverse effect on our business, financial condition and results of operations.
We could experience an interruption or reduction of supply or delivery of refined products if our suppliers partially or completely ceased
operations, temporarily or permanently. The ability of these refineries and our suppliers to supply refined products to us could be temporarily
disrupted by anticipated events, such as scheduled upgrades or maintenance, as well as events beyond their control, such as unscheduled
maintenance, fires, floods, storms, explosions, power outages, accidents, acts of terrorism or other catastrophic events, labor difficulties and
work stoppages, governmental or private party litigation, or legislation or regulation that adversely impacts refinery operations.
In addition, any
reduction in capacity of other pipelines that connect with our suppliers' pipelines or our pipelines due to testing, line repair, reduced operating
pressures, or other causes could result in reduced volumes of refined product supplied to our logistics segment's West Texas terminals. A
reduction in the volume of refined products supplied to our West Texas terminals could adversely affect our sales and earnings.
We are subject to risks associated with significant investments in the Permian Basin.
We and our joint ventures have made and are continuing to make significant
from
the Permian Basin in West Texas. Similar investments have been made and additional investments may be made in the future by us, our
competitors or by new entrants to the markets we serve. The success of these and similar projects largely relies on the realization of anticipated
market demand and growth in production in the Permian Basin. These projects typically require significant development periods, during which
time demand for such infrastructure may change, production in the Permian Basin may decrease, or additional investments by competitors may
be made. Lower production in the Permian Basin, or further investments by us or others in new pipelines, storage or dock capacity could result
investments in infrastructure to gather crude oil
41 |
Risk Factors
in capacity that exceeds demand, which could reduce the utilization of our gathering system and midstream assets and the related services or
the prices we are able to charge for those services. There are several projects currently underway that are expected to increase pipeline
capacity from the Permian Basin beyond current production. This excess capacity could decrease the differential between the Permian and end
markets, resulting in a highly competitive environment for transportation services and reducing the rates for those services. When infrastructure
investments in the markets we serve result in capacity that exceeds the demand in those markets, our facilities or investments could be
underutilized, and rates could be unfavorably impacted, which could materially adversely affect our results of operations, financial position or
cash flows, as well as our ability to pay cash distributions.
We have made investments in joint ventures which subject us to additional risks, over which we do not have full control and which
have unique risks.
We have made investments in several joint ventures, and we may enter into other joint venture arrangements in the future. Generally, we have
limited control over the activities of the joint venture, including the cash distribution policies of each of the joint ventures. We also have financial
obligations related to our joint venture investments, some of which may be contingent on the activities of the joint ventures and the abilities of
the joint ventures to obtain their own financing for their activities. Construction delays, cost increases, changes in market conditions, and other
factors may result in a change in our expectations for the results of our investments in these joint ventures, and may require additional
contributions from us to a joint venture.
Additionally, the partners that we share ownership within these joint ventures may not always share our goals and objectives. Differences in
views among the partners may result in delayed decisions or failures to agree on major matters, such as large expenditures or contractual
commitments, the construction of assets or the borrowing of money, among others. Delay or failure to agree may prevent action with respect to
such matters, even though such action may not serve our best interest or that of the joint venture. Accordingly, delayed decisions and
disagreements could adversely affect the business and operations of the joint ventures and, in turn, our business and operations. From time to
time, our joint ventures may be involved in disputes or legal proceedings which may negatively affect our investments. Accordingly, any such
occurrences could adversely affect our financial condition, results of operations or cash flows.
Our retail segment is dependent on fuel sales, which makes us susceptible to increases in the cost of gasoline and interruptions in
fuel supply.
Our dependence on fuel sales makes us susceptible to increases in the cost of gasoline and diesel fuel, and fuel profit margins have a
significant impact on our earnings. The volume of fuel sold by us, and our fuel profit margins, are affected by numerous factors beyond our
control, including the supply and demand for fuel, volatility in the wholesale fuel market and the pricing policies of competitors in local markets.
Although we can rapidly adjust our pump prices to reflect higher fuel costs, a material increase in the price of fuel could adversely affect
demand. A material, sudden increase in the cost of fuel that causes our fuel sales to decline could have a material adverse effect on our
business, financial condition and results of operations.
In addition, credit card interchange fees are typically calculated as a percentage of the transaction amount rather than a percentage of gallons
sold. Higher refined product prices often result in negative consequences for our retail operations, such as higher credit card expenses, lower
retail fuel gross margin per gallon and reduced demand for gasoline and diesel. These conditions could result in fewer retail gallons sold and
fewer retail merchandise transactions, which could have a material adverse effect on our business, financial condition and results of
operations.
Our dependence on fuel sales also makes us susceptible to interruptions in fuel supply. Gasoline sales generate customer traffic to our retail
fuel and convenience stores, and any decrease in gasoline sales, whether due to shortage or otherwise, could adversely affect our
merchandise sales. A serious interruption in the supply of gasoline to our retail fuel and convenience stores could have a material adverse
effect on our business, financial condition and results of operations.
General economic conditions may adversely affect our business, operating results and financial condition.
Economic slowdowns may have serious negative consequences for our business and operating results, because our performance is subject to
domestic economic conditions and their impact on levels of consumer spending. Some of the factors affecting consumer spending include
general economic conditions, unemployment, consumer debt, reductions in net worth based on declines in equity markets and residential real
estate values, adverse developments in mortgage markets,
rates, consumer confidence and other
macroeconomic factors. Political instability and global health crises, such as the COVID-19 Pandemic, can also impact the global economy and
decrease worldwide demand for oil and refined products. During a period of economic weakness or uncertainty, current or potential customers
may travel less, reduce or defer purchases, go out of business or have insufficient funds to buy or pay for our products and services. Moreover,
a financial market crisis may have a material adverse impact on financial institutions and limit access to capital and credit. This could, among
other things, make it more difficult for us to obtain (or increase our cost of obtaining) capital and financing for our operations. Our access to
additional capital may not be available on terms acceptable to us or at all.
taxation, energy prices,
interest
Also, because all of our operating refineries are located in the Gulf Coast Region, we primarily market our refined products in a relatively limited
geographic area. As a result, we are more susceptible to regional economic conditions compared to our more geographically diversified
competitors, and any unforeseen events or circumstances that affect the Gulf Coast Region could also materially and adversely affect our
revenues and cash flows. The primary factors include, among other things, changes in the economy, weather conditions, demographics and
42 |
Risk Factors
population, increased supply of refined products from competitors and reductions in the supply of crude oil or other feedstocks. In the event of a
shift in the supply/demand balance in the Gulf Coast Region due to changes in the local economy, an increase in aggregate refining capacity or
other reasons, resulting in supply exceeding the demand in the region, our refineries may have to deliver refined products to more customers
outside of the Gulf Coast Region and thus incur considerably higher transportation costs, resulting in lower refining margins, if any.
Additionally, general economic conditions in West Texas are highly dependent upon the price of crude oil. When crude oil prices exceed certain
dollar per barrel thresholds, demand for people and equipment to support drilling and completion activities for the production of crude oil is
robust, which supports overall economic health of the region. If crude oil prices fall below certain dollar per barrel thresholds, economic activity
in the region may slow down, which could have a material adverse impact on the profitability of our business in West Texas.
The termination or expiration of, or periodic price adjustment settlements in, the J. Aron Supply and Offtake Agreements could have a
material adverse effect on our liquidity.
In April 2020, we amended and restated our three supply and offtake agreements with J. Aron to renew and extend the terms to December 30,
2022, with J. Aron having the sole discretion to further extend to May 30, 2025 by providing at least six months prior notice to the current
maturity date. Pursuant to the agreements, J. Aron purchases a substantial portion of the crude oil and refined products for three of our
refineries' inventory at market prices. Upon any termination of the agreements, including at expiration or in connection with a force majeure or
default, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements,
including procurement contracts, commitments for the sale of product and pipeline, terminalling, storage and shipping arrangements. As part of
the amendment, there were changes to the underlying market index, annual fee, the crude purchase fee, crude roll fees and timing of cash
settlements related to periodic price adjustments ("PPA") on the differentials. The PPA are calculated semi-annually on October 1 and May 1
("Re-pricing dates") and will result in cash settlements, (either payments to J. Aron or receipts of additional funds from J. Aron), based on the
market value of the underlying commodity differential compared to the contractual differential, subject to a set threshold amount.
In the event
that the periodic price adjustments are triggered on the Re-pricing dates, we may be required to make earlier cash payments within three
months following the Re-pricing date.
If there is negative publicity concerning our brand names or the brand names of our suppliers, fuel and merchandise sales in our
retail segment may suffer.
Negative publicity, regardless of whether the concerns are valid, concerning food, beverage, fuel or other product quality, food, beverage or
other product safety or other health concerns, facilities, employee relations or other matters may materially and adversely affect demand for
products offered at our stores and could result in a decrease in customer traffic to our stores. We offer food products in our stores that are
marketed under our brand names and certain nationally recognized brands. These nationally recognized brands have significant operations at
facilities owned and operated by third parties and negative publicity concerning these brands as a result of events that occur at facilities that
we do not control could also adversely affect customer traffic to our stores. Additionally, we may be the subject of complaints or litigation
arising from food or beverage-related illness or injury in general which could have a negative impact on our business. Health concerns, poor
food, beverage, fuel or other product quality or operating issues stemming from one store or a limited number of stores can materially and
adversely affect the operating results of some or all of our stores and harm our proprietary brands.
Wholesale cost increases, vendor pricing programs and tax increases applicable to tobacco products, as well as campaigns to
discourage their use, could adversely impact our results of operations in our retail segment.
Increases in the retail price of tobacco products as a result of increased taxes or wholesale costs could materially impact our cigarette sales
volume and/or revenues, merchandise gross profit and overall customer traffic. Cigarettes are subject to substantial and increasing excise
taxes at both a state and federal level. In addition, national and local campaigns to discourage the use of tobacco products may have an
adverse effect on demand for these products. A reduction in cigarette sales volume and/or revenues, merchandise gross profit from tobacco
products or overall customer demand for tobacco products could have a material adverse effect on the business, financial condition and
results of operations of our retail segment.
In addition, major cigarette manufacturers currently offer substantial rebates to us; however, there can be no assurance that such rebate
programs will continue. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are
decreased or eliminated, or we fail to earn the rebates, our wholesale cigarette costs will
increase. For example, certain major cigarette
manufacturers have offered rebate programs that provide rebates only if we follow the manufacturer's retail pricing guidelines. If we do not
receive the rebates, because we do not participate in the program or if the rebates we receive by participating in the program do not offset or
surpass the revenue lost as a result of complying with the manufacturer's pricing guidelines, our cigarette gross margin will be adversely
impacted. In general, we attempt to pass wholesale price increases on to our customers. However, competitive pressures in our markets may
adversely impact our ability to do so. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively
impact gross margins. These factors could materially impact our retail price of cigarettes, cigarette sales volume and/or revenues,
merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition
and results of operations.
Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently
insure companies in the energy industry may cease to do so or substantially increase premiums.
43 |
Risk Factors
We carry property, business interruption, pollution, casualty and cyber insurance, but we do not maintain insurance coverage against all
potential losses, costs or liabilities. We could suffer losses for uninsurable, or uninsured, risks or in amounts in excess of existing insurance
coverage.
In addition, we purchase insurance programs with large self-insured retentions and large deductibles. For example, we retain a
short period of our business interruption losses. Therefore, a significant part, or all, of a business interruption loss or other types of loss could
be retained by us. The occurrence of a loss that is retained by us, or not fully covered by insurance, could have a material adverse effect on our
business, financial condition and results of operations.
The energy industry is highly capital intensive, and the entire or partial loss of individual facilities or multiple facilities can result in significant
costs to both energy industry companies, such as us, and their insurance carriers. Historically, large energy industry claims have resulted in
significant increases in the level of premium costs and deductible periods for participants in the energy industry. For example, hurricanes have
caused significant damage to energy companies operating along the Gulf Coast, in addition to numerous oil and gas production facilities and
pipelines in that region.
Insurance companies that have historically participated in underwriting energy-related risks may discontinue that
practice, may reduce the insurance capacity they are willing to offer or demand significantly higher premiums or deductible periods to cover
these risks.
If significant changes in the number, or financial solvency, of insurance underwriters available to the energy industry occur, or if
other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate
insurance at reasonable cost.
In addition, we cannot assure that our insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange
for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which we suffer
significant losses could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to successfully execute our strategy of growth through acquisitions.
A significant part of our growth strategy is to acquire assets, such as refineries, pipelines, terminals, and retail fuel and convenience stores that
If attractive opportunities arise, we may also acquire assets in new
complement our existing assets and/or broaden our geographic presence.
lines of business that are complementary to our existing businesses.
In the past we have acquired refineries, and we have developed our
logistics segment through the acquisition of transportation and marketing assets. We expect to continue to acquire assets that complement our
existing assets and/or broaden our geographic presence as a major element of our growth strategy. However, the occurrence of any of the
following factors could adversely affect our growth strategy:
• We may not be able to identify suitable acquisition candidates or acquire additional assets on favorable terms;
• We usually compete with others to acquire assets, which competition may increase, and any level of competition could result in decreased
availability or increased prices for acquisition candidates;
• We may experience difficulty in anticipating the timing and availability of acquisition candidates;
• We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions; and
•
As a public company, we are subject to reporting obligations, internal controls and other accounting requirements with respect to any
business we acquire, which may prevent or negatively affect the valuation of some acquisitions we might otherwise deem favorable or
increase our acquisition costs.
Acquisitions involve risks that could cause our actual growth or operating results to differ adversely compared with our expectations.
Due to our emphasis on growth through acquisitions, we are particularly susceptible to transactional risks that could cause our actual growth or
operating results to differ adversely compared with our expectations. For example:
during the acquisition process, we may fail, or be unable, to discover some of the liabilities of companies or businesses that we acquire;
we may assume contracts or other obligations in connection with particular acquisitions on terms that are less favorable or desirable than
the terms that we would expect to obtain if we negotiated the contracts or other obligations directly;
we may fail to successfully integrate or manage acquired assets;
acquired assets may not perform as we expect, or we may not be able to obtain the cost savings and financial
anticipate;
improvements we
acquisitions may require us to incur additional debt or issue additional equity;
acquired assets may suffer a diminishment in fair value as a result of which we may need to record a write-down or impairment;
we may fail to grow our existing systems, financial controls, information systems, management resources and human resources in a
manner that effectively supports our growth;
to the extent that we acquire assets in new lines of business, we may become subject to additional regulatory requirements and additional
risks that are characteristic or typical of these lines of business; and
to the extent that we acquire equity interests in entities that control assets (rather than acquiring the assets directly), we may become
subject to liabilities that predate our ownership and control of the assets.
•
•
•
•
•
•
•
•
•
44 |
Risk Factors
The occurrence of any of these factors could materially and adversely affect our business, financial condition or results of operations.
Our future results will suffer if we do not effectively manage our expanded operations.
The size and scope of operations of our business have increased. In addition, we may continue to expand our size and operations through
additional acquisitions or other strategic transactions. Our future success depends, in part, upon our ability to manage our expanded business,
which may pose substantial challenges for management, including challenges related to the management and monitoring of new operations
including, without limitation, integrating new operations with those of our existing business, managing the increased scope or geographic
diversity of our expanded business, and associated increased costs and complexity. There can be no assurance that we will be successful, or
that we will realize the expected economies of scale, synergies and other benefits anticipated from any additional acquisitions or strategic
transactions.
We may incur significant costs and liabilities with respect to investigation and remediation of environmental conditions at our
facilities.
Prior to our purchase of our refineries, pipelines, terminals and other facilities, the previous owners had been engaged for many years in the
investigation and remediation of hydrocarbons and other materials which contaminated soil and groundwater. Upon purchase of the facilities,
we became responsible and liable for certain costs associated with the continued investigation and remediation of known and unknown
impacted areas at the facilities.
In the future, it may be necessary to conduct further assessments and remediation efforts at impacted areas at
our facilities and elsewhere.
In addition, we have identified and self-reported certain other environmental matters subsequent to our purchase
of our facilities.
Based upon environmental evaluations performed internally and by third parties, we recorded and periodically update environmental liabilities
and accrued amounts we believe are sufficient to complete remediation. We expect remediation at some properties to continue for the
foreseeable future. The need to make future expenditures for these purposes that exceed the amounts we estimated and accrued for could
have a material adverse effect on our business, financial condition and results of operations.
In addition, Alon indemnified certain parties, to which they sold assets, for costs and liabilities that may be incurred as a result of environmental
conditions existing at the time of such sales. As a result of our purchase of Alon, if we are forced to incur costs or pay liabilities in connection
with these indemnification obligations, such costs and payments could be significant.
In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not been discovered at our
current or former locations or locations that we may acquire, or at third party sites where hazardous substances from these locations have been
treated or disposed. Our handling and storage of petroleum and hazardous substances may lead to additional contamination at our facilities or
along our pipelines and at facilities to which we send or have sent wastes or by-products for treatment or disposal. In addition, new legal
increased legislative activity and governmental enforcement and other
requirements, new interpretations of existing legal requirements,
developments could require us to make additional unforeseen expenditures. As a result, we may be subject to additional investigation and
remediation costs, governmental penalties and third-party suits alleging personal injury and property damage. Liabilities for future remediation
costs are recorded when environmental assessments and/or remedial efforts are probable and costs can be reasonably estimated as material.
Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other
studies or a commitment to a formal plan of action.
We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations
or otherwise comply with health, safety, environmental and other laws and regulations.
Our operations require numerous permits and authorizations under various laws and regulations. These authorizations and permits are subject
to revocation, renewal or modification, and can require operational changes to limit impacts or potential impacts on the environment and/or
health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines,
criminal sanctions, permit revocations, injunctions and/or facility shutdowns.
In addition, major modifications of our operations could require
modifications to our existing permits or upgrades to our existing pollution control equipment. Any, or all, of these matters could have a negative
effect on our business, results of operations and cash flows.
Our Tyler refinery currently primarily distributes refined petroleum products via truck or rail. We do not have the ability to distribute
these products into markets outside our local market via pipeline.
In recent years, we have expanded our refined product distribution capabilities in northeast Texas with our acquisition of refined product
terminals in Big Sandy and Mt. Pleasant, Texas and through the use of transloading facilities enabling the shipment of products by rail to distant
markets, including Mexico. However, unlike most refineries, the Tyler refinery currently has limited ability to distribute refined products outside
its local market in northeast Texas due to a lack of pipeline assets connecting the facility to other markets. This limited ability may limit the
refinery’s ability to increase the production of petroleum products, attract new customers for its refined petroleum products or increase sales of
products from the refinery. In addition, if demand for petroleum products diminishes in northeast Texas, the refinery may be required to reduce
production levels and our financial results may be adversely affected.
45 |
Risk Factors
An increase in competition, and/or reduction in demand in the markets in which we purchase feedstocks and sell our refined
products, could increase our costs and/or lower prices and adversely affect our sales and profitability.
Certain of our refineries operate in localized or niche markets. If competitors commence operations within these niche markets, we could lose
our niche market advantage, which could have a material adverse effect on our business, financial condition and results of operations.
Additionally, where feedstocks are purchased in a localized market, disruptions in supply channels could significantly impact our ability to meet
production demands in those facilities.
In addition, the maintenance, or replacement, of our existing customers depends on a number of factors outside of our control, including
increased competition from other suppliers and demand for refined products in the markets we serve. The market for distribution of wholesale
motor fuel is highly competitive and fragmented. Some of our competitors have significantly greater resources and name recognition than us.
The loss of major customers, or a reduction in amounts purchased by major customers, could have a material adverse effect on us to the extent
that we are not able to correspondingly increase sales to other purchasers.
Compliance with and changes in tax laws could adversely affect our performance.
We are subject to extensive tax liabilities, including federal and state income taxes and transactional taxes, such as excise, sales/use, payroll,
franchise, withholding and ad valorem taxes. New tax laws and regulations, and changes in existing tax laws and regulations, are continuously
being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Certain of these liabilities are subject to
periodic audits by the respective taxing authority, which could increase or otherwise alter our tax liabilities.
Though we have applied
reasonable interpretations and assumptions in determining our tax liabilities, it is possible that the IRS could issue subsequent guidance or take
positions on audit that differ from our prior interpretations and assumptions, which could adversely impact our cash tax liabilities, results of
operations, and financial condition. Subsequent changes to our tax liabilities as a result of these audits may also subject us to interest and
penalties, and could have a material adverse effect on our business, financial condition and results of operations.
If a change in
For example, the tax treatment of our logistics segment depends on its status as a partnership for federal income tax purposes.
law, our failure to comply with existing law or other factors were to cause our logistics segment to be treated as a corporation for federal income
tax purposes, it would become subject to entity-level taxation. As a result, our logistics segment would pay federal income tax on all of its
taxable income at regular corporate income tax rates (subject to corporate alternative minimum tax for years ended prior to 2018), would likely
pay additional state and local income taxes at varying rates, and distributions to unitholders, including us, would be generally treated as taxable
In such case, the logistics segment would likely experience a material reduction in its anticipated cash flow and
dividends from a corporation.
after-tax return to its unitholders, and we would likely experience a substantial reduction in its value.
Adverse weather conditions or other unforeseen developments could damage our facilities, reduce customer traffic and impair our
ability to produce and deliver refined petroleum products or receive supplies for our retail fuel and convenience stores.
The regions in which we operate are susceptible to severe storms, including hurricanes, thunderstorms, tornadoes, floods, extended periods of
rain, ice storms and snow, all of which we have experienced in the past few years. Our facilities located in California and the related pipeline
are located in areas with a history of earthquakes, some of which have been quite severe.
In addition, for a variety of reasons, many members
of the scientific community believe that climate changes are occurring that could have significant physical effects, such as increased frequency
If any such effects were to occur, they could have an adverse effect on
and severity of storms, droughts and floods and other climatic events.
our assets and operations.
Inclement weather conditions, earthquakes or other unforeseen developments could damage our facilities, interrupt production, adversely
impact consumer behavior, travel and retail fuel and convenience store traffic patterns or interrupt or impede our ability to operate our locations.
If such conditions prevail near our refineries, they could interrupt or undermine our ability to produce and transport products from our refineries
and receive and distribute products at our terminals. Regional occurrences, such as energy shortages or increases in energy prices, fires and
other natural disasters, could also hurt our business. The occurrence of any of these developments could have a material adverse effect on our
business, financial condition and results of operations.
Our operating results are seasonal and generally lower in the first and fourth quarters of the year for our refining and logistics
segments and in the first quarter of the year for our retail segment. We depend on favorable weather conditions in the spring and
summer months.
Demand for gasoline, convenience merchandise and asphalt products is generally higher during the summer months than during the winter
months due to seasonal increases in motor vehicle traffic and road and home construction. Varying vapor pressure requirements between the
summer and winter months also tighten summer gasoline supply. As a result, the operating results of our refining segment and logistics
segment are generally lower for the first and fourth quarters of each year. Seasonal fluctuations in traffic also affect sales of motor fuels and
merchandise in our retail fuel and convenience stores. As a result, the operating results of our retail segment are generally lower for the first
quarter of the year.
Weather conditions in our operating area also have a significant effect on our operating results in our retail segment. Customers are more likely
to purchase more gasoline and higher profit margin items such as fast foods, fountain drinks and other beverages during the spring and
summer months. Unfavorable weather conditions during these months and a resulting lack of the expected seasonal upswings in traffic and
sales could have a material adverse effect on our business, financial condition and results of operations.
46 |
Risk Factors
A substantial portion of the workforce at our refineries is unionized, and we may face labor disruptions that would interfere with our
operations.
As of December 31, 2020, approximately 15% of our employees were represented by unions and/or covered by a collective bargaining
agreement. None of our employees in our logistics segment, retail segment or in our corporate office are represented by a union. We consider
our relations with our employees to be satisfactory. Although the collective bargaining agreements contain provisions to discourage strikes or
work stoppages, we cannot assure that strikes or work stoppages will not occur. A strike or work stoppage could have a material adverse effect
on our business, financial condition and results of operations.
We rely on information technology in our operations, and any material failure, inadequacy, interruption, cyber-attack or security
failure of that technology could harm our business.
We rely on information technology across our operations, including the control of our refinery processes, monitoring the movement of petroleum
through our pipelines and terminals, the point of sale processing at our retail sites and various other processes and transactions. We utilize
information technology systems and controls throughout our operations to capture accounting, technical and regulatory data for subsequent
archiving, analysis and reporting. Disruption, failure, or cyber security breaches affecting or targeting our computer and telecommunications, our
infrastructure, or the infrastructure of our cloud-based IT service providers may materially impact our business and operations. An undetected
failure of these systems, because of power loss, unsuccessful transition to upgraded or replacement systems, unauthorized access or other
cyber breach or attack could result in disruption to our business operations, access to or disclosure or loss of data and/or proprietary
information, personal injuries and environmental damage, which could have an adverse effect on our business, reputation, and effectiveness.
We could also be subject to resulting investigation and remediation costs as well as regulatory enforcement of private litigation and related
costs, which could have a material adverse impact on our cash flow and results of operations.
We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of
confidential customer information, such as payment card and personal credit information.
In addition, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment
cards themselves, may put certain payment card data at risk. These standards for determining the required controls applicable to these systems
are mandated by credit card issuers and administered by the Payment Card Industry Security Standards Counsel and not by us. The regulatory
environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly
changing requirements. We have taken the necessary steps to comply with the Payment Card Industry Data Security Standards ("PCI-DSS") at
all of our locations. However, compliance with these requirements may result in cost increases due to necessary systems changes and the
development of new administrative processes.
In recent years, several retailers have experienced data breaches, resulting in the exposure of sensitive customer data, including payment card
information. A breach could also originate from, or compromise, our customers' and vendors' or other third-party networks outside of our control.
Any compromise or breach of our information and payment technology systems could cause interruptions in our operations, damage our
reputation, reduce our customers' willingness to visit our sites and conduct business with them, or expose us to litigation from customers or
sanctions for violations of the PCI-DSS. In addition, a compromise of our internal data network at any of our refining or terminal locations may
have disruptive impacts similar to that of our retail operations. These disruptions could range from inconvenience in accessing business
information to a disruption in our refining operations.
Despite our security measures, we experience attempts by external parties to penetrate and attack our networks and systems. Although such
attempts to date have not, to our knowledge, resulted in any material breaches, disruptions, or loss of business-critical information, our systems
and procedures for protecting against such attacks and mitigating such risks may prove to be insufficient in the future and such attacks could
have an adverse impact on our business and operations, including damage to our reputation and competitiveness, remediation costs, litigation
or regulatory actions. In addition, as technologies evolve, and cyber-attacks become more sophisticated, we may incur significant costs to
upgrade or enhance our security measures to protect against such attacks and we may face difficulties in fully anticipating or implementing
adequate preventive measures or mitigating potential harm. We could also be liable under laws that protect the privacy of personal information,
subject to regulatory penalties, experience damage to our reputation or a loss of consumer confidence, or incur additional costs for remediation
and modification or enhancement of our information systems to prevent future occurrences, all of which could adversely affect our reputation,
business, operations or financial results.
If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted.
Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical
personnel. We do not currently maintain key person life insurance policies for any of our senior management team. The loss or unavailability to
us of any member of our senior management team or a key technical employee could significantly harm us. We face competition for these
professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members
of our senior management team and key technical personnel would be unavailable to us for any reason, we would be required to hire other
personnel to manage and operate our company and to develop our products and technology. We cannot assure that we would be able to
locate or employ such qualified personnel on acceptable terms or at all.
47 |
Risk Factors
If we are, or become, a United States real property holding corporation, special tax rules may apply to a sale, exchange or other
disposition of common stock, and non-U.S. holders may be less inclined to invest in our stock, as they may be subject to United
States federal income tax in certain situations.
A non-U.S. holder of our common stock may be subject to United States federal income tax with respect to gain recognized on the sale,
exchange or other disposition of our common stock if we are, or were, a "U.S. real property holding corporation" ("USRPHC") at any time during
the shorter of the five-year period ending on the date of the sale or other disposition and the period such non-U.S. holder held our common
stock (the shorter period referred to as the "lookback period").
In general, we would be a USRPHC if the fair market value of our "U.S. real
property interests," as such term is defined for United States federal income tax purposes, equals or exceeds 50% of the sum of the fair market
value of our worldwide real property interests and our other assets used or held for use in a trade or business. The test for determining
USRPHC status is applied on certain specific determination dates and is dependent upon a number of factors, some of which are beyond our
control (including, for example, fluctuations in the value of our assets).
If we are or become a USRPHC, so long as our common stock is
regularly traded on an established securities market such as the NYSE, only a non-U.S. holder who, actually or constructively, holds or held
during the lookback period more than five percent of our common stock will be subject to United States federal income tax on the disposition of
our common stock.
Loss of or reductions to tax incentives for biodiesel production may have a material adverse effect on earnings, profitability and cash
flows relating to our renewable fuels facilities.
The biodiesel industry has historically been substantially aided by federal and state tax incentives. One tax incentive program that has been
significant to our renewable fuels facilities is the federal blender's tax credit. The blender's tax credit (or biodiesel tax credit) provides a $1.00
refundable tax credit per gallon of pure biodiesel, or B100, to the first blender of biodiesel with petroleum-based diesel fuel. The blender's tax
credit has expired on several occasions, only to be reinstated on a retroactive basis. The blender's tax credit was re-enacted in December 2019
for the years 2020 through 2022 and was retroactively reinstated for 2018 and 2019. See Note 4 of the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information regarding the
extension of this tax credit.
It is uncertain what action, if any, Congress may take with respect to enacting or reinstating the blender's tax credit beyond 2022 or when such
action might be effective.
If Congress does not enact or reinstate the credit for future years, it may result in a material adverse effect on the
earnings, profitability and cash flows relating to our renewable fuels facilities.
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
The market price of our common stock may be influenced by many factors, some of which may be beyond our control, including:
•
•
•
•
•
•
•
•
•
•
our quarterly or annual earnings, or those of other companies in our industry;
inaccuracies in, and changes to, our previously published quarterly or annual earnings;
changes in accounting standards, policies, guidance, interpretations or principles;
economic conditions within our industry, as well as general economic and stock market conditions;
the failure of securities analysts to cover our common stock, or the cessation of such coverage;
changes in financial estimates by securities analysts and the frequency and accuracy of such reports;
future issuance or sales of our common stock;
announcements by us or our competitors of significant contracts or acquisitions;
sales of common stock by our senior officers or our affiliates; and
the other factors described in these "Risk Factors."
In recent years, the stock market in general, and the market for energy companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. This volatility has had a
significant impact on the market price of securities issued by many companies, including companies in our industry. The trading price of Delek
common stock has been volatile over the past three years. The changes often occur without any apparent regard to the operating performance
of these companies, and these fluctuations could materially reduce our stock price.
48 |
Risk Factors
Stockholder activism may negatively impact the price of our common stock.
Our stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or
acquire control over us. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to
increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or
sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-
consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business
strategies.
If individuals are elected or appointed to our Board of Directors who do not agree with our strategic plans, it may adversely affect the
ability of our Board of Directors to function effectively and our ability to effectively and timely implement our strategic plans and create additional
value for our stockholders. As a result, stockholder campaigns could adversely affect our results of operations, financial condition and cash
flows.
On January 14, 2021, we received formal notice from CVR Energy, Inc. ("CVR Energy"), the owner of approximately 15% of our outstanding
common stock, of their intention to propose three director candidates at our 2021 Annual Meeting. CVR Energy also proposed, among other
things, that we cease refining operations at the Krotz Springs and El Dorado refineries, stop dropping down core refining assets to Delek
Logistics, sell our retail business, exit non-core supply and trading activities, and simplify our corporate structure.
Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our
board of directors or senior management team arising from the proposals by CVR Energy or others could lead to the perception of a change in
the direction of our business or instability which may be exploited by our competitors, result in the loss of potential business opportunities, and
make it more difficult to pursue our strategic initiatives or attract and retain qualified personnel and business partners, any of which could have
an adverse effect, which may be material, on our business and operating results.
In addition, actions such as those described above could cause significant fluctuations in the trading prices of our common stock based on
temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our
business. As we continue to engage in discussions with CVR Energy, the trading price of our common stock may be subject to significant
fluctuations.
Likewise, to the extent that we implement any proposals made by CVR Energy or other proposals made by any of our shareholders, the
resulting changes in our business, assets, results of operations and financial condition could be material and could have an impact, which may
be material, on the market price of our common stock.
As a result of the contested director election, we expect to incur significant costs during 2021.
Future sales of shares of our common stock could depress the price of our common stock, and could result in substantial dilution to
our stockholders.
We may sell securities in the public or private equity markets, regardless of our need for capital, and even when conditions are not otherwise
favorable. The market price of our common stock could decline as a result of the introduction of a large number of shares of our common stock
into the market or the perception that these sales could occur. Sales of a large number of shares of our common stock, or the possibility that
these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem
appropriate.
Our stockholders will suffer dilution if we issue currently unissued shares of our stock or sell our treasury holdings in the future. Our
stockholders will also suffer dilution as stock, restricted stock units, stock options, stock appreciation rights, warrants or other equity awards,
whether currently outstanding or subsequently granted, are exercised.
We depend upon our subsidiaries for cash to meet our obligations and pay any dividends.
We are a holding company. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Consequently,
our cash flow and our ability to meet our obligations or pay dividends to our stockholders depend upon the cash flow of our subsidiaries and the
payment of funds by our subsidiaries to us in the form of dividends, distributions, tax sharing payments or otherwise. Our subsidiaries' ability to
make any payments will depend on many factors, including their earnings, cash flows, the terms of any applicable credit facilities, tax
considerations and legal restrictions.
We have suspended our quarterly dividend and cannot assure our shareholders when we will declare dividends in the future.
In the fourth quarter of 2020, we suspended our quarterly dividend on our common stock in order to conserve capital in response to the impact
of the COVID-19 Pandemic and related market activity. We are not obligated to declare or pay any dividend. Any future declaration, amount and
payment of dividends will be at the sole discretion of our Board of Directors; however, because the impact of the COVID-19 Pandemic and
related market activity is difficult to predict, we cannot provide assurance as to when our Board of Directors will declare a dividend in the future.
The declaration of future dividends on our common stock will be at the discretion of our Board of Directors and will depend upon many factors,
including our results of operations,
financial condition, earnings, capital requirements, restrictions in our debt agreements and legal
requirements. As a result, if our Board of Directors does not declare or pay dividends, a shareholder may not receive any return on an
investment in our common stock unless they sell our common stock for a price greater than that which they paid for it.
The stockholder rights plan adopted by our Board of Directors may impair an attempt to acquire control of Delek.
49 |
Risk Factors
On March 20, 2020, our Board of Directors adopted a stockholder rights plan and declared a dividend of one preferred share purchase right for
each outstanding share of our common stock to stockholders of record on March 30, 2020. In the event that a person or group acquires
beneficial ownership of 15% or more of our then-outstanding common stock, subject to certain exceptions, each right would entitle its holder
(other than such person or members of such group) to purchase one one-thousandth of a share of Series A Junior Participating Preferred
Stock. In addition, at any time after a person or group acquires 15% or more of our common stock (unless such person or group acquires 50%
or more), the Board may exchange one share of our common stock for each outstanding right (other than rights owned by such person or
group, which would have become void). Unless extended by the Board of Directors prior to expiration, the rights will expire on March 19, 2021.
The stockholder rights plan could make it more difficult for a third party to acquire control of Delek or a large block of our common stock without
the approval of our Board of Directors.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our
stockholders may consider in their best interests, which could negatively affect our stock price.
Provisions of Delaware law, our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws may have the
effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may
consider in their best interests. For example, our Amended and Restated Certificate of Incorporation provides that:
•
•
•
•
•
stockholder actions may only be taken at annual or special meetings of stockholders;
members of our Board of Directors can be removed with or without cause by a supermajority vote of stockholders;
the Court of Chancery of the State of Delaware is, with certain exceptions, the exclusive forum for certain legal actions;
our bylaws, as may be in effect from time to time, can be amended only by a supermajority vote of stockholders; and
certain provisions of our certificate of incorporation, as may be in effect from time to time, can be amended only by a supermajority vote of
stockholders.
In addition, our Amended and Restated Certificate of Incorporation authorizes us to issue up to 10,000,000 shares of preferred stock in one or
more different series, with terms to be fixed by our Board of Directors. Stockholder approval is not necessary to issue preferred stock in this
manner.
Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group
to acquire control of us and could effectively be used as an anti-takeover device. On the date of this report, no shares of our preferred stock are
outstanding.
Finally, our Amended and Restated Bylaws provide for an advance notice procedure for stockholders to nominate director candidates for
election or to bring business before an annual meeting of stockholders and require that special meetings of stockholders be called only by our
chairman of the Board of Directors, president or secretary after written request of a majority of our Board of Directors. The advance notice
provision requires disclosure of derivative positions, hedging transactions, short interests, rights to dividends and other similar positions of any
stockholder proposing a director nomination, in order to promote full disclosure of such stockholder's economic interest in us.
The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the
benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover
attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as
discouraging takeover attempts in the future.
Financial Instrument and Credit Profile Risks
Changes in our credit profile could affect our relationships with our suppliers, which could have a material adverse effect on our
liquidity and our ability to operate our refineries at full capacity.
Changes in our credit profile could affect the way crude oil, feedstock and refined product suppliers view our ability to make payments. As a
result, suppliers could shorten the payment terms of their invoices with us, or require us to provide significant collateral to them that we do not
currently provide. Due to the large dollar amounts and volume of our crude oil and other petroleum product purchases, as well as the historical
volatility of crude oil pricing, any imposition by our suppliers of more burdensome payment terms, or collateral requirements, may have a
material adverse effect on our liquidity and our ability to make payments to our suppliers. This, in turn, could cause us to be unable to operate
our refineries at desired capacities. A failure to operate our refineries at desired capacities could adversely affect our profitability and cash
flows.
Our commodity and interest rate derivative activity may limit potential gains, increase potential losses, result in earnings volatility
and involve other risks.
At times, we enter into commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil,
ethanol and other feedstocks, future sales of refined products, manage our RINs exposure or to secure margins on future production. At times
we also enter into interest rate swap and cap agreements to manage our market exposure to changes in interest rates related to our floating
rate borrowings. We expect to continue to enter into these types of transactions from time to time and have increased our use of commodity
risk management activities in recent years.
50 |
Risk Factors
While these transactions are intended to limit our exposure to the adverse effects of fluctuations in crude oil prices, refined products prices, RIN
prices and interest rates, they may also limit our ability to benefit from favorable changes in market conditions, and may subject us to period-by-
period earnings volatility in the instances where we do not seek hedge accounting for these transactions. Further, depending on the volume of
commodity derivative activity as compared to our actual use of crude oil, production of refined products or total RINs exposure, our risk
management activity may only partially limit our exposure to market volatility. Also, in connection with such derivative transactions, we may be
required to make cash payments or provide letters of credit to maintain margin accounts and to settle the contracts at their value upon
termination. Finally, this activity exposes us to potential risk of counterparties to our derivative contracts failing to perform under the contracts.
As a result, the effectiveness of our risk management policies could have a material adverse impact on our business, results of operations and
cash flows. For additional information about the nature and volume of these transactions, see Item 7A. Quantitative and Qualitative Disclosures
about Market Risk, of this Annual Report on Form 10-K.
Additionally, it continues to be a strategic and operational objective to manage supply risk related to crude oil that is used in refinery production,
and to develop strategic sourcing relationships. For that purpose, we often enter into purchase and sale contracts with vendors and customers
or take physical or financial commodity positions for crude oil that may not be used immediately in production, but that may be used to manage
the overall supply and availability of crude expected to ultimately be needed for production and/or to meet minimum requirements under
strategic pipeline arrangements, and also to optimize and hedge availability risks associated with crude that we ultimately expect to use in
production. Such transactions are inherently based on certain assumptions and judgments made about the current and possible future
availability of crude. Therefore, when we take physical or financial positions for optimization purposes, our intent is generally to take offsetting
positions in quantities and at prices that will advance these objectives while minimizing our positional and financial statement risk. However,
because of the volatility of the market in terms of pricing and availability, it is possible that we may have material positions with timing
differences or, more rarely, that we are unable to cover a position with an offsetting position as intended. Also, in connection with such
transactions, we may be required to make cash payments or provide letters of credit to maintain margin accounts and to settle the contracts at
their value upon termination. Finally, this activity exposes us to potential risk of counterparties to our derivative contracts failing to perform under
the contracts.
As a result of the risks described above, the effectiveness of our risk management policies over these types of transactions and positions could
have a material adverse impact on our business, results of operations and cash flows. For additional information about the nature and volume
of these transactions, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk, of this Annual Report on Form 10-K and in Note
12 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form
10-K.
We are exposed to certain counterparty risks which may adversely impact our results of operations.
We evaluate the creditworthiness of each of our various counterparties, but we may not always be able to fully anticipate or detect deterioration
in a counterparty's creditworthiness and overall financial condition. The deterioration of creditworthiness or overall financial condition of a
material counterparty (or counterparties) could expose us to an increased risk of nonpayment or other default under our contracts with them.
If
a material counterparty (or counterparties) defaults on their obligations to us, this could materially adversely affect our financial condition, results
of operations or cash flows. For example, under the terms of the supply and offtake agreements with J. Aron, we grant J. Aron the exclusive
right to store and withdraw crude and certain products in the tanks associated with the El Dorado, Big Spring and Krotz Springs refineries.
These agreements also provide that the ownership of substantially all crude oil and certain other refined products in the tanks associated with
these refineries will be retained by J. Aron, and that J. Aron will purchase substantially all of the specified refined products processed at these
refineries. An adverse change in J. Aron's business, results of operations, liquidity or financial condition could adversely affect its ability to
timely discharge its obligations to us, which could consequently have a material adverse effect on our business, results of operations or liquidity.
From time to time, our cash and credit needs may exceed our internally generated cash flow and available credit, and our business
could be materially and adversely affected if we are not able to obtain the necessary cash or credit from financing sources.
We have significant short-term cash needs to satisfy working capital requirements, such as crude oil purchases which fluctuate with the pricing
and sourcing of crude oil. We rely in part on our access to credit to purchase crude oil for our refineries.
If the price of crude oil increases
significantly, we may not have sufficient available credit, and may not be able to sufficiently increase such availability, under our existing credit
facilities or other arrangements, to purchase enough crude oil to operate our refineries at desired capacities. Our failure to operate our
refineries at desired capacities could have a material adverse effect on our business, financial condition and results of operations. We also
have significant long-term needs for cash, including any capital expenditures for growth projects, sustaining maintenance, as well as projects
necessary for regulatory compliance.
Depending on the conditions in the credit markets, it may become more difficult to obtain cash or credit from third-party sources.
If we cannot
generate cash flow or otherwise secure sufficient liquidity to support our short-term and long-term capital requirements, we may not be able to
comply with regulatory deadlines or pursue our business strategies, in which case our operations may not perform as well as we currently
expect.
51 |
Risk Factors
Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.
As of December 31, 2020, we had total debt of $2,348.4 million, including current maturities of $33.4 million.
In addition to our outstanding debt,
as of December 31, 2020, our letters of credit issued under our various credit facilities were $253.2 million. Our borrowing availability under our
various credit facilities as of December 31, 2020 was $850.2 million.
Our level of debt could have important consequences for us. For example, it could:
•
•
•
•
•
•
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to service our debt and lease obligations, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a disadvantage relative to our competitors that have less indebtedness or better access to capital by, for example, limiting our
ability to enter into new markets, upgrade our fixed assets or pursue acquisitions or other business opportunities;
limit our ability to borrow additional funds in the future; and
increase interest costs for our borrowed funds and letters of credit.
In addition, a substantial portion of our debt has a variable rate of interest, which increases our exposure to interest rate fluctuations, to the
extent we elect not to hedge such exposures.
If we are unable to meet our principal and interest obligations under our debt and lease agreements, we could be forced to restructure or
refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. Our
default on any of those agreements could have a material adverse effect on our business, financial condition and results of operations.
In
addition, if new debt is added to our current debt levels, the related risks that we now face could intensify.
Our debt agreements contain operating and financial restrictions that might constrain our business and financing activities.
The operating and financial restrictions and covenants in our credit facilities and any future financing agreements could adversely affect our
ability to finance future operations or capital needs or to engage in, expand or pursue our business activities. For example, to varying degrees
our credit facilities restrict our ability to:
•
•
•
•
•
•
•
declare dividends and redeem or repurchase capital stock;
prepay, redeem or repurchase debt;
make loans and investments, issue guaranties and pledge assets;
incur additional indebtedness or amend our debt and other material agreements;
make capital expenditures;
engage in mergers, acquisitions and asset sales; and
enter into certain intercompany arrangements or make certain intercompany payments, which in some instances could restrict our ability to
use the assets, cash flows or earnings of one operating segment to support another operating segment or Delek.
Other restrictive covenants require that we meet certain financial covenants, including leverage coverage, fixed charge coverage and net worth
tests, as described in the applicable credit agreements.
In addition, the covenant requirements of our various credit agreements require us to
make many subjective determinations pertaining to our compliance thereto and exercise good faith judgment in determining our compliance.
Our ability to comply with the covenants and restrictions contained in our debt instruments may be affected by events beyond our control,
If market or other economic conditions deteriorate, our ability to comply with
including prevailing economic, financial and industry conditions.
these covenants and restrictions may be impaired.
If we breach any of the restrictions or covenants in our debt agreements, a significant
portion of our indebtedness may become immediately due and payable, and our lenders' commitments to make further loans to us may
terminate. We might not have, or be able to obtain, sufficient funds to make these immediate payments.
In addition, our obligations under our
credit facilities are secured by substantially all of our assets.
If we are unable to timely repay our obligations under our credit facilities, the
lenders could seek to foreclose on the assets, or we may be required to contribute additional capital to certain of our subsidiaries. Any of these
outcomes could have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in interest rates could materially affect our financial results.
Because a significant portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest
expense. The use of interest rate hedges, including of the types we have employed in the past, may not be effective at mitigating this risk.
Further, the London Interbank Offered Rate (“LIBOR”) and certain other interest rate "benchmarks" are the subject of recent proposals for
reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be
predicted. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has publicly announced that it intends to discontinue
the reporting of certain LIBOR rates after 2021, with a complete cessation for all USD LIBOR rates after June 2023. Certain of our agreements
52 |
Risk Factors
use LIBOR as a “benchmark” or “reference rate” for various terms. Some agreements contain an existing LIBOR alternative. Where there is
not an alternative, we expect to replace the LIBOR benchmark with an alternative reference rate. While we do not expect the transition to an
alternative rate to have a significant impact on our business or operations, it is possible that the move away from LIBOR could materially
impact our borrowing costs on our variable rate indebtedness.
We may refinance a significant amount of indebtedness and otherwise require additional financing; we cannot guarantee that we will
be able to obtain the necessary funds on favorable terms or at all.
We may elect to refinance certain of our indebtedness, even if not required to do so by the terms of such indebtedness. In addition, we may
need, or want, to raise additional funds for our operations. We have been, and may continue to be, engaged in discussions with certain
potential financing sources, which could provide a source of additional funds and liquidity for our operations. However, our ability to obtain
such financing will depend on, among other factors, prevailing market conditions at the time of the proposed financing and other factors
beyond our control. There is no assurance that we will be able to obtain additional financing on terms acceptable to us, or at all.
We recorded goodwill and other intangible assets that could become impaired and result in material non-cash charges to our results
of operations in the future.
The Delek/Alon Merger has been accounted for as an acquisition, by us, of Alon in accordance with accounting principles generally accepted
in the United States. Under the acquisition method of accounting, the assets and liabilities of Alon and its subsidiaries have been recorded, as
of the completion of the Delek/Alon Merger, at their respective fair values. Under the acquisition method of accounting, the total purchase price
has been allocated to Alon’s tangible assets and liabilities and identifiable intangible assets based on their estimated fair values as of the date
of completion of the Delek/Alon Merger. The excess of the purchase price over the estimated fair values of reporting units has been recorded
as goodwill, which was further allocated to other reporting units as permitted under GAAP. To the extent the value of goodwill or intangibles
becomes impaired, we may be required to incur material non-cash charges relating to such impairment. Our financial condition and operating
results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment. We
recorded goodwill impairment of $126.0 million during the year ended December 31, 2020.
53 |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including, environmental claims
and employee-related matters.
Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil
penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party
will have a material adverse effect on our business, financial condition or results of operations.
SEC regulations require disclosure of proceedings arising under federal, state or local provisions regulating the discharge of materials into the
environment or protecting the environment, if we reasonably believe that such proceedings may result in monetary sanctions of $0.3 million or
more. There is no such pending litigation against us requiring disclosure.
On June 19, 2017, the Arkansas Teacher Retirement System filed a lawsuit in the Delaware Court of Chancery (Arkansas Teacher Retirement
System v. Alon USA Energy, Inc., et al., Case No. 2017-0453), alleging breach of fiduciary duty claims. Specifically, it alleges that Delek used
its position as a purportedly controlling stockholder of Alon’s to obtain buyout terms from Alon at an unfairly discounted price, and that the
defendant Alon directors breached their fiduciary duties allegedly owed to the plaintiff stockholder and purported class by engaging in conduct
that led to the sale of Alon shares at an unfairly discounted price. The plaintiff has asked the Delaware Chancery Court to, among other things,
award damages to the plaintiff and purported class in an amount to be determined at trial, award additional shares of our common stock to the
plaintiff and purported class and award the plaintiff attorneys’ and experts’ fees. Although we believe the plaintiff’s claims are without merit, we
cannot predict the outcome of or estimate the possible loss or range of loss from this litigation. The parties are currently engaged in discovery
and a trial date is currently scheduled in June 2021.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
54 |
Market for Equity, Stockholder Matters, and Purchase of Equity Securities
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock is traded on the New York Stock Exchange under the symbol "DK." As of February 19, 2021, there were approximately
25 common stockholders of record. This number does not include beneficial owners of our common stock whose stock is held in nominee or
"street name" accounts through brokers.
Dividends
In the fourth quarter of 2020, we suspended our quarterly dividend on our common stock. The Board of Directors will continue to monitor the
Company's liquidity and will determine whether, and if so when, it is appropriate to resume paying dividends. There can be no assurance the
Company will resume paying dividends on our common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth information with respect to the purchase of shares of our common stock made during the three months ended
December 31, 2020 by or on behalf of us or any “affiliated purchaser,” as defined by Rule 10b-18 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"):
Period
October 1 - October 31, 2020
November 1 - November 30, 2020
December 1 - December 31, 2020
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans
or Programs
— $
—
—
— $
—
—
—
—
— $
—
—
—
229,724,248
229,724,248
229,724,248
N/A
(1) On November 6, 2018, the Board of Directors authorized the repurchase of $500.0 million of Delek common stock. This authorization has no expiration. Any share repurchases
under the repurchase program may be implemented through open market transactions or in privately negotiated transactions, in accordance with applicable securities laws. The
timing, price, and size of repurchases will be made at the discretion of management and will depend on prevailing market prices, general economic and market conditions and
other considerations. The repurchase program does not obligate us to acquire any particular amount of stock and does not expire.
55 |
Market for Equity, Stockholder Matters, and Purchase of Equity Securities
Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such
information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as
amended, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares cumulative total returns for our stockholders to the Standard and Poor's 500 Stock Index and a market
capitalization weighted peer group selected by management for the five-year period commencing December 31, 2015 and ending December
31, 2020. The graph assumes a $100 investment made on December 31, 2015. Each of the three measures of cumulative total return assumes
reinvestment of dividends. The 2020 peer group is comprised of CVR Energy, Inc. (NYSE: CVI), HollyFrontier Corporation (NYSE: HFC),
Marathon Petroleum Corporation (NYSE: MPC), PBF Energy, Inc. (NYSE: PBF), Phillips 66 (NYSE: PSX), and Valero Energy Corporation
(NYSE: VLO). The stock performance shown on the graph below is not necessarily indicative of future price performance.
ITEM 6. RESERVED
56 |
Management's Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, 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 outbreak of COVID-19
and the actions of members of the OPEC and Russia with respect to oil production and pricing, and statements regarding our efforts and plans
in response to such events, the information concerning our planned capital expenditures by segment for 2021, possible future results of
operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will or 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, and 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:
•
•
•
•
•
•
•
•
•
•
•
volatility in our refining margins or fuel gross profit as a result of
changes in the prices of crude oil, other feedstocks and refined
petroleum products and the impact of the COVID-19 Pandemic on
such demand;
reliability of our operating assets;
actions of our competitors and customers;
changes in, or the failure to comply with, the extensive government
regulations applicable to our industry segments, including current
and future restrictions on commercial and economic activities in
response to the COVID-19 Pandemic;
our ability to execute our strategy of growth through acquisitions and
capital projects and changes in the expected value of and benefits
derived therefrom, including any inability to successfully integrate
acquisitions,
realize expected synergies or achieve operational
efficiency and effectiveness;
in value of
diminishment
in an
impairment in the carrying value of the assets on our balance sheet
and a resultant loss recognized in the statement of operations;
long-lived assets may result
the unprecedented market environment and economic effects of the
COVID-19 Pandemic,
including uncertainty regarding the timing,
pace and extent of economic recovery in the United States due to
the COVID-19 Pandemic;
general economic and business conditions affecting the southern,
southwestern and western United States, particularly levels of
spending related to travel and tourism and the ongoing and future
impacts of the COVID-19 Pandemic;
volatility under our derivative instruments;
deterioration of creditworthiness or overall financial condition of a
material counterparty (or counterparties);
unanticipated increases in cost or scope of, or significant delays in
the completion of, our capital improvement and periodic turnaround
projects;
•
•
•
•
•
•
•
•
•
•
•
•
•
risks and uncertainties with respect to the quantities and costs of
refined petroleum products supplied to our pipelines and/or held in
our terminals;
operating hazards, natural disasters, casualty losses and other
matters beyond our control;
increases in our debt levels or costs;
possibility of accelerated repayment on a portion of
the J. Aron
supply and offtake liability if the purchase price adjustment feature
triggers a change on the re-pricing dates;
changes in our ability to continue to access the credit markets;
compliance, or
covenants in our various debt agreements;
failure to comply, with restrictive and financial
the suspension of our quarterly dividend;
seasonality;
acts of
terrorism (including cyber-terrorism) aimed at either our
facilities or other facilities that could impair our ability to produce or
transport refined products or receive feedstocks;
future decisions by OPEC+ members regarding production and
pricing and disputes between OPEC+ members regarding such;
disruption, failure, or cybersecurity breaches affecting or targeting
our IT systems and controls, our infrastructure, or the infrastructure
of our cloud-based IT service providers;
changes in the cost or availability of transportation for feedstocks
and refined products; and
other factors discussed under Item 1A. Risk Factors and Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations and in our other filings with the SEC.
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
57 |
Management's Discussion and Analysis
historical performance to anticipate future results or period trends. We can give no assurances that any of the events anticipated by any
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.
Executive Summary and Strategic Overview
Business Overview
We are an integrated downstream energy business focused on petroleum refining, the transportation, storage and wholesale distribution of
crude oil, intermediate and refined products and convenience store retailing.
Business and Economic Environment
The outbreak of the COVID-19 Pandemic has resulted in significant economic disruption globally, including in the U.S. and specific geographic
areas where we operate. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread
of COVID-19 through both voluntary and mandated social distancing, curfews, shutdowns and expanded safety measures have restricted travel,
many business operations, public gatherings and the overall level of individual movement and in-person interaction across the globe. This has
in turn significantly reduced global economic activity which has had a significant impact on the nature and extent of travel. The COVID-19
Pandemic has had a devastating impact on the airline industry, dramatically reducing the number of domestic flights and, due to foreign travel
bans and immigration restrictions abroad as well as traveler concerns over exposure, virtually eliminating international travel originating from the
U.S. to many parts of the world. Additionally, the COVID-19 Pandemic has had a significant negative impact on motor vehicle use. As a result,
there has also been a decline in the demand for, and thus also the market prices of, crude oil and certain of our products, particularly our refined
petroleum products and most notably gasoline and jet fuel. In April and June 2020, agreements were reached to cut oil production between the
members of OPEC+ as part of the efforts to resolve the oil production disputes that significantly affected crude oil prices beginning in the first
quarter of 2020 (the "OPEC Production Disputes"), and to provide stability in the oil markets. While OPEC+ have reached an agreement to cut
oil production, the uncertainty about the duration of the COVID-19 Pandemic has caused storage constraints in the U.S. resulting from over-
supply of produced oil. Based on these conditions and events, downward pressure on commodity prices, crack spreads and demand remains a
significant risk and could continue for the foreseeable future.
During the latter part of 2020, governmental authorities in various states across the U.S., particularly those in our Permian Basin and U.S. Gulf
Coast regions, began to lift many of the restrictions created by actions taken to slow down the spread of COVID-19. Additionally, during the
fourth quarter 2020, the availability of multiple viable vaccines was announced and since have begun distribution. These actions have resulted
in an increase in the level of individual movement and travel and, in turn, an increase in the demand for some of our products relative to earlier
in the year, as well as an improvement in the forward curve and pricing outlooks for crude oil prices and crack spreads. These improvements
have likewise led to improvement in the equity market capitalization of public companies in the midstream and downstream oil and gas sectors.
However, many of the states where such restrictions were lifted also experienced a marked increase in the spread of COVID-19 and many
governmental authorities in such areas have responded by reimposing certain restrictions they had previously lifted. This response, as well as
the increased infection rates, impacts regions that we serve and could significantly impact demand in ways that we cannot predict. Additionally,
increased infection rates could impact our refining, logistics and retail operations, particularly in high-infection states, if our employees are
personally affected by the illness, both through direct infection and quarantine procedures.
Identified Uncertainties Impacting Delek
During the year ended December 31, 2020, Delek experienced the impact on demand and pricing of these unprecedented conditions, most
notably in our refining segment. Our business and our 2020 results reflect the impact of decreased demand combined with decreased crack
spreads. We also experienced operational constraints, including COVID-19 infections at certain of our company locations that resulted in re-
imposed or expanded remote work policies and quarantine protocols. And we continue to face risk from our suppliers and customers who are
being affected by similar challenges.
We have identified the following known uncertainties resulting from the ongoing COVID-19 Pandemic:
•
•
•
•
Significant declines and/or volatility in prices of refined products we sell and the feedstocks we purchase as well as in crack spreads
resulting from the COVID-19 Pandemic could have a significant impact on our revenues, cost of sales, operating income and liquidity;
A decline in the market prices of refined products and feedstocks below the carrying value in our inventory may result in the
adjustment of the value of our inventories to the lower market price and a corresponding loss on the value of our inventories;
The decline in demand for refined product could significantly impact the demand for throughput at our refineries, unfavorably
impacting operating results at our refineries, and could impact the demand for storage, which could impact our logistics segment;
The decline in demand and margins impacting current results and forecasts could result in impairments in certain of our long-lived or
indefinite-lived assets, including goodwill, or have other financial statement impacts that cannot currently be anticipated (See further
discussion in Note 2 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K);
58 |
Management's Discussion and Analysis
•
•
•
•
•
•
•
•
A significant reduction or suspension in U.S. crude oil production could adversely affect our suppliers and sources of crude oil;
An outbreak in one of our refineries, exacerbated by a limited pool of qualified replacements as well as quarantine protocols, could
cause significant disruption in our production or, worst case, temporary idling of the facility;
The restrictions on travel and requirements for social distancing could significantly impact the traffic at our convenience stores,
particularly the demand for fuel;
Customers of the refining segment as well as third-party customers of the logistics segment may experience financial difficulties which
could interrupt the volumes ordered by those customers and/or could impact the credit worthiness of such customers and the
collectability of their outstanding receivables;
The impact of COVID-19 or protocols implemented in response to COVID-19 by key or specialty suppliers may negatively affect our
ability to obtain specialty equipment or services when needed;
Equity method investees may be significantly impacted by the COVID-19 Pandemic which may increase the risk of impairment of
those investments;
Access to capital markets may be significantly impacted by the volatility and uncertainty in the oil and gas market specifically which
could restrict our ability to raise funds; while our current liquidity needs are managed by existing facilities, sources of future liquidity
needs may be impacted by the volatility in the debt market and the availability and pricing of such funds as a result of the COVID-19
Pandemic; and
The U.S. Federal Government has enacted certain stimulus and relief measures, including the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act") passed on March 27, 2020, and is continuing to consider additional relief legislation. Beyond the direct
impact of existing legislation on Delek in the current period, the extent to which the provisions of the existing or any future legislation
will achieve its intention to stimulate or provide relief to the greater U.S. economy and/or consumer, as well as the impact and success
of such efforts, remains unknown.
Other uncertainties related to the impact of the COVID-19 Pandemic as well as global geopolitical factors may exist that have not been
identified or that are not specifically listed above, and could impact our future results of operations and financial position, the nature of which
and the extent to which are currently unknown. Actions taken by OPEC+ in April and June 2020, including the agreement for management of
crude oil supply in the hopes of contributing to market stabilization (the "Oil Production Cuts"), as well as the U.S. Federal Government's
passage and/or enactment of additional stimulus and relief measures, as well as their future actions may impact the extent to which the risk
underlying these uncertainties are realized. To the extent these uncertainties have been identified and are believed to have an impact on our
current period results of operations or financial position based on the requirements for assessing such financial statement impact under U.S.
GAAP, we have considered them in the preparation of our consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
Delek's Response to the Continuing Impact of the Pandemic and the Identified Uncertainties
In addition, management continues to actively respond to the continuing impact of the COVID-19 Pandemic on our business. Such efforts
include (but are not limited to) the following:
•
•
•
•
•
•
•
•
•
•
•
Reviewing planned production throughputs at our refineries and planning for optimization of operations;
Coordinating planned maintenance or turnaround activities with possible downtime as a result of possible reductions in throughputs;
Searching for additional storage capacity if needed to store potential builds in crude oil or refined product inventories;
Finding additional suppliers for key or specialty items or securing inventory or priority status with existing vendors;
Reducing planned capital expenditures as compared to pre-Pandemic levels;
Suspending the share repurchase program and dividend distributions until our internal parameters are met for resuming such
activities;
Taking advantage of the income and payroll tax relief afforded to us by the CARES Act or other Pandemic relief legislation;
Implementing regular site cleaning and disinfecting procedures;
Adopting remote working where possible, and mandating masks and social distancing protocols where on-site operations are
required;
Identifying alternative financing solutions to enhance our access to sources of liquidity; and
Enacting cost reduction measures across the organization,
employee related costs, workforce reduction and reducing or eliminating non-critical travel.
including reducing contract services, reducing overtime and other
The most significant of these efforts to date as well as specifically identified measures that are anticipated in the near term, in terms of realized
or anticipated impact on our financial results, include the following:
59 |
Management's Discussion and Analysis
•
•
•
•
•
For the year ended December 31, 2020 pursuant to the provisions of the CARES Act, we recognized $16.8 million of current federal
income tax benefit attributable to anticipated tax refunds from net operating loss carryback to prior 35% tax rate years, and deferred
$10.9 million of payroll tax payments which will be payable in equal installments in December 2021 and December 2022. Additionally,
we recorded an income tax receivable totaling $156.2 million as of December 31, 2020 related to the net operating loss carryback,
which we expect to collect $135.6 million in the first half of 2021 and the remaining balance within eighteen months.
Beginning in the second quarter 2020, we made significant efforts to reduce our capital spending, particularly on growth and non-
critical sustaining maintenance projects. As a result, we spent $239.6 million in capital expenditures (as discussed further in the
"Capital Spending" section of the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis) during
the year ended December 31, 2020 compared to our initial full-year forecast included in our December 31, 2019 Annual Report on
Form 10-K of $325.7 million. See the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis for
further information.
In light of the weak macro-economic environment, we elected to pull forward turnaround work into the fourth quarter of 2020 on
certain units at the Krotz Springs refinery that is being conducted on a straight-time basis. This allowed us to continue running the
more profitable units of the refinery and should help improve economics toward a break-even level. After this work is complete in the
first quarter of 2021 and depending on market conditions, we have the flexibility to optimize operations at Krotz Springs by operating
only the units that are producing favorable margins, thereby reducing unnecessary operating expenses, or moving back to full
utilization at the facility, should the macro-economic environment and margins improve.
Additionally, we have developed a cost savings plan for 2021 designed to significantly reduce operating expenses and general and
administrative expenses. The majority of the expected operating expenses reduction is attributable to the temporary unit optimization
at the Krotz Spring refinery, while other efforts such as targeted budgeting around outside contractor expenses and deferral of certain
non-critical, non-capitalizable maintenance activities are also expected to have a favorable impact. Furthermore, both operating and
general and administrative expenses have been and will continue to be favorably impacted by a cumulative reduction in workforce,
the first of which began in the second quarter 2020 and was completed in the fourth quarter. Reductions in workforce are made
possible in large part by significant efforts to improve process efficiency and leverage technology where cost-effective. For the year
ended December 31, 2020, we have incurred incremental severance costs of $8.5 million related to these workforce reductions.
Finally, we elected to suspend dividends beginning in the fourth quarter 2020 in order to conserve capital. We expect this will help us
maintain our liquidity and manage our cost of capital during periods impacted by the Pandemic, and we also believe it will provide us
with flexibility to pursue opportunities to provide value to investors with respect to our stock price, which we believe is undervalued.
The combination of
these efforts are expected to have a favorable impact on cash flows in 2021 as well as our operations process
improve our liquidity positioning and operational flexibility and response in anticipation of the continued economic
effectiveness, which will
impacts of the COVID-19 Pandemic. See the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis of this
Annual Report on Form 10-K for further information.
The extent to which our future results are affected by the COVID-19 Pandemic will depend on various factors and consequences beyond our
control, such as the duration and scope of the Pandemic; additional actions by businesses and governments in response to the Pandemic, and
the speed and effectiveness of responses to combat the virus and any new variants. The COVID-19 Pandemic, and the volatile regional and
global economic conditions stemming from the Pandemic, could also exacerbate the risk factors identified in the "Risk Factors"' section located
in Item 1A. of this Annual Report on Form 10-K. The COVID-19 Pandemic may also materially adversely affect our results in a manner that is
either not currently known or that we do not currently consider to be a significant risk to our business.
Significant Subsequent Events
During February 2021, the Company experienced a severe weather event at the Tyler, El Dorado and Krotz Springs refineries, resulting in units
being temporarily shut down and damages to parts of the facilities due to extreme freezing conditions. The Company is currently determining
the financial impact of the event and expects to incur certain recovery costs and repair costs. Additionally, the severe weather conditions and
the resultant industry downtime have caused energy prices to rise in certain regions where we operate, which are expected to result in
additional operating expenses for the refineries impacted until such time that supply is restored and energy prices stabilize. As a result of this
event and the related outages at our El Dorado refinery, we expect to accelerate certain of our planned turnaround activities to coincide with
repairs of any damaged units, therefore optimizing and limiting our downtime.
On February 27, 2021, our El Dorado refinery experienced a fire in its Penex unit, in which six Delek employees were injured. Our on-site
emergency response team, with the assistance of the El Dorado Fire Department, extinguished the fire, and we immediately began to monitor
the air quality within the refinery and the community and have detected no adverse impacts as of the date of this Annual Report on Form 10-K.
Our most critical focus, however, is on the safety of our employees, contractors and neighbors. While all of our facilities have rigorous, well-
documented safety controls, a full investigation will be launched as soon as possible, consistent with our dedication to Safety as a Core Value.
The facility was in the process of undergoing turnaround activity, so there are no operational disruptions as a result of the fire. Although we are
in the preliminary stages of assessing the extent of damages, we do not believe that this incident will have a material adverse effect on our
results of operations.
60 |
Management's Discussion and Analysis
Refining Overview
The refining segment (or "Refining") processes crude oil and other feedstocks for the manufacture of transportation motor fuels, including
various grades of gasoline, diesel fuel, aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-
party product terminals. The refining segment has a combined nameplate capacity of 302,000 bpd as of December 31, 2020. A high-level
summary of the refinery activities is presented below:
Total Nameplate Capacity
(barrels per day ("bpd"))
Primary Products
Relevant Crack Spread
Benchmark
Marketing and Distribution
Tyler Refinery
El Dorado Refinery
Big Spring Refinery
Krotz Springs Refinery
75,000
80,000
73,000
74,000
Gasoline, jet fuel, ultra-low-sulfur
diesel, liquefied petroleum
gases, propylene, petroleum
coke and sulfur
Gasoline, ultra-low-sulfur diesel,
liquefied petroleum gases,
propylene, asphalt and sulfur
Gasoline, jet fuel, ultra-low-sulfur
diesel, liquefied petroleum
gases, propylene, aromatics and
sulfur
Gasoline, jet fuel, high-sulfur
diesel, light cycle oil, liquefied
petroleum gases, propylene and
ammonium thiosulfate
Gulf Coast 5-3-2
Gulf Coast 5-3-2 (1)
Gulf Coast 3-2-1 (2)
Gulf Coast 2-1-1 (3)
The refining segment's petroleum-based products are marketed primarily in the south central, southwestern and western regions of the
United States, and the refining segment also ships and sells gasoline into wholesale markets in the southern and eastern United States.
Motor fuels are sold under the Alon or Delek brand through various terminals to supply Alon or Delek branded retail sites. In addition,
we sell motor fuels through our wholesale distribution network on an unbranded basis.
(1) While there is variability in the crude slate and the product output at the El Dorado refinery, we compare our per barrel refined product margin to the U.S. Gulf Coast 5-3-2
crack spread because we believe it to be the most closely aligned benchmark.
(2) Our Big Spring refinery is capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate, and/or substantial volumes of sweet
crude oil, and therefore the WTI Cushing/WTS price differential, taking into account differences in production yield, is an important measure for helping us make strategic,
market-respondent production decisions.
(3) The Krotz Springs refinery has the capability to process substantial volumes of light sweet crude oil to produce a high percentage of refined light products.
Our refining segment also owns and operates three biodiesel facilities involved in the production of biodiesel fuels and related activities, located
in Crossett, Arkansas, Cleburne, Texas, and New Albany, Mississippi.
Logistics Overview
Our logistics segment (or "Logistics") gathers, transports and stores crude oil and markets, distributes, transports and stores refined products in
select regions of the southeastern United States and West Texas for our refining segment and third parties. It is comprised of the consolidated
balance sheet and results of operations of Delek Logistics (NYSE: DKL), where we owned an 80.0% interest at December 31, 2020. Delek
Logistics was formed by Delek in 2012 to own, operate, acquire and construct crude oil and refined products logistics and marketing assets, and
a substantial majority of its assets are currently integral to our refining and marketing operations. Logistics' pipelines and transportation
business owns or leases capacity on approximately 400 miles of crude oil transportation pipelines, approximately 450 miles of refined product
pipelines, and approximately 900-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately
10.2 million barrels of active shell capacity. It also owns and operates nine light product terminals and markets light products using third-party
terminals. Logistics has strategic investments in pipeline joint ventures that provide access to pipeline capacity as well as the potential for
earnings from joint venture operations. On March 31, 2020, Logistics acquired from another of our segments approximately 200 miles of
gathering and ancillary assets located in Howard, Borden and Martin Counties, Texas. In May 2020, Logistics acquired from another of our
segments certain leased and owned tractors and trailers and related assets, and subsequently owns or leases approximately 264 tractors and
353 trailers used to haul primarily crude oil and other products for related and third parties.
Retail Overview
Our retail segment (or "Retail") at December 31, 2020 includes the operations of 253 owned and leased convenience store sites located
primarily in Central and West Texas and New Mexico. Our convenience stores typically offer various grades of gasoline and diesel under the
DK or Alon brand name and food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well
as money orders to the public, primarily under the 7-Eleven and DK or Alon brand names pursuant to a license agreement with 7-Eleven, Inc. In
November 2018, we terminated the license agreement with 7-Eleven, Inc. and the terms of such termination and subsequent amendment
require the removal of all 7-Eleven branding on a store-by-store basis by December 31, 2023. Merchandise sales at our convenience store sites
will continue to be sold under the 7-Eleven brand name until 7-Eleven branding is removed pursuant to the termination. As of December 31,
2020, we have removed the 7-Eleven brand name at 57 of our store locations. Substantially all of the motor fuel sold through our retail segment
is supplied by our Big Spring refinery, which is transferred to the retail segment at prices substantially determined by reference to published
commodity pricing information. In connection with our Retail strategic initiatives, we closed or sold 46 under-performing or non-strategic store
locations since the fourth quarter of 2018.
Corporate and Other Overview
Our corporate activities, results of certain immaterial operating segments, discontinued operations, our recently commenced wholesale crude
operations, and intercompany eliminations are reported in 'corporate, other and eliminations' in our segment disclosures.
61 |
Management's Discussion and Analysis
Strategic Overview
The Company's overall strategy is to take a disciplined approach that looks to balance returning cash to our shareholders and prudently
investing in the business to support safe and reliable operations, while exploring opportunities for growth. Our goal has been to balance the
different aspects of this program based on evaluations of each opportunity and how it matches our strategic priorities for the company, while
factoring in market conditions and expected cash flows.
In 2019, Delek’s leadership team built a Five-Year Strategic Framework to facilitate development of the Company’s strategies and initiatives.
This framework lays out the Company’s overarching objectives for a five-year period and provides the foundation for our Core Strategic Focus
Areas, our Strategic Initiatives, and ultimately our Annual Strategic Priorities, as follows:
Five-Year Strategic Framework
Our Five-Year Strategic Framework consisted of the following overarching objectives:
I.
Become nationally recognized for safety and wellness leadership.
II. Maximize return on assets through best-in-industry reliability and integrity.
III.
IV.
Improve efficiency and execution through development of systems and processes.
Identify and manage risks to improve decision-making and increase profitability.
V. Significantly increase overall earnings.
These overarching objectives are supported by strategic focus areas, which inform the priorities of each segment’s initiatives, while our overall
strategy has been and continues to be to take a disciplined approach that looks to balance returning cash to our shareholders and prudently
investing in the business to support safe and reliable operations, while exploring opportunities for growth.
Core Strategic Focus Areas
Our strategic focus areas and plans must balance the different aspects of our Five-Year Strategic Framework based on evaluations of each
opportunity and how it matches our strategic goals for the company, while factoring in market conditions and expected cash generation.
Recognizing the significance of the economic impact of the COVID-19 Pandemic (and, earlier in the year, the OPEC Production Disputes), we
re-calibrated our 2020 strategy to ensure we were identifying the significant uncertainties arising from and related to the Pandemic in order to be
responsive and proactive regarding the risks that those uncertainties created (as discussed above). That said, our modified 2020 strategy as
well as our 2021 strategy are still centered around the following strategic focus areas:
I.
Safety and wellness.
II. Reliability and integrity.
III. Systems and processes.
IV. Risk-based decision making.
V. Positioning for growth.
62 |
Management's Discussion and Analysis
We believe that these Core Strategic Focus Areas are just as relevant in the Pandemic environment as they are in more stable economic
conditions, and are representative of our desire to maximize the opportunities both within and external to the organization in a way that is
innovative and forward-thinking while simultaneously managing risk and incorporating some of the strategies that have been essential to our
story so far and are part of who we are as a company.
Strategic Initiatives
Building on the Five-Year Strategic Framework and the Core Strategic Focus Areas, we developed the following Strategic Initiatives:
2020 Strategic Priorities - A Look Back
All of the elements above are a critical evolution to how we determine our strategic priorities for a particular year, under normal conditions.
There were many unforeseen external factors impacting our operations and the economic environment during 2020, but we took that as a
challenge rather than a derailment, and we used it as an opportunity to evaluate the fundamentals of our strategy. What we found is that the
unforeseen events and conditions arising as a result of the Pandemic reinforced the importance of our Framework and our Focus Areas, and
validated the relevancy of not only our Initiatives, but also of our previously identified 2020 Strategic Priorities. These Strategic Priorities are
outlined below.
2020 Strategic Priorities
•
•
•
Maintain and continue to enhance our safe operations and commitment to responsible corporate citizenship. A central focus
is to enhance the safety across our organization. It is a core value at Delek and we work day-to-day to ingrain this into our culture.
The organization is focused on Environment/Health/Safety, Employee Engagement, Community Commitment and Ethics/Governance
in an effort to have safe and compliant operations for the benefit of our employees, communities, customers and shareholders.
◦
Our successes in this area included continued focus on safety across our organization, as well as the completion of our first
ever Sustainability Report, and improving our performance and executing on our plans for environmental, social and
governance responsibility (or "ESG") continues to be a priority for us.
Broaden our winning culture. As a growing organization, we want to develop a culture that can support its success. Our core
values: Safety, Integrity, Maximize Value, Passion for Winning & Excellence, Growth Oriented and Commitment are guiding factors in
the way we do business. We are committed to investing in our people to expand our knowledge base through training, systems and
processes with a goal to retain the ability to act quickly as we grow.
◦ We had significant constraints on costs and investment during 2020 as a result of the Pandemic, and even a workforce
reduction. But that is when we really saw the returns from our investments in getting the right people, who in turn have been
creating and improving our processes and helping us lay the groundwork for system upgrades that will be key to our
continued growth and success. The success of these efforts to date was particularly evident this year in terms of how we
have managed our business and our risk in the COVID-19 Pandemic economic environment.
Enhance our integrated platform. Our integrated platform allows us to purchase a barrel of crude oil at the wellhead, transport
crude oil to our refineries to produce finished products then transport it to our retail network or third parties. Enhancing this platform
we believe will maximize our return on investments and opportunities for growth.
63 |
Management's Discussion and Analysis
•
•
•
•
◦
In 2020, projects such as the dropdown of gathering and trucking assets to Logistics, our involvement and investment in the
expansion of Logistics and other pipeline joint venture systems, and the development of wholesale crude sales channels for
excess gathered barrels, are all examples of the continuous effort to enhance our existing platform.
Diversify our business model through growth in our midstream operations. We executed initiatives in 2019 to develop our
midstream operations through construction of the Big Spring Gathering System, entering into joint ventures for the Red River and
Wink to Webster pipelines, with the intention to use our cash flow and strong balance sheet to diversify our earnings mix by increasing
the size of our more stable midstream business.
◦ We saw continued growth in our midstream operations with strategic dropdowns of the Big Spring Gathering System and
the pipeline capacity under Logistics' Red River joint venture
trucking assets to Delek Logistics and expansions of
investment, both of which provided immediate accretive value when we executed the IDR Simplification, as well as long
term accretive value through our investment in Delek Logistics.
Maximize operational efficiencies. This extends to all aspects of the organization. From back office processes and systems to the
operating assets in refining, logistics and retail. By safely maximizing our efficiencies, reliability and asset integrity, we should
enhance our competitiveness and free cash flow generation potential. In a commodity based environment that changes quickly, we
are consistently focused on executing on factors that are within our control.
◦
In light of the Pandemic and the resulting decline in commodity prices and crack spreads, we quickly shifted our focus away
from capital growth projects in the early part of 2020. This provided us with the opportunity to focus our team's considerable
efforts and talent on process improvement initiatives, cost control measures, and opportunities for innovation. As a result,
we have implemented new technologies, processes and other changes that are already having a positive effect on safety
(e.g., we now have more structured safety protocols), our costs (e.g., operating expenses significantly declined in 2020
compared to the prior year), and our operational effectiveness (e.g., our cost and contractor management process and
system improvements are positively impacting our ability to monitor and manage our capital spend).
Create organizational scalability to support growth. A challenge of a growing company is that sometimes it comes in large steps,
which can stretch an organization. We are focused on developing our systems and processes, improving efficiencies and retaining
knowledge within the organization to create a structure that is scalable as we grow in the future.
◦
As referenced above, we have implemented new technologies, processes and other changes that we believe are already
having a positive effect on safety, our costs, and our operational effectiveness. These represent fundamental cultural
changes that we expect will position us well to implement other planned process and system improvements in the near
term, and better position us for scalable growth.
Use our financial flexibility and cash flow to create shareholder value. Delek is focused on managing the cash flow of our
business to support a capital allocation program that includes: 1) returning cash to shareholders through dividends and share
repurchases, 2) applying a disciplined approach to investing in our business and 3) growing through acquisitions all of which combine
to serve our overarching goal of increasing long-term value for our shareholders, while also actively managing cash flow and financial
risk during periods of negative economic pressure.
◦
Even during this unprecedented year, we have achieved successes in this area, both in terms of strategic transactions that
enhance shareholder value and in terms of managing our cash flow and financial risk so that we are protecting our
shareholders' investments in Delek as best we can. See the section below, as well as the "Liquidity and Capital Resources"
section of Item 7. Management's Discussion and Analysis of this Annual Report on Form 10-K for further information.
The following section highlights some of the specific significant developments and successes realized during 2020.
2020 Significant Developments
With these objectives and priorities serving as our guiding principles, and applying the short-term measures to mitigate the impact of the
COVID-19 Pandemic and the OPEC Production Disputes described in the 'Business Overview' above, we are pleased to report that we have
achieved the following successes during 2020:
Transactions designed to maximize return on assets and shareholder value
Investment in Midstream Ventures
In July 2019, we acquired a 15% ownership interest in Wink to Webster Pipeline LLC (the "WWP Joint Venture"), which we subsequently
contributed to a non-recourse financing joint venture with MPLX (who likewise contributed their 15% interest in the WWP Joint Venture) as
collateral for and in service of the related project financing (the "WWP Project Financing JV") effective February 21, 2020, in exchange for a
50% interest in the WWP Project Financing JV. The WWP Joint Venture is constructing and will operate a crude oil pipeline system from Wink,
Texas to Webster, Texas along with certain pipelines from Webster, Texas to other destinations in the Texas Gulf Coast area that are
expected to span approximately 650 miles at completion. Construction of the crude oil pipeline system remains on schedule, and the main
segment of the pipeline system commenced operations in the fourth quarter of 2020, with additional segments expected to be placed in
service throughout 2021. It is anticipated that capital contributions required of the 15% ownership interest we contributed to the WWP Project
64 |
Management's Discussion and Analysis
Financing JV will total approximately $340 million to $380 million over the course of construction, the majority of which will be financed under
the nonrecourse financing facility of the WWP Project Financing JV. Distributions received from the WWP Joint Venture through the WWP
Project Financing JV will first be applied in service of the related project financing debt, with excess distributions being made to the members
of the WWP Project Financing JV. The obligations of the members under the WWP Project Financing JV HoldCo LLC Agreement are
guaranteed by the parents of the members of the WWP Project Financing JV. See further discussion in Note 7 of our consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Transactions with Delek Logistics
Effective August 13, 2020, Delek Logistics completed a restructuring transaction to eliminate the incentive distribution rights held by us and
convert the 2.0% economic general partner interest into a non-economic general partner interest, in exchange for total consideration consisting
the "IDR Simplification").
of $45.0 million in cash and 14.0 million newly issued common limited partner units (as previously defined,
Contemporaneously, we repurchased a 5.2% ownership interest in Delek Logistics GP, LLC, the general partner of Delek Logistics from certain
of our affiliates, who are also members of the general partner's management and board of directors, for $23.1 million in cash. Subsequent to
these transactions, we owned 34,745,868 common limited partner units, increasing our ownership to 80.0% of the outstanding common units,
and 100% of the outstanding interest in the general partner.
Effective May 1, 2020, Delek through its wholly owned subsidiaries Lion Oil Company (“Lion Oil”) and Delek Refining, Ltd. (“Delek Refining”)
contributed certain leased and owned tractors and trailers and related assets used in the provision of trucking and transportation services for
crude oil, petroleum and certain other products throughout Arkansas, Oklahoma and Texas to Delek Trucking, LLC (“Delek Trucking”), a direct
wholly owned subsidiary of Lion Oil. Following this contribution, Lion Oil sold all of the issued and outstanding membership interests in Delek
Trucking (the “Acquisition”) to DKL Transportation, LLC (“DKL Transportation”), a wholly owned subsidiary of Delek Logistics. Promptly following
the consummation of the Acquisition, Delek Trucking merged with and into DKL Transportation, with DKL Transportation continuing as the
surviving entity. Total consideration for the Acquisition was approximately $48.0 million in cash, subject to certain post-closing adjustments,
primarily financed with borrowings under Delek Logistics’ revolving credit facility.
Effective March 31, 2020, Delek Logistics, through its wholly-owned subsidiary DKL Permian Gathering, LLC, acquired the Big Spring Gathering
System, located in Howard, Borden and Martin Counties, Texas, from Delek. Delek Logistics will operate and maintain the Big Spring
Gathering System connecting our interests in and to certain crude oil production with the Delek Logistics' Big Spring, Texas terminal and
provide gathering, transportation and other related services. The total consideration was comprised of $100.0 million in cash and 5.0 million
common limited partner units in Delek Logistics. The cash component of this dropdown was financed with borrowings on the Delek Logistics
Credit Facility (as defined in Note 8 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data,
of this Annual Report on Form 10-K.
Finally, in March 2020, we purchased 451,822 common limited partner units in Delek Logistics from a public investor for approximately $5.0
million. See further discussion in Note 6 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
Sale of Bakersfield Non-Operating Refinery
On May 7, 2020, we sold our equity interests in Alon Bakersfield Property, Inc., an indirect wholly-owned subsidiary that owns our non-operating
refinery located in Bakersfield, California, to a subsidiary of Global Clean Energy Holdings, Inc. (“GCE”) for total cash consideration of $40.0
million. GCE intends to repurpose the refinery into a renewable diesel plant. As part of the transaction, GCE granted a call option to Delek to
acquire up to a 33 1/3% limited member interest in the acquiring subsidiary of GCE for $400 per unit (up to $13.3 million), subject to certain
adjustments. Such option is exercisable by Delek through the 90th day after GCE demonstrates commercial operations, as contractually
defined. See further discussion in Note 4 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
Transactions designed to minimize the cost of capital/manage financial risk exposures
Amendment and Restated Supply and Offtake Agreements
In April 2020, we amended and restated our three Supply and Offtake Agreements to amend and extend the terms to December 30, 2022, with
J. Aron having the sole discretion to further extend to May 30, 2025 by providing at least six months notice prior to the current maturity date. As
part of this amendment, there were changes to the underlying market index, annual fee, the crude purchase fee, crude roll fees and timing of
cash settlements related to periodic price adjustments on the fixed differential component of the Baseline Volume Step-Out Liabilities. The
amendments provide us dedicated financing for the inventory covered through at least December 2022, and certain specific market-indexed
provisions improve our ability to manage our exposure to commodity price volatility during the term of the agreements. See further discussion in
Note 10 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K.
2020 Amendment to the Term Loan Credit Facility
On May 19, 2020, we amended the Term Loan Credit Facility agreement (as defined in Note 11 of our consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K) and borrowed $200.0 million in
aggregate principal amount of incremental term loans (the “Third Incremental Term Loan”) at an original issue discount of 7.00%, requiring
65 |
Management's Discussion and Analysis
quarterly principal amortization payments of $0.5 million commencing on June 30, 2020. There are no restrictions on the Company's use of the
proceeds of the Third Incremental Term Loan, and the proceeds may be used (i) for general corporate purposes and (ii) to pay transaction fees
and expenses associated with the Third Incremental Term Loan. See further discussion in Note 11 of our consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Dividend Suspension
On November 5, 2020, we announced that we have elected to suspend dividends beginning in the fourth quarter of 2020 in order to conserve
capital. Our previous quarterly cash dividend amounts ranged between $0.27 to $0.30 per share for dividends paid throughout 2019 and was
$0.31 per share for the dividends paid during each of the previous three quarterly periods of 2020. The declaration, amount and payment of any
future dividends on our common stock will be at the sole discretion of our Board of Directors.
Share Repurchases
During the year ended December 31, 2020, Delek repurchased 58,713 shares for an aggregate purchase price of $1.9 million under the most
recent share repurchase plan which provided for repurchases up to $500.0 million and was approved by the Board of Directors on November 6,
2018. As of December 31, 2020, there remained $229.7 million available for repurchases under the most recent repurchase plan. In our efforts
to conserve capital, for the time being, we have temporarily suspended the repurchase of shares. See further discussion in Note 22 of our
consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
A Look to the Future: Our 2021 Strategic Priorities
As we move forward, we are increasingly optimistic about our outlook, and we have identified five strategic priorities for 2021 that continue to be
rooted in our Five-Year Strategic Framework, linked to our Core Strategic Focus Areas, and driven by our Strategic Initiatives discussed above.
Our 2021 Strategic Priorities are presented below.
2021 Strategic Priorities
Building on the continuation of our Five-Year Strategic Framework and the Core Strategic Focus Areas, we have developed and are optimistic
about the following 2021 Strategic Initiatives:
•
•
•
•
•
Maintain and Continue to Enhance Our Safe Operations. We are proud of our commitment to safety as a core value of the
company, and this commitment is reflected in our continuous improvement in DART (days away, restricted or transferred) and TRIR
(total recordable incident rate) metrics since 2016. According to the American Fuel & Petrochemical Manufacturers trade association,
Delek ranks second overall in these safety metrics among companies operating multiple refineries. The retail business unit’s TRIR is
half the industry average.
the company acted decisively by adapting to the challenging macro
Drive EBITDA and Cash Flow Improvement. In 2020,
environment and delivering significant cost savings. We plan to maintain and enhance our cost containment efforts in 2021.
Simultaneously, initiatives for margin improvements through optimization are underway. The combination of these improvements
along with a diverse asset base should lead to a lower cash flow break-even profile in the future.
Develop and Utilize Systems, Processes and Technology to Improve Operations. Recognizing that the energy industry remains
behind the curve in terms of technological advancements, and that Delek has a long history of being nimble, we have added
innovation to our core values. Our vision is to use select technologies and implement advanced systems and processes to achieve
further, more structural cost reductions, operational improvements and asset optimization over the medium to longer term. Through
our focus on innovation, we expect to enhance the competitiveness of the portfolio within the industry.
Ongoing Commitment to ESG. At Delek, we understand the importance of ESG and the growing role it plays with all stakeholders,
as well as within an investment management framework. Therefore, we were pleased that the sustainability report we published in
2020 was well-received, yielding improved scoring from multiple rating agencies. However, we are still relatively early in our ESG
journey, and we are striving for progressive improvements over time in terms of underlying performance metrics and disclosure in all
ESG categories. We are taking a holistic approach to addressing the evolving and challenging requirements of ESG by gleaning fresh
ideas and feedback from business leaders and employees throughout the organization. One example is our de-carbonization steering
committee that involves members of each business unit and attempts to generate leading-edge solutions to improve our carbon
footprint while maximizing long-term returns on our capital investments.
Laying the Foundation for Future Growth. Delek was built through a history of strategic acquisitions, with a strong track record of
seamless integration. We understand that difficult macro environments often create acquisition opportunities or prospects to pivot
strategically. After focusing mainly on improving our cash flow break-even profile through reduced capital expenditures and operating
costs in 2020, we are emerging from this downturn with an improved cost structure, a healthy balance sheet and opportunities to
pursue future growth. We are constantly evaluating the optimal
investment options available in our various business units and
comparing the potential returns of both organic and inorganic opportunities. In the constantly evolving energy landscape, Delek
remains strong, nimble and well-positioned to capture opportunities.
66 |
Management's Discussion and Analysis
Market Trends
Commodity Prices
Our results of operations are significantly affected by fluctuations in the prices of certain commodities, including, but not limited to, crude oil,
gasoline, distillate fuel, biofuels and natural gas and electricity, among others. Historically, our profitability has been affected by commodity price
volatility, specifically as it relates to the price of crude oil and refined products. We have significant sources of WTI Midland crude because of
our gathering system, and so accordingly favorable pricing of WTI Midland crude compared to other WTI crude can favorably impact our cost of
materials and other and therefore our margins compared to other refiners.
The table below reflects the quarterly average prices of WTI Midland and WTI Cushing crude oil for each of the quarterly periods over the past
three years. As shown in the historical graph, over the past three years WTI Midland crude prices have generally been favorable as compared
to WTI Cushing, though that trend reversed slightly in the fourth quarter 2019 and third quarter of 2020.
WTI Crude Oil Prices
(Average Price per Barrel)
$62.51
$59.93
$55.28
$53.64
$53.70
$57.56
$56.12
$57.80
$62.89
$68.03
$69.63
$59.97
$54.87
$59.80
$56.40
$56.88
$45.51
$41.03
$43.07
$29.77
$45.57
$29.77
$40.88
$42.63
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
WTI Midland
WTI Cushing
Crack Spreads
Crack spreads are used as benchmarks for predicting and evaluating a refinery's product margins by measuring the difference between the
market price of feedstocks and crude oil and refined products. Generally, crack spreads represent the approximate refining margin resulting
from processing one barrel of crude oil into its outputs, generally gasoline and diesel fuel.
The table below reflects the quarterly average Gulf Coast 5-3-2 ULSD, 3-2-1 and 2-1-1 crack spreads for each of the quarterly periods over the
past three years. As the chart illustrates, the 3-2-1 crack spread has outperformed the 5-3-2 and the 2-1-1 crack spreads in certain periods. In
such conditions, things being equal (i.e., near-capacity throughputs and no significant outages), our Big Spring refinery, whose benchmark is
the 3-2-1 crack spread, should outperform our other refineries in terms of refining margin.
Gulf Coast Crack Spread
(Average per Barrel)
$18.26
$17.43
$16.81
$16.05
$15.31
$14.19
$15.42
$15.18
$13.94
$15.06
$19.24
$17.55
$17.74
$16.02
$14.86
$14.27
$11.41
$9.72
$10.83
$11.20
$9.75
$12.03
$10.40
$6.47
$7.33
$10.74
$7.08
$8.15
$8.08
$6.67
$7.49
$7.83
$8.12
$2.35
$3.51
$4.46
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
5-3-2 Crack Spread
3-2-1 Crack Spread
2-1-1 Crack Spread
67 |
Management's Discussion and Analysis
Crack spreads are impacted by the price of refined products as compared to the price of crude oil and therefore may narrow or widen based on
different trends in those market prices, or lags in one commodity pricing change versus the other. For example, the average Gulf Coast 5-3-2
ULSD crack spread per barrel remained relatively steady at $8.18 in 2020 compared to $15.77 in 2019, despite Gulf Coast price of gasoline
(CBOB) decreasing 33.1%, from an average of $1.63 per gallon in 2019 to $1.09 per gallon in 2020, which indicates that decreases in
feedstocks trended similarly. As a result, while, in such circumstances, total revenues for gasoline and corresponding cost of materials and
other will be lower (assuming consistent volumes), refining margins would remain relatively flat year-over-year. Thus, while fluctuations in
refined product prices will significantly impact our top line revenue (assuming consistent volumes), crack spread has greater direct impact on
our margins.
Refined Product Prices
Our refineries produce the following products:
Tyler Refinery
El Dorado Refinery
Big Spring Refinery
Primary Products
Gasoline, jet fuel, ultra-low-
sulfur diesel, liquefied
petroleum gases, propylene,
petroleum coke and sulfur
Gasoline, ultra-low-sulfur
diesel, liquefied petroleum
gases, propylene, asphalt
and sulfur
Gasoline, jet fuel, ultra-low-
sulfur diesel, liquefied
petroleum gases, propylene,
aromatics and sulfur
Krotz Springs Refinery
Gasoline, jet fuel, high-sulfur
diesel, light cycle oil,
liquefied petroleum gases,
propylene and ammonium
thiosulfate
In addition to decreases in the price of CBOB gasoline, the Gulf Coast price of High Sulfur Diesel decreased 40.2%, from an average of $1.76
per gallon in 2019 to $1.06 per gallon in 2020. The Gulf Coast price of Ultra Low Sulfur Diesel decreased 36.6% from an average of $1.88 per
gallon in 2019 to $1.19 per gallon in 2020. The charts below illustrate the quarterly average prices of Gulf Coast Gasoline, U.S. High Sulfur
Diesel and U.S. Ultra Low Sulfur Diesel over the past three years.
Gulf Coast Refined Product Prices
(Average Price per Gallon)
$1.77
$1.93
$1.96
$1.98
$2.11
$2.14
$1.59
$1.79
$2.01
$1.52
$1.88
$1.64
$1.94
$1.58
$1.85
$1.87
$1.25
$1.77
$1.96
$2.03
$1.92
$1.75
$1.80
$1.74
$1.76
$1.47
$0.81
$1.36
$0.91
$0.73
$1.15
$1.17
$1.16
$1.24
$1.02
$1.13
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Gasoline
High Sulfur Diesel
Ultra Low Sulfur Diesel
Crude Pricing Differentials
As U.S. crude oil production has increased over recent years, domestic producers have benefited from the discount for WTI Cushing compared
to Brent, a global benchmark crude. This generally leads to higher margins in our refineries as refined product prices are influenced by Brent
crude prices and the majority of our crude supply is WTI-linked. The average discount for WTI Cushing compared to Brent increased to $3.54
during 2020 from $7.13 during 2019. We note similar historical trends when reviewing the discount for LLS compared to WTI Cushing, where
the average discount decreased to $1.67 during 2020 from $5.66 during 2019. Additionally, our refineries continue to have relatively greater
access to WTI Midland and WTI Midland-linked crude feedstocks compared to certain of our competitors. The average discount for WTI Midland
compared to WTI Cushing decreased to $(0.13) during 2020 from $0.68 during 2019. As these discounts shrink or become premiums, our
reliance on WTI-linked crude pricing, and specifically WTI Midland crude can negatively impact our results. Conversely, as these price discounts
increase, so does our competitive advantage, created by our access to WTI-linked crude oil pricing, and specifically WTI Midland crude sources
through our gathering systems.
68 |
The chart below illustrates the differentials of both Brent crude oil and WTI Midland crude oil as compared to WTI Cushing crude oil as well as
WTI Cushing as compared to LLS over the past three years.
Management's Discussion and Analysis
Crude Oil Discount (Premium)
(Average per Barrel)
$14.35
$8.10
$6.93
$8.72
$8.96
$8.64
$6.13
$7.51
$6.33
$7.49
$7.26
$5.63
$5.52
$4.99
$4.51
$4.32
$2.93
$0.38
$4.91
$4.32
$4.18
$2.24
$3.80
$2.47
$2.55
$1.17
$0.28
$2.06
$0.06
$1.53
$—
$1.58
$1.51
$(0.92)
$(0.15)
$(0.44)
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
LLS/WTI Cushing
WTI Cushing/Brent
WTI Cushing/WTI Midland
RIN Volatility
Environmental regulations continue to affect our margins in the form of volatility in the costs of RINs. On a consolidated basis, we work to
balance our RINs obligations in order to minimize the effect of RINs on our results. While we generate RINs in both of our refining and logistics
segments through our ethanol blending and biodiesel production, our refining segment needs to purchase additional RINs to satisfy its
obligations. As a result, increases in the price of RINs generally adversely affect our results of operations. It is not possible at this time to predict
with certainty what future volumes or costs may be, but given the volatile price of RINs, the cost of purchasing sufficient RINs could have an
adverse impact on our results of operations if we are unable to recover those costs in the price of our refined products. The chart below
illustrates the volatile nature of the price for RINs over the past three years.
RIN Prices
(Average per RIN)
$0.78
$0.59
$0.31
$0.53
$0.41
$0.40
$0.51
$0.46
$0.38
$0.21
$0.13
$0.20
$0.17
$0.19
$0.14
$0.56
$0.54
$0.47
$0.26
$0.40
$0.47
$0.88
$0.67
$0.63
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Ethanol RINs
Biodiesel RINs
69 |
Summary Financial and Other Information
The following table provides summary financial data for Delek (in millions):
Summary Statement of Operations Data
Net revenues
Total operating costs and expenses
Operating (loss) income
Total non-operating expenses, net
(Loss) income before income tax (benefit) expense
Income tax (benefit) expense
(Loss) income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net (loss) income
Net income attributed to non-controlling interests
Net (loss) income attributable to Delek
We report operating results in three reportable segments:
•
•
•
Refining
Logistics
Retail
Management's Discussion and Analysis
Year Ended December 31,
2020
2019
$
$
7,301.8
8,029.8
(728.0)
35.1
(763.1)
(192.7)
(570.4)
—
(570.4)
37.6
$
(608.0) $
9,298.2
8,805.9
492.3
89.6
402.7
71.7
331.0
5.2
336.2
25.6
310.6
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 contribution margin.
70 |
Management's Discussion and Analysis
Results of Operations
Consolidated Results of Operations — Comparison of the Year Ended December 31, 2020 versus the Year
Ended December 31, 2019
Net Income
Consolidated net loss for the year ended December 31, 2020 was $570.4 million compared to net income of $336.2 million for the year ended
December 31, 2019. Consolidated net loss attributable to Delek for the year ended December 31, 2020 was $608.0 million, or $(8.26) per basic
share, compared to net income of $310.6 million, or $4.10 per basic share, for the year ended December 31, 2019. Explanations for significant
drivers impacting net income as compared to the comparable period of the prior year are discussed in the sections below.
Net Revenues
We generated net revenues of $7,301.8 million and $9,298.2 million during the years ended December 31, 2020 and 2019, respectively, a
decrease of $1,996.4 million, or 21.5%. The decrease in net revenues was primarily due to the following:
•
•
•
in our refining segment, decreases in the average price of U.S. Gulf Coast gasoline of 33.1%, ULSD of 36.6%, and High-Sulfur diesel
("HSD") of 40.2%;
in our retail segment, decreases in fuel sales volumes due to demand slowdown as a result of the COVID-19 Pandemic and reduction in
average number of stores, as well as a 17.5% decrease in average price charged per gallon; partially offset by an increase in merchandise
revenue; and
in our logistics segment, decreases in the average volume sold and sales prices per gallon of gasoline and diesel sold in our West Texas
marketing operations, where the average sales prices per gallon of gasoline and diesel sold decreased $0.49 per gallon and $0.71 per
gallon, respectively. Such decrease was partially offset by increased revenue associated with agreements executed in connection with Big
Spring Gathering System and Delek Trucking acquisitions.
Operating Costs and Expenses
Cost of Materials and Other
Cost of materials and other was $6,841.2 million for the year ended December 31, 2020, compared to $7,657.2 million for 2019, a decrease of
$816.0 million, or 10.7%. The net decrease in cost of materials and other primarily related to the following:
•
•
•
a decrease in the cost of crude oil feedstocks at the refineries including a decrease in the cost of WTI Cushing crude oil from an average of
$56.99 per barrel to an average of $39.89, and a decrease in the cost of WTI Midland crude oil from an average of $56.31 per barrel to an
average of $40.02 per barrel;
a decrease in average volumes sold and the cost of refined products in the logistics segment where the average cost per gallon of gasoline
and diesel purchased decreased $0.43 per gallon and $0.66 per gallon, respectively; and
a decrease in retail fuel cost of materials and other attributable to demand slowdown, a decrease in average cost per gallon of $0.50 and a
reduction in average number of stores during the year.
Such decreases were partially offset by:
•
•
•
a decrease in hedging gains to a loss of $83.4 million recognized during the year ended December 31, 2020 from a gain of $22.8 million
recognized during the year ended December 31, 2019
the (expense) benefit of $(29.2) million related to the change in pre-tax inventory valuation recognized during the year ended December
31, 2020 compared to $52.3 million recognized during the year ended December 31, 2019; and
a prior period benefit of approximately $77.6 million and $20.7 million related to the BTC and 2018 RINs waivers, respectively, recognized
during 2019.
Operating Expenses
Operating expenses (included in both cost of sales and other operating expenses) were $559.8 million for the year ended December 31, 2020
compared to $682.2 million in 2019, a decrease of $122.4 million, or (17.9)%. The decrease in operating expenses was primarily driven by the
following:
decrease in outside service costs across all segments due to cost reduction measures;
decreases in the refining segment related to lower employee, utilities, catalysts and maintenance costs; and
decrease in retail operating expenses due to reduction in number of stores.
•
•
•
71 |
Management's Discussion and Analysis
General and Administrative Expenses
General and administrative expenses were $248.3 million for the year ended December 31, 2020 compared to $274.7 million in 2019, a
decrease of $26.4 million, or 9.6%. The decrease was primarily driven by the following:
•
•
•
•
decrease in contract services due to cost reduction measures;
decrease in travel related expense due to travel restrictions in place as a result of the COVID-19 Pandemic;
decrease in loss allowance on a note receivable; and
decrease in stock-based compensation due to workforce reductions in 2020.
These decreases were partially offset by increases in salaried labor, including severance, partially offset by a decrease in incentive accrual.
Depreciation and Amortization
Depreciation and amortization (included in both cost of sales and other operating expenses) was $267.6 million and $194.3 million for the years
ended December 31, 2020 and 2019, respectively, an increase of $73.3 million, or 37.7%, primarily due to the following:
•
•
depreciation associated with assets added during the Big Spring refinery turnaround in the first quarter of 2020, the El Dorado turnaround
assets added in the second quarter of 2019 and the addition of the alkylation unit at our Krotz Springs refinery late in the second quarter of
2019; and
accelerated depreciation of approximately $19.0 million taken in the fourth quarter of 2020 primarily due to the decision to abandon certain
property and equipment.
Other Operating Income, Net
Other operating income, net was $13.1 million and $2.5 million for the years ended December 31, 2020 and 2019, respectively, an increase of
$10.6 million, primarily due to a gain of $10.8 million on the underlying commodity related to our contract to store crude oil barrels at one of the
Strategic Petroleum Reserve locations. Refer to Note 13 of the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K, for additional information.
Non-Operating Expenses
Interest Expense
Interest expense was $129.0 million in the year ended December 31, 2020, compared to $131.1 million for 2019, a decrease of $2.1 million, or
1.6%.
Results from Equity Method Investments
We recognized income from equity method investments of $30.3 million for the year ended December 31, 2020, compared to $34.3 million for
the year ended December 31, 2019, a decrease of $4.0 million. This decrease was primarily driven by the following:
•
an $8.5 million loss from WWP Project Financing Joint Venture primarily due to impairment taken by the underlying WWP Joint Venture.
This decrease was partially offset by an increase in income primarily related to our logistics joint ventures.
Other Non-Operating Expenses, Net
During the year ended December 31, 2020, we recognized a gain of $56.8 million on the sale of our non-operating refinery located in
Bakersfield, California. See Note 4 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data,
of this Annual Report on Form 10-K.
Other income increased $7.6 million, to $3.5 million during the year ended December 31, 2020, compared to expense of $4.1 million year ended
December 31, 2019.
Income Taxes
Income tax expense decreased $264.4 million during the years ended December 31, 2020 compared to the same period for 2019, primarily
driven by the following:
•
pre-tax loss of $763.1 million compared to pre-tax income of $402.7 million for the years ended December 31, 2020 and 2019,
respectively;
72 |
Management's Discussion and Analysis
•
•
an increase in our effective tax rate which was 25.3% compared to 17.8% for the years ended December 31, 2020 and 2019, respectively,
primarily due to the following:
◦
◦
◦
projected 2020 federal net operating loss carryback to a prior 35% tax rate year creating a 14% tax rate arbitrage;
reversal of a valuation allowance attributable to book-tax basis differences in partnership investments reported as a discrete
benefit in the first quarter, offset by an increase in valuation allowance on certain state attributes; and
exclusion of goodwill impairment expense from taxable income.
Refer to Note 15 of the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K, for additional information.
A detailed discussion of the fiscal year 2019 compared to year-over-year changes from fiscal year 2018 can be found in Part II, Item 7.
Management's Discussion and Analysis, "Results of Operations", of our 2019 Annual Report on Form 10-K, filed on February 28, 2020.
73 |
Refining Segment
The tables and charts below set forth certain information concerning our refining segment operations ($ in millions, except per barrel amounts):
Refining Segment Margins
Management's Discussion and Analysis
Net revenues
Cost of materials and other
Refining Margin
Operating expenses (excluding depreciation and amortization)
Contribution margin
Contribution margin percentage
Factors Impacting Refining Profitability
Year Ended December 31,
2020
2019
5,817.7
5,745.5
72.2
402.7
(330.5)
$
$
8,798.5
7,528.2
1,270.3
492.4
777.9
(5.7)%
8.8 %
$
$
Our profitability in the refining segment is substantially determined by the difference between the cost of the crude oil feedstocks we purchase
and the price of the refined products we sell, referred to as the "crack spread", "refining margin" or "refined product margin". Refining margin is
used as a metric to assess a refinery's product margins against market crack spread trends, where "crack spread" is a measure of the
difference between market prices for crude oil and refined products and is a commonly used proxy within the industry to estimate or identify
trends in refining margins.
The cost to acquire feedstocks and the price of the refined petroleum products we ultimately sell from our refineries depend on numerous
factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined petroleum products which, in turn,
depend on, among other factors, changes in domestic and foreign economies, weather conditions such as hurricanes or tornadoes, local,
domestic and foreign political affairs, global conflict, production levels, the availability of imports, the marketing of competitive fuels and
government regulation. Other significant factors that influence our results in the refining segment include operating costs (particularly the cost
of natural gas used for fuel and the cost of electricity), seasonal factors, refinery utilization rates and planned or unplanned maintenance
activities or turnarounds. Moreover, while the fluctuations in the cost of crude oil are typically reflected in the prices of light refined products,
such as gasoline and diesel fuel, the price of other residual products, such as asphalt, coke, carbon black oil and LPG are less likely to move
in parallel with crude cost. This could cause additional pressure on our realized margin during periods of rising or falling crude oil prices.
Additionally, our margins are impacted by the pricing differentials of the various types and sources of crude oil we use at our refineries and
their relation to product pricing. Our crude slate is predominantly comprised of WTI crude oil. Therefore, favorable differentials of WTI
compared to other crude will favorably impact our operating results, and vice versa. Additionally, because of our gathering system presence in
the Midland area and the significant source of crude specifically from that region into our network, a widening of the WTI Cushing less WTI
Midland spread will favorably influence the operating margin for our refineries. Alternatively, a narrowing of this differential will have an adverse
effect on our operating margins. Global product prices are influenced by the price of Brent crude which is a global benchmark crude. Global
product prices influence product prices in the U.S. As a result, our refineries are influenced by the spread between Brent crude and WTI
Midland. The Brent less WTI Midland spread represents the differential between the average per barrel price of Brent crude oil and the
average per barrel price of WTI Midland crude oil. A widening of the spread between Brent and WTI Midland will favorably influence our
refineries' operating margins. Also, the Krotz Springs refinery is influenced by the spread between Brent crude and LLS. The Brent less LLS
spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of LLS crude oil. A
discount in LLS relative to Brent will favorably influence the Krotz Springs refinery operating margin.
The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our
retail segment depends on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined
petroleum products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic
and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. Our
retail merchandise sales are driven by convenience, customer service, competitive pricing and branding. Motor fuel margin is sales less the
delivered cost of fuel and motor fuel taxes, measured on a cents per gallon basis. Our motor fuel margins are impacted by local supply,
demand, weather, competitor pricing and product brand.
In addition to the above, it continues to be a strategic and operational objective to manage price and supply risk related to crude oil that is used
in refinery production, and to develop strategic sourcing relationships. For that purpose, from a pricing perspective, we enter into commodity
derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of refined
products or to fix margins on future production. We also enter into future commitments to purchase or sell renewable identification numbers
("RINs") at fixed prices and quantities, which are used to manage the costs of our credits for commitments required by the U.S. Environmental
Protection Agency ("EPA") to blend biofuels into fuel products ("RINs Obligation"). Additionally, from a sourcing perspective, we often enter
into purchase and sale contracts with vendors and customers or take physical or financial commodity positions for crude oil that may not be
74 |
Management's Discussion and Analysis
used immediately in production, but that may be used to manage the overall supply and availability of crude expected to ultimately be needed
for production and/or to meet minimum requirements under strategic pipeline arrangements, and also to optimize and hedge availability risks
associated with crude that we ultimately expect to use in production. Such transactions are inherently based on certain assumptions and
judgments made about the current and possible future availability of crude. Therefore, when we take physical or financial positions for
optimization purposes, our intent is generally to take offsetting positions in quantities and at prices that will advance these objectives while
minimizing our positional and financial statement risk. However, because of the volatility of the market in terms of pricing and availability, it is
possible that we may have material positions with timing differences or, more rarely, that we are unable to cover a position with an offsetting
position as intended. Such differences could have a material impact on the classification of resulting gains/losses, assets or liabilities, and
could also significantly impact refining contribution margin.
Finally, as part of our overall business strategy, we regularly evaluate opportunities to expand our portfolio of businesses and may at any time
be discussing or negotiating a transaction that, if consummated, could have a material effect on our business, financial condition, liquidity or
results of operations.
75 |
Refinery Statistics
Management's Discussion and Analysis
Year Ended December 31,
2020
2019
Tyler, TX Refinery
Days in period
Total sales volume - refined product (average barrels per day) (1)
Products manufactured (average barrels per day):
Gasoline
Diesel/Jet
Petrochemicals, LPG, NGLs
Other
Total production
Throughput (average barrels per day):
Crude Oil
Other feedstocks
Total throughput
Total refining revenue ($ in millions)
Cost of materials and other ($ in millions)
Total refining margin ($ in millions)
Per barrel of refined product sales:
Tyler refining margin
Direct operating expenses
Crude Slate: (% based on amount received in period)
WTI crude oil
East Texas crude oil
El Dorado, AR Refinery
Days in period
Total sales volume - refined product (average barrels per day) (1)
Products manufactured (average barrels per day):
Gasoline
Diesel
Petrochemicals, LPG, NGLs
Asphalt
Other
Total production
Throughput (average barrels per day):
Crude Oil
Other feedstocks
Total throughput
Total refining revenue ($ in millions)
Cost of materials and other ($ in millions)
Total refining margin ($ in millions)
Per barrel of refined product sales:
El Dorado refining margin
Operating expenses
Crude Slate: (% based on amount received in period)
WTI crude oil
Local Arkansas crude oil
Other
76 |
366
74,075
40,031
29,220
2,794
1,461
73,506
51,854
22,126
73,980
1,432.2
1,331.7
100.5
3.71
3.45
92.0 %
8.0 %
366
75,992
35,480
28,429
1,772
6,687
789
73,157
70,385
2,979
73,364
1,788.8
1,809.3
(20.5)
(0.74)
3.81
52.3 %
17.8 %
29.9 %
$
$
$
$
$
$
$
$
365
76,178
40,801
30,673
2,798
1,554
75,826
70,516
5,873
76,389
2,209.2
1,817.5
391.7
14.09
3.91
89.0 %
11.0 %
365
62,420
27,712
20,753
872
5,533
735
55,605
54,420
1,576
55,996
3,291.1
3,123.0
168.1
7.38
5.73
39.3 %
23.1 %
37.6 %
$
$
$
$
$
$
$
$
Refinery Statistics (continued)
Management's Discussion and Analysis
Year Ended December 31,
2020
2019
Big Spring, TX Refinery
Days in period
Total sales volume - refined product (average barrels per day) (1)
Products manufactured (average barrels per day):
Gasoline
Diesel/Jet
Petrochemicals, LPG, NGLs
Asphalt
Other
Total production
Throughput (average barrels per day):
Crude oil
Other feedstocks
Total throughput
Total refining revenue ($ in millions)
Cost of materials and other ($ in millions)
Total refining margin ($ in millions)
Per barrel of refined product sales:
Big Spring refining margin
Operating expenses
Crude Slate: (% based on amount received in period)
WTI crude oil
WTS crude oil
Krotz Springs, LA Refinery
Days in period
Total sales volume - refined product (average barrels per day) (1)
Products manufactured (average barrels per day):
Gasoline
Diesel/Jet
Heavy Oils
Petrochemicals, LPG, NGLs
Other
Total production
Throughput (average barrels per day):
Crude Oil
Other feedstocks
Total throughput
Total refining revenue ($ in millions)
Cost of materials and other ($ in millions)
Total refining margin ($ in millions)
Per barrel of sales:
Krotz Springs refining margin
Operating expenses
366
65,508
32,340
23,283
3,183
1,685
1,119
61,610
61,428
1,078
62,506
1,531.7
1,497.2
34.5
1.44
4.33
67.0 %
33.0 %
366
61,302
20,615
20,422
418
2,223
13,512
57,190
53,875
4,126
58,001
1,266.6
1,296.3
(29.7)
(1.32)
3.97
$
$
$
$
$
$
$
$
365
76,413
36,352
27,602
3,746
1,870
1,327
70,897
72,039
(453)
71,586
2,366.5
1,984.6
381.9
13.69
4.35
75.5 %
24.5 %
365
70,511
35,026
28,049
1,131
4,647
26
68,879
67,943
(366)
67,577
2,175.7
1,914.2
261.5
10.16
4.46
$
$
$
$
$
$
$
$
Crude Slate: (% based on amount received in period)
WTI Crude
Gulf Coast Sweet Crude
70.1 %
29.1 %
72.0 %
28.0 %
(1)
Includes inter-refinery sales and sales to other segments which are eliminated in consolidation. See tables below.
77 |
Included in the refinery statistics above are the following inter-refinery and sales to other segments:
Inter-refinery Sales
(in barrels per day)
Tyler refined product sales to other Delek refineries
El Dorado refined product sales to other Delek refineries
Big Spring refined product sales to other Delek refineries
Krotz Springs refined product sales to other Delek refineries
Refinery Sales to Other Segments
(in barrels per day)
Tyler refined product sales to other Delek segments
El Dorado refined product sales to other Delek segments
Big Spring refined product sales to other Delek segments
Krotz Springs refined product sales to other Delek segments
Pricing Statistics (average for the period presented)
WTI — Cushing crude oil (per barrel)
WTI — Midland crude oil (per barrel)
WTS — Midland crude oil (per barrel)
LLS (per barrel)
Brent crude oil (per barrel)
U.S. Gulf Coast 5-3-2 crack spread (per barrel) - utilizing HSD
U.S. Gulf Coast 5-3-2 crack spread (per barrel) (1)
U.S. Gulf Coast 3-2-1 crack spread (per barrel) (1)
U.S. Gulf Coast 2-1-1 crack spread (per barrel) (1)
U.S. Gulf Coast Unleaded Gasoline (per gallon)
Gulf Coast Ultra low sulfur diesel (per gallon)
U.S. Gulf Coast high sulfur diesel (per gallon)
Natural gas (per MMBTU)(2)
Management's Discussion and Analysis
Year Ended December 31,
2020
2019
2,010
924
1,356
190
894
5,039
990
9,734
Year Ended December 31,
2020
2019
1,623
94
22,601
362
252
83
25,223
462
Year Ended December 31,
2020
2019
$
$
$
$
$
$
$
$
$
$
$
$
$
39.89
40.02
39.96
41.56
43.24
5.87
8.18
8.70
4.65
1.09
1.19
1.06
2.13
$
$
$
$
$
$
$
$
$
$
$
$
$
56.99
56.31
56.27
62.65
64.14
13.78
15.77
16.71
9.90
1.63
1.88
1.76
2.53
For our Tyler and El Dorado refineries, we compare our per barrel refining product margin to the Gulf Coast 5-3-2 crack spread consisting of WTI Cushing crude, U.S. Gulf
Coast CBOB and U.S. Gulf Coast Pipeline No. 2 heating oil (ultra low sulfur diesel). For our Big Spring refinery, we compare our $1.06 per barrel refined product margin to
the Gulf Coast 3-2-1 crack spread consisting of WTI Cushing crude, Gulf Coast 87 Conventional gasoline and Gulf Coast ultra low sulfur diesel, and for our Krotz Springs
refinery, we compare our per barrel refined product margin to the Gulf Coast 2-1-1 crack spread consisting of LLS crude oil, Gulf Coast 87 Conventional gasoline and U.S.
Gulf Coast Pipeline No. 2 heating oil (high sulfur diesel). The Tyler refinery's crude oil input is primarily WTI Midland and East Texas, while the El Dorado refinery's crude
input is primarily combination of WTI Midland, local Arkansas and other domestic inland crude oil. The Big Spring refinery’s crude oil input is primarily comprised of WTS and
WTI Midland. The Krotz Springs refinery’s crude oil input is primarily comprised of LLS and WTI Midland.
One million British thermal units ("MMBTU").
(1)
(2)
78 |
Management's Discussion and Analysis
Refining Segment Operational Comparison of the Year Ended December 31, 2020 versus the Year Ended
December 31, 2019
Net Revenues
Net revenues for the refining segment decreased $2,980.8 million, or 33.9%, in the year ended December 31, 2020 compared to the year
ended December 31, 2019. The decrease was primarily driven by the following:
•
•
decreases in the average price of U.S. Gulf Coast gasoline of 33.1%, ULSD of 36.6%, and HSD of 40.2%; and
decreases in sales volume of refined product totaling 0.8 million barrels partially due to scheduled turnaround activities at our Big Spring
refinery, partially offset by increased sales volumes at our El Dorado refinery due to prior year scheduled turnaround activities and
production issues, and a 3.9 million barrel decrease in purchased product sales due to decreased demand.
Net revenues included sales to our retail segment of $220.0 million and $379.6 million, sales to our logistics segment of $203.8 million and
$278.3 million and sales to our other segment of $30.8 million and $44.7 million for the years ended December 31, 2020 and 2019,
respectively. We eliminate this intercompany revenue in consolidation.
Finished Product Prices
(Average per Gallon)
$1.09
$1.19
$1.06
$1.63
$1.88
$1.76
2020
2019
Year Ended December 31
Gasoline
ULSD
HSD
Cost of Materials and Other
Cost of materials and other decreased $1,782.7 million, or 23.7%, in the year ended December 31, 2020 compared to the year ended
December 31, 2019. This decrease was primarily driven by the following:
•
•
a decrease in the cost of WTI Cushing crude oil from an average of $56.99 per barrel for 2019 to an average of $39.89 during 2020;
a decrease in the cost of WTI Midland crude oil, from an average of $56.31 per barrel for 2019 to an average of $40.02 during 2020.
These decreases were partially offset by the following:
•
•
•
•
a prior period benefit of $77.6 million due to the reenactment of the BTC in December 2019 for the 2018 and 2019 periods, of which
$31.1 million related to the first three quarters of 2019 blending activities and $36.0 million related to 2018 blending activities;
a prior period benefit of approximately $20.7 million related to the 2018 RIN Waivers recognized during the year ended December 31,
2019, whereas there was no benefit for the same period of 2020;
the (expense) benefit of $(29.4) million related to the change in pre-tax inventory valuation recognized during the year ended December
31, 2020 compared to $52.2 million recognized during the twelve year ended December 31, 2019; and
a decrease in hedging gains to a loss of $68.2 million recognized during the year ended December 31, 2020 from a gain of $32.6 million
recognized during the year ended December 31, 2019.
79 |
Management's Discussion and Analysis
Crude Oil Prices
(Average per Barrel)
$39.89
$40.02
$56.99
$56.31
2020
2019
Year Ended December 31
WTI - Cushing
WTI - Midland
Our refining segment purchases finished product from our logistics segment and has multiple service agreements with our logistics segment
which, among other things, require the refining segment to pay terminalling and storage fees based on the throughput volume of crude and
finished product in the logistics segment pipelines and the volume of crude and finished product stored in the logistics segment storage tanks,
subject to minimum volume commitments. These costs and fees were $339.1 million and $218.0 million during the years ended December 31,
2020 and 2019, respectively. We eliminate these intercompany fees in consolidation.
Refining Margin
Refining margin decreased by $1,198.1 million, or 94.3%, for the year ended December 31, 2020 compared to the year ended December 31,
2019, with a refining margin percentage of 1.2% as compared to 14.4% for the years ended December 31, 2020 and 2019, respectively,
primarily driven by the following:
•
•
•
•
•
•
•
a narrowing of the discount between WTI Midland crude oil and Brent crude oil where, during the year ended December 31, 2020, the
WTI Midland crude oil differential to Brent crude oil was an average discount of $3.22 per barrel compared to $7.83 per barrel during the
same period of 2019;
a narrowing of the average WTI Cushing crude oil and WTS crude oil to $(0.07) during the year ended December 31, 2020, compared to
$0.72 during the same period of 2019;
a narrowing of the discount between WTI Midland crude oil compared to WTI Cushing where, during the year ended December 31, 2020,
the average WTI Midland crude oil differential to WTI Cushing crude oil was $(0.13) per barrel compared to $0.68 during the year ended
December 31, 2019;
a narrowing of the discount between WTI Cushing crude oil compared to Brent where, during the year ended December 31, 2020, the
average WTI Cushing crude oil differential to Brent crude oil was $3.54 per barrel compared to $7.13 during the year ended December
31, 2019;
a 48.1% decline in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 47.9% decline in the
average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 53.0% decline in the average Gulf Coast
2-1-1 crack spread (the primary measure for the Krotz Springs refinery);
a decrease in hedging gains to a loss of $68.2 million recognized during the year ended December 31, 2020 from a gain of $32.6 million
recognized during the year ended December 31, 2019; and
a decrease in reversal benefit of inventory valuation reserve during year ended December 31, 2020 compared to the prior year period.
80 |
Refining Margin Per Barrel
Average Crack Spread
Management's Discussion and Analysis
$14.09
$13.69
$10.16
$7.38
$15.77
$16.71
$9.90
$8.18
$8.70
$4.65
$3.71
$1.44
$(0.74)
$(1.32)
2020
2019
2020
2019
Year Ended December 31
Year Ended December 31
Tyler
Big Spring
El Dorado
Krotz Springs
Gulf Coast 5-3-2
Gulf Coast 2-1-1
Gulf Coast 3-2-1
WTI Discounts (Premium)
(Average per barrel)
$7.13
$5.66
$3.54
$1.67
$0.68
$0.72
$(0.13)
$(0.07)
2020
2019
Year Ended December 31
WTI Cushing/Brent
WTI Midland/WTI Cushing
WTI Cushing/WTS
WTI Cushing/LLS
Operating Expenses
Operating expenses decreased $89.7 million, or 18.2%, in the year ended December 31, 2020, compared to year ended December 31, 2019.
The decrease in operating expenses was primarily driven by the following:
decrease in contract services and inspection costs associated with cost reduction measures taken in 2020;
decrease in maintenance costs due to deferral of projects amidst
maintenance costs at our Big Spring refinery in the comparable prior year period; and
the COVID-19 Pandemic, and the incurrence of extraordinary
decreases in utilities and catalyst costs, primarily at our Big Spring and Krotz Springs refineries related to reduced throughput due to
turnaround and unit downtime, respectively;
decrease in employee related expenses due to deferrals of projects and elimination of incentive bonus; and
reduced costs as a result of the sale of the Bakersfield refinery in May 2020.
•
•
•
•
•
81 |
Management's Discussion and Analysis
Contribution Margin
Contribution margin decreased by $1,108.4 million, or a 14.5% decline in contribution margin percentage, for the year ended December 31,
2020 compared to the year ended December 31, 2019, primarily driven by the following:
•
•
•
•
the decline of the Midland WTI crude oil differential to Brent crude oil compared to the prior-year period;
an overall decline in the average crack spreads;
a decrease in reversal benefit related to inventory valuation reserves recognized during the year ended December 31, 2020 compared to
the prior year period; and
a narrowing of the discount between WTI Cushing and WTI crude oil compared to the prior-year period.
These decreases were partially offset by decreases in operating expenses across all refineries.
82 |
Logistics Segment
The table below sets forth certain information concerning our logistics segment operations ($ in millions, except per barrel amounts):
Logistics Contribution Margin and Operating Information
Management's Discussion and Analysis
Net revenues
Cost of materials and other
Operating expenses (excluding depreciation and amortization)
Contribution margin
Operating Information:
East Texas - Tyler Refinery sales volumes (average bpd) (1)
Big Spring wholesale marketing throughputs (average bpd)
West Texas wholesale marketing throughputs (average bpd)
West Texas wholesale marketing margin per barrel
Terminalling throughputs (average bpd) (2)
Throughputs (average bpd):
Lion Pipeline System:
Crude pipelines (non-gathered)
Refined products pipelines to Enterprise Systems
SALA Gathering System
East Texas Crude Logistics System
Big Spring Gathering System (3)
Plains Connection System (3)
Excludes jet fuel and petroleum coke.
$
$
$
Year Ended December 31,
2020
2019
563.4
269.1
56.2
238.1
$
71,182
76,345
11,264
2.37
$
584.0
336.5
74.1
173.4
74,206
82,695
11,075
4.44
147,251
160,075
74,179
53,702
13,466
15,960
82,817
104,770
49,485
37,716
15,325
19,927
—
—
Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville,
Tennessee terminals.
Throughputs for the Big Spring Gathering System and the Plains Connection System are for the approximately 275 days we owned the assets following the Big Spring
Gathering Assets Acquisition effective March 31, 2020.
(1)
(2)
(3)
83 |
Management's Discussion and Analysis
Logistics Segment Operational Comparison of the Year Ended December 31, 2020 versus the Year Ended
December 31, 2019
Net Revenues
Net revenues decreased by $20.6 million, or 3.5%, in the year ended December 31, 2020 compared to the year ended December 31, 2019
primarily driven by the following:
•
decreases in the average sales prices per gallon of gasoline and diesel sold, partially offset by increase in the average sales volume of
gasoline in our West Texas marketing operations:
◦
◦
the average volumes of gasoline sold increased by 12.6 million gallons, offset by 8.1 million decrease of diesel gallons sold.
the average sales prices per gallon of gasoline and diesel sold decreased by $0.49 per gallon and $0.71 per gallon, respectively.
Such decreases were partially offset by the following:
•
increased revenues associated with agreements executed in connection with Big Spring Gathering System and Delek Trucking
acquisitions, which were effective March 31, 2020 and May 1, 2020, respectively. Refer to Note 6 of the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information.
Net revenues included sales to our refining segment of $377.7 million and $254.9 million for the years ended December 31, 2020 and 2019,
respectively, and sales to our other segment of $2.1 million and $6.1 million for the years ended December 31, 2020 and 2019, respectively.
We eliminate this intercompany revenue in consolidation.
West Texas Sales Prices
(Average per gallon)
$1.32
$1.34
$1.81
$2.05
2020
2019
Year Ended December 31
Gasoline
Diesel
Cost of Materials and Other
Cost of materials and other for the logistics segment decreased by $67.4 million, or 20.0%, in the year ended December 31, 2020 compared to
the year ended December 31, 2019. This decrease was primarily driven by the following:
•
decreases in the average volumes of diesel sold and average cost per gallon of gasoline and diesel sold partially offset by increases in
averages volumes of gasoline sold in our West Texas marketing operations:
◦
◦
the average volumes of gasoline sold increased by 12.6 million gallons, partially offset by a 8.1 million decrease of diesel gallons
sold.
the average cost per gallon of gasoline and diesel sold decreased by $0.43 per gallon and $0.66 per gallon, respectively.
Our logistics segment purchased product from our refining segment of $203.8 million and $278.3 million for the years ended December 31,
2020 and 2019, respectively. We eliminate these intercompany costs in consolidation.
84 |
Management's Discussion and Analysis
West Texas
Finished Product Cost
(Average per gallon)
$1.27
$1.29
$1.70
$1.95
2020
2019
Year Ended December 31
Gasoline
ULSD
Operating Expenses
Operating expenses decreased by $17.9 million, or 24.2%, in the year ended December 31, 2020 compared to the year ended December 31,
2019, primarily driven by the following:
•
•
•
decrease in employee and outside services costs due to measures implemented to respond to the COVID-19 Pandemic including delaying
non-essential projects;
lower operating costs associated with allocated contract services pertaining to certain of our assets; and
decreases in variable expenses such as utilities, maintenance and materials costs due to lower production.
Contribution Margin
Contribution margin increased by $64.7 million, or 37.3%, in the year ended December 31, 2020 compared to the year ended December 31,
2019, primarily driven by the following:
•
•
increases in revenue associated with agreements executed in connection with Big Spring Gathering System and Delek Trucking
acquisitions; and
decreases in operating expenses.
Such increases were partially offset by the following:
•
decreases in gross margin per barrel sold of $2.07 in our West Texas marketing operations.
85 |
Retail Segment
The tables below sets forth certain information concerning our retail segment operations (gross sales $ in millions):
Retail Contribution Margin and Operating Information
Management's Discussion and Analysis
Net revenues
Cost of materials and other
Operating expenses (excluding depreciation and amortization)
Contribution margin
Operating Information
Number of stores (end of period)
Average number of stores
Average number of fuel stores
Retail fuel sales
Retail fuel sales (thousands of gallons)
Average retail gallons per average number of stores (in thousands)
Average retail sales price per gallon sold
Retail fuel margin ($ per gallon)(1)
Merchandise sales (in millions)
Merchandise sales per average number of stores (in millions)
Merchandise margin %
Same-Store Comparison (2)
Change in same-store retail fuel gallons sold
Change in same-store merchandise sales
(1)
Year Ended December 31,
2020
2019
681.7
523.6
90.5
67.6
$
838.0
684.7
94.8
58.5
Year Ended December 31,
2020
2019
253
253
248
357.9
176,924
715
2.02
0.347
323.8
1.3
$
$
$
$
$
252
266
247
524.9
214,094
827
2.45
0.276
313.1
1.2
31.0 %
30.8 %
$
$
$
$
$
$
$
Year Ended December 31,
2020
2019
(17.3)%
6.2 %
2.9 %
(1.0)%
Retail fuel margin represents gross margin on fuel sales in the retail segment, and is calculated as retail fuel sales revenue less retail fuel cost of sales. The retail fuel
margin per gallon calculation is derived by dividing retail fuel margin by the total retail fuel gallons sold for the period.
(2)
Same-store comparisons include year-over-year changes in specified metrics for stores that were in service at both the beginning of the year and the end of the most recent
year used in the comparison.
86 |
Management's Discussion and Analysis
Retail Segment Operational Comparison of the Year Ended December 31, 2020 versus the Year Ended
December 31, 2019
Net Revenues
Net revenues for the retail segment decreased by $156.3 million, or 18.7%, for the year ended December 31, 2020 compared to the year
ended December 31, 2019, primarily driven by the following:
•
•
total fuel sales were $357.9 million for the year ended December 31, 2020 compared to $524.9 million for 2019, attributable to the
following:
◦
◦
◦
a decrease in total retail fuel gallons sold of 176,924 thousand gallons during 2020 compared to 214,094 thousand gallons in 2019,
primarily attributable to a same-store decline in fuel volumes of (17.3)%, primarily due to demand slowdown as a result of the
COVID-19 Pandemic;
a $0.43 decrease in average price charged per gallon; and
$9.8 million decrease related to reduction in number of stores period over period;
merchandise sales were $323.8 million for the year ended December 31, 2020 compared to $313.1 million for 2019 primarily driven by
the following:
◦
a same-store sales increase of 6.2% due to strong sales growth for key categories such as beer, cigarettes and packaged
beverages, partially offset by a $10.8 million decrease related to reduction in number of stores period over period.
Retail Fuel Volumes
(Thousands of gallons per store)
Average Retail Sales Price
per Gallon Sold
715
827
$2.02
$2.45
2020
2019
2020
2019
Year Ended December 31
Year Ended December 31
Merchandise Sales & Margin
($ in millions)
$323.8
31.0%
2020
$313.1
30.8%
2019
Year Ended December 31
Merchandise Sales
Merchandise margin %
87 |
Management's Discussion and Analysis
Cost of Materials and Other
Cost of materials and other for the retail segment decreased by $161.1 million, or 23.5%, for the year ended December 31, 2020 compared to
the year ended December 31, 2019, primarily driven by the following:
•
•
a decrease in average cost per gallon of $0.50 or 23.0% applied to fuel sales volumes that decreased period over period; and
a $16.3 million decrease due to reduction in number of stores period over period.
Our retail segment purchased finished product from our refining segment of $220.0 million and $379.6 million for the years ended December
31, 2020 and 2019, respectively. We eliminate this intercompany cost in consolidation.
Operating Expenses
Operating expenses for the retail segment decreased by $4.3 million, or 4.5%, for the year ended December 31, 2020 compared to the year
ended December 31, 2019. This decrease is primarily attributable to a decrease in operating costs associated with the reduction in the number
of stores, in addition to the execution of various cost reduction initiatives implemented beginning in the second quarter of 2020.
Contribution Margin
Contribution margin for the retail segment increased by $9.1 million, a 15.6% increase in contribution margin percentage, for the year ended
December 31, 2020 compared to the year ended December 31, 2019, primarily driven by a $0.071 per gallon improvement in the retail fuel
margin and a 0.2% increase in merchandise margin.
Retail Fuel Margin
(Average per gallon sold)
$2.02
$1.68
$0.347
2020
$2.45
$2.18
$0.276
2019
Average Sales Price
Average Cost
Fuel Margin
88 |
Management's Discussion and Analysis
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are
•
•
•
cash generated from our operating activities;
borrowings under our debt facilities; and
potential issuances of additional equity and debt securities.
At December 31, 2020 our total liquidity amounted to $1.6 billion comprised of $746.8 million in unused credit commitments under the Delek
Revolving Credit Facility, $103.4 million in unused credit commitments under the DKL Credit Facility and $787.5 million in cash and cash
equivalents. Historically, we have generated adequate cash from operations to fund ongoing working capital requirements, pay quarterly cash
dividends and operational capital expenditures. Other funding sources including borrowings under existing credit agreements and issuance of
equity and debt securities have been utilized to meet our funding requirements and support our growth capital projects and acquisitions. In
addition we have historically been able to source funding at terms 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 terms that are
sustainable and profitable for the Company. However, there can be no assurances regarding the availability of any future debt or equity
financings or whether such financings can be made available on terms that are acceptable to us; any execution of such financing activities will
be dependent on the contemporaneous availability of functioning debt or equity markets. Additionally, new debt financing activities will be
subject to the satisfaction of any debt incurrence limitation covenants in our existing financing agreements. Our debt limitation covenants in our
existing financing documents are usual and customary for credit agreements of our type and reflective of market conditions at the time of their
execution. Additionally, our ability to satisfy working capital requirements, to service our debt obligations, to fund planned capital expenditures,
or to pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the oil and gas
industry and other financial and business factors, including the current COVID-19 Pandemic and the impact on demand and commodity prices
as well as crack spreads, some of which are beyond our control.
During 2020 and through the date of this Annual Report, the COVID-19 Pandemic has had a significant negative impact on economic conditions
in the U.S., and a particularly severe impact on the oil and gas industry because of the significant impact the Pandemic has had on motor and
air travel. As previously discussed at length in the 'Executive Summary and Strategic Overview' Section of Management's Discussion and
Analysis, we have identified several uncertainties and related risks associated with the current and potential future effects of the Pandemic,
including increased uncertainty and risk associated with our ability to manage liquidity and capital resources. As a result, and while it's always a
critical area of focus, we have dedicated significant efforts throughout 2020 to monitoring and evaluating the evolving uncertainties around
liquidity and capital resources and implementing measures and plans to mitigate and manage the associated risk. Here are some of our most
significant areas of focus:
•
•
•
In early 2020, as the economic impact of the Pandemic became evident, we reviewed our capital expenditure planning and forecast
and suspended the majority of our non-critical growth capital projects during 2020 as well as made strategic decisions to abandon
certain capital assets/projects that may no longer fit our objectives. Instead, we focused on required maintenance and regulatory
projects as well as strategically-timed turnaround activities. As a result, we were able to reduce our capital expenditures to $239.6
million during the year ended December 31, 2020, compared to our initial full-year forecast included in our December 31, 2019
Annual Report on Form 10-K of $325.7 million;
The temporary suspension of growth and non-essential projects (particularly in Refining) provided us with the opportunity to shift our
focus to process improvement initiatives, cost control measures, and opportunities for innovation, which has improved our ability to
control costs in terms of operating expenses and the aforementioned critical capital projects, particularly during the fourth quarter of
2020 (and as evident in our results of operations and cash flows from investing activities as presented in our unaudited consolidated
financial statements for the three months ended, December 31, 2020, which is presented in our earnings release included in Ex.
99.1 to our Form 8-K filed with the SEC on February 24, 2021), all of which also favorably impact our cash position and provide a
longer term foundation for increased operational effectiveness;
Throughout 2020, we continued to monitor credit and liquidity of our key customers, which already go through a stringent and
ongoing credit evaluation as part of our internal controls, and we have been able to successfully maintain our collection efforts
without significant losses or write-offs. As part of this effort, we also continue to monitor our customers, as well as vendors, for any
areas of concentration that could put us at undue risk, and have experienced no significant deterioration in credit or concentration
risks that warrant disclosure;
• We continued executing on our strategy of divesting of non-strategic or underperforming assets. Where we made significant
divestitures of underperforming stores in Retail during 2019, in 2020 we focused on executing a transaction to divest of our
remaining non-operating refinery located in Bakersfield, California. As a result, on May 7, 2020, we sold our equity interests in our
non-operating refinery located in Bakersfield to a subsidiary of Global Clean Energy Holdings,
Inc. (“GCE”) for total cash
consideration of $40.0 million (and resulting in a realized gain on the sale of $56.8 million) and which was incurring non-operating
losses to maintain basic regulatory requirements. As a result, not only did the sale produce significant cash proceeds, its elimination
was immediately cash accretive. See further discussion in Note 4 of our consolidated financial statements included in Item 8.
89 |
Management's Discussion and Analysis
Financial Statements and Supplementary Data, of this Annual Report on Form 10-K;
•
To mitigate some of the risk inherent in prices, we utilized (and continue to utilize) various derivative financial instruments to protect
a portion of our commodity exposure against pricing risk. In many cases, we hedge our production in a manner that systematically
places hedges for several quarters in advance, allowing us to maintain a disciplined risk management program as it relates to
commodity price volatility. We supplement the systematic hedging program with discretionary hedges that take advantage of
favorable market conditions. These activities included certain fixed price purchase contracts and crack spread hedges executed
throughout the year to ensure that we were not overly exposed to the unusually high market volatility which could impact cash
requirements at settlement. However, many of these activities also require margin deposits that can fluctuate significantly in a
volatile market, much of which cannot be anticipated;
• We continue to actively monitor our maintenance and incurrence covenants under our credit facilities and debt instruments, and
have implemented enhancements in our cash forecasting and modeling that allow us to better anticipate potential issues, in many
cases, before they occur. We believe that our enhanced forecasting efforts and processes will better position us to preemptively
work toward amendments with lenders as needed, though it is possible that amendments may not be granted for reasons that may
or may not be known to us;
• We have examined our discretionary uses of cash, including our stock repurchase activities and dividend distribution payments, both
of which are designed to provide a return on shareholder value in times of favorable economic conditions and operating results, but
which can actually weaken shareholder value in times of economic distress and downward pressure on our operating results if such
activities diminish our ability to appropriately manage and mitigate the heightened risk. As a result of this examination, beginning in
the second quarter 2020, we have temporarily suspended the repurchase of shares. Additionally, on November 5, 2020, we
announced that we have elected to suspend dividends indefinitely beginning in the fourth quarter of 2020. Both of these decisions
have the immediate benefit of conserving capital. Depending on market conditions, we may make the decision to resume share
repurchases could which may take priority over future dividends or growth capital; and
•
Finally, we are always evaluating our existing sources of capital and considering the feasibility and potential advantages of strategic
transactions and capital markets opportunities that could expand our sources of liquidity and strengthen our flexibility, while
balancing the comparative cost of capital, the incremental
leverage risk, as well as the potential transactional risk on our core
business and infrastructure. We are pleased that, despite the challenging environment, we have continued to successfully manage
our liquidity and available sources of capital during 2020 through strategic transactions such as the following:
◦
◦
◦
The Delek Logistics IDR Simplification, which resulted in the receipt of newly issued registered common limited partner
units that we may sell
in the market, when we determine that such sale meets all of our criteria for pursuing such a
divestiture, including (but not limited to):
▪
▪
▪
that we have evaluated the impact of a dilution of our ownership interest in Delek Logistics' common limited
partner units in terms of the impact on distributions to Delek and on Delek's earnings per share and believe the
liquidity, potential shareholder value and/or strategic benefits/considerations to be sufficient to warrant the
transaction;
that there is a market for the number of units we are considering divesting; and
that the cost of capital associated with the sale transaction (i.e., in terms of the fees and discounts) is reasonable
and not unduly cost-prohibitive, given the other factors.
By monetizing assets (including financial assets such as RINs inventories), where the cost of capital is not cost-prohibitive
compared to the liquidity considerations, through product financing arrangements; and
By renegotiating and extending financing arrangements and taking advantage of expansion opportunities under our
existing credit facilities, where appropriate. The two most significant of these transactions executed during 2020 were as
follows:
▪
▪
In April 2020, we amended and restated our three Supply and Offtake Agreements with J. Aron which extended
our dedicated financing for the inventory covered through at least December 2022, and updated certain specific
market-indexed provisions to improve our ability to manage our exposure to commodity price volatility during the
term of the Agreements. See further discussion in Note 10 of our consolidated financial statements included in
Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K; and
On May 19, 2020, we amended the Term Loan Credit Facility agreement (as defined in Note 11 of our
consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K) and borrowed $200.0 million in aggregate principal amount of incremental term
loans (the “Third Incremental Term Loan”) at an original issue discount of 7.00%, requiring quarterly principal
amortization payments of $0.5 million commencing on June 30, 2020.
90 |
Management's Discussion and Analysis
As a result of these efforts, and despite the devastating economic effects of the Pandemic on our industry, we have maintained a strong cash
position with capital resources flexibility that positions us well as we look forward to the expected economic recovery from the Pandemic,
where crack spread forecasts and forward curves indicate the market's expectation for significant recovery in 2022 and stabilization by 2023.
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 for Delek Logistics public unitholders, and planned capital expenditures. However, if
market conditions were to change, for instance due to another significant decline in oil prices or crack spreads and/or significant worsening of
conditions/uncertainty created by the COVID-19 Pandemic, and our revenue was reduced significantly or operating costs were to increase
significantly, our cash flows and liquidity could be unfavorably impacted.
As of December 31, 2020, we believe we were in compliance with all of our debt maintenance covenants, where the most significant long-term
obligation subject to such covenants was the Delek Logistics Credit Facility (see further discussion in Note 11 of our consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K). After considering the
current effect of the significant decline in oil prices and uncertainty created by the COVID-19 Pandemic on our operations, we currently expect
to remain in compliance with our existing debt maintenance covenants, though we can provide no assurances, particularly if conditions
significantly worsen beyond our ability to predict. Additionally, we were in compliance with incurrence covenants during the quarter ended
December 31, 2020 to the extent that any of our activities triggered these covenants. However, given the uncertainty around economic
conditions arising from the COVID-19 Pandemic, it is at least reasonably possible that conditions could change significantly, and that such
changes could adversely impact our ability to meet some of these incurrence based covenants, in the event that our activities would warrant
testing these covenants. Failure to meet the incurrence covenants could impose certain incremental restrictions on our ability to incur new debt
and also may limit whether and the extent to which we may resume paying dividends, as well as impose additional restrictions on our ability to
repurchase our stock, make new investments and incur new liens (among others). Such restrictions would generally remain in place until such
quarter that we return to compliance under the applicable incurrence based covenants. In the event that we are subject to these incremental
restrictions, we believe that we have sufficient current and alternative sources of liquidity, including (but not limited to): available borrowings
under our existing Wells Fargo Revolving Credit Facility, and for Delek Logistics, under its Delek Logistics Credit Facility (see further
discussion in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K); the allowance to incur an additional $200 million of secured debt under the Wells Fargo Term Loan Credit
Facility(see further discussion in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K); as well as the possibility of obtaining other secured and unsecured debt, raising capital through
equity issuance, or taking advantage of
financing opportunities such as sale-leasebacks or joint ventures, as otherwise
contemplated and allowed under our incurrence covenants.
transactional
Cash Flows
The following table sets forth a summary of our consolidated cash flows (in millions):
Consolidated
Cash Flow Data:
Operating activities
Investing activities
Financing activities
Net decrease
Year Ended December 31,
2019
2020
$
$
(282.9) $
(191.3)
306.4
(167.8) $
575.2
(691.3)
(7.9)
(124.0)
Cash Flows from Operating Activities
Net cash used in operating activities was $282.9 million for the year ended December 31, 2020, compared to cash provided of $575.2 million for
the comparable period of 2019. Cash receipts from customers and cash payments to suppliers and for salaries decreased resulting in a net
$960.5 million decrease in cash from operating activities mainly due to a decline in the prices and volume of refined product sold. This decrease
was partially offset by a $9.3 million increase in cash received for dividends, a $90.6 million decrease in cash paid for taxes and a $2.5 million
decrease in cash paid for debt interest.
Cash Flows from Investing Activities
Net cash used in investing activities was $191.3 million for the year ended December 31, 2020, compared to $691.3 million in the comparable
period of 2019. Equity method investment contributions decreased $236.2 million primarily due to our initial investments in and contributions to
the Red River Pipeline Joint Venture and WWP Joint Venture in 2019 for $128.6 million and $126.7 million, respectively. During the year ended
December 31, 2020, we contributed $12.2 million related to our Red River Pipeline Joint Venture and $18.9 million related to our interest in
WWP and WWP Project Financing JV. Additionally, we received distributions from our WWP Project Financing JV in the amount of $69.3 million
for which there was no comparable activity in the prior year period. We also received proceeds of $39.9 million from the sale of our Bakersfield
refinery in the year ended December 31, 2020. Also contributing to the decrease was cash purchases of property, plant and equipment which
91 |
Management's Discussion and Analysis
decreased from $413.0 million in 2019, to $269.4 million in 2020, partially attributable to delaying non-essential projects in light of the COVID-19
Pandemic.
Cash Flows from Financing Activities
Net cash provided by financing activities was $306.4 million for the year ended December 31, 2020, compared to cash used of $7.9 million in
the comparable 2019 period. This increase in cash provided was predominantly due to net proceeds received from long-term revolvers of
$128.2 million during the year ended December 31, 2020, compared to net payments of $118.3 million in the comparable 2019 period.
Additionally contributing to this increase were a decrease in repurchases of common stock to $1.9 million for the year ended December 31,
2020 compared to $178.1 million in the comparable 2019 period due to management suspending our share repurchase program, and an
increase in net proceeds from inventory financing arrangements to $169.1 million for the year ended December 31, 2020 compared to $18.6
million in the comparable 2019 period. Partially offsetting this increase was a decrease in net proceeds received from term debt to $147.1
million during the year ended December 31, 2020, compared to $399.7 million in the comparable 2019 period, and a $28.9 million increase in
repurchase of non-controlling interests primarily associated with IDR simplification transactions.
Cash Position and Indebtedness
As of December 31, 2020, our total cash and cash equivalents were $787.5 million and we had total long-term indebtedness of approximately
$2,348.4 million. The total
long-term indebtedness is net of deferred financing costs and debt discount of $6.4 million and $24.4 million,
respectively. Additionally, we had letters of credit issued of approximately $253.2 million. Total unused credit commitments or borrowing base
availability, as applicable, under our revolving credit facilities was approximately $850.2 million. The increase of $281.3 million compared to the
balance at December 31, 2019 resulted primarily from the additional borrowings under the Term Loan Credit Facility and the Delek Logistics
Credit Facility in 2020. As of December 31, 2020, our total long-term indebtedness consisted of the following:
•
•
•
•
•
•
•
no aggregate principal amount under the Revolving Credit Facility, due on March 30, 2023, with average borrowing rate of 3.50%;
an aggregate principal amount of $1,273.0 million under the Term Loan Credit Facility, due on March 30, 2025, with effective interest of
3.57%;
an aggregate principal amount of $39.6 million in outstanding borrowings under the BHI Term Loan, due on December 31, 2022, with
effective interest of 3.58%;
an aggregate principal amount of $746.6 million under the Delek Logistics Credit Facility, due on September 28, 2023, with average
borrowing rate of 2.44%;
an aggregate principal amount of $250.0 million under the Delek Logistics Notes, due in 2025, with effective interest rate of 7.45%;
an aggregate principal amount of $50.0 million under the Reliant Bank Revolver, due on June 30, 2022, with fixed interest rate of 4.50%;
and
an aggregate principal amount of $20.0 million under the Promissory Notes, due on January 04, 2021, with fixed interest rate of 5.50%.
See Note 11 to our accompanying consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K for additional information about our separate debt and credit facilities.
Additionally, our obligation under the supply and offtake inventory financing agreements with J. Aron amounted to $347.7 million at December
31, 2020, $224.9 million of which is due on December 30, 2022, except that a portion (not to exceed $33.1 million) of this otherwise long-term
to potential earlier payment under the Periodic Price Adjustment provision. See Note 10 to our accompanying
component
consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional
information about our supply and offtake facilities.
is subject
Debt Ratings
We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of
qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels and
seniorities, cost structure, planned asset sales and production growth opportunities.
There are no “rating triggers” in any of our contractual debt obligations that would accelerate scheduled maturities should our debt rating fall
below a specified level. However, a downgrade could adversely impact our interest rate on any credit facility implementations and the ability to
economically access debt markets in the future. Additionally, any rating downgrades may result in additional letters of credit or cash collateral
being posted under certain contractual arrangements.
92 |
Our credit ratings as of December 31, 2020 and 2019 are presented below:
Delek
S&P
Moody's
Delek Logistics
S&P
Moody's
Capital Spending
Management's Discussion and Analysis
Year Ended December 31,
2020
BB/Negative
Ba3/Stable
BB-/Negative
B1/Stable
2019
BB/Stable
Ba3/Stable
BB-/Stable
B1/Stable
A key component of our long-term strategy is our capital expenditure program. Our capital expenditures for the year ended December 31, 2020
were $239.6 million, of which approximately $201.0 million was spent in our refining segment, $15.8 million in our logistics segment, $9.1 million
in our retail segment and $13.7 million in corporate and other. The following table summarizes our actual capital expenditures for 2020 and
planned capital expenditures for 2021 by operating segment and major category (in millions):
Year Ended December 31,
2021 Forecast
2020 Actual
Refining
Sustaining maintenance, including turnaround activities
$
92.2
$
Regulatory
Discretionary projects
Refining segment total
Regulatory
Sustaining maintenance
Discretionary projects
Logistics segment total
Regulatory
Sustaining maintenance
Discretionary projects
Retail segment total
Regulatory
Sustaining maintenance
Discretionary projects (1)(2)
Other total
Total capital spending
Logistics
Retail
Corporate and Other
4.4
0.7
97.3
9.0
4.9
6.9
20.8
3.3
—
2.4
5.7
1.8
15.0
9.9
26.7
158.9
41.3
0.8
201.0
1.9
1.5
12.4
15.8
0.2
2.4
6.5
9.1
0.4
1.2
12.1
13.7
$
150.5
$
239.6
(1) Excludes purchases of rights-of-way in the amount of $2.7 million in 2020.
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 and subject to the changes and uncertainties discussed under the 'Forward-Looking Statements' section of Item 7. Management
Discussion and Analysis, of this Annual Report on Form 10-K. For further information, please refer to our discussion in Item 1A. Risk Factors,
of this Annual Report on Form 10-K.
93 |
Contractual Obligations and Commitments
Information regarding our known contractual obligations of the types described below as of December 31, 2020, is set forth in the following table
(in millions):
Management's Discussion and Analysis
Long term debt and notes payable obligations
Interest(1)
Operating lease commitments(2)
Purchase commitments(3)
Product financing agreements(4)
Transportation agreements(5)
J. Aron supply and offtake obligations (6)
Total
<1 Year
33.4
77.9
216.6
876.6
198.0
124.8
15.5
1,542.8
$
$
$
$
Payments Due by Period
3-5 Years
>5 Years
1-3 Years
861.8
145.1
407.5
—
—
230.1
243.5
1,888.0
$
$
1,484.0
72.4
277.0
—
—
127.5
—
1,960.9
$
$
— $
—
214.4
—
—
60.0
—
274.4
$
Total
2,379.2
295.4
1,115.5
876.6
198.0
542.4
259.0
5,666.1
(1) Expected interest payments on debt outstanding at December 31, 2020. Floating interest rate debt is calculated using December 31, 2020 rates. For additional information, see
Note 11 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of December 31, 2020.
(3) We have supply agreements to secure certain quantities of crude oil, finished product and other resources used in production at both fixed and market prices. We have estimated
future payments under the market-based agreements using current market rates. Excludes purchase commitments in buy-sell transactions which have matching notional
amounts with the same counterparty and are generally net settled.
(4) Balances consist of obligations under RINs product financing arrangements, as described in the 'Environmental Credits and Related Regulatory Obligations' accounting policy
included in Note 2 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(5) Balances consist of contractual obligations under agreements with third parties (not including Delek Logistics) for the transportation of crude oil to our refineries.
(6)
Balances consists of contractual obligations under the J. Aron Supply and Offtake Agreements, including annual fees and principal obligation for the Baseline Volume Step-Out
Liability. For additional information, see Note 10 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form
10-K.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements through the date of this Annual Report on Form 10-K.
94 |
Management's Discussion and Analysis
Accounting Standards
Critical Accounting Policies and Estimates
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. We
prepare our consolidated financial statements in conformity with GAAP, and in the process of applying these principles, we must make
judgments, assumptions and estimates based on the best available information at the time. To aid a reader's understanding, management has
identified our critical accounting policies. These policies are considered critical because they are both most important to the portrayal of our
financial condition and results, and require our most difficult, subjective or complex judgments. Often they require judgments and estimation
about matters which are inherently uncertain and involve measuring at a specific point in time, events which are continuous in nature. Actual
results may differ based on the accuracy of the information utilized and subsequent events, some over which we may have little or no control.
Evaluation of Variable Interest Entities ("VIEs")
Our consolidated financial statements include the financial statements of our subsidiaries and VIEs, of which we are the primary beneficiary. We
evaluate all legal entities in which we hold an ownership or other pecuniary interest to determine if the entity is a VIE. Variable interests can be
contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the VIE’s assets. If we are not the
primary beneficiary, the general partner or another limited partner may consolidate the VIE, and we record the investment as an equity method
investment. Significant judgment is exercised in determining that a legal entity is a VIE and in evaluating whether we are the primary beneficiary
in a VIE. Generally, the primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE’s
economic performance and the right to receive benefits or obligation to absorb losses that could be potentially significant to the VIE. We
evaluate the entity’s need for continuing financial support; the equity holder’s lack of a controlling financial interest; and/or if an equity holder’s
voting interests are disproportionate to its obligation to absorb expected losses or receive residual returns. We evaluate our interests in a VIE to
determine whether we are the primary beneficiary. We use a primarily qualitative analysis to determine if we are deemed to have a controlling
financial interest in the VIE, either on a standalone basis or as part of a related party group. We continually monitor our interests in legal entities
for changes in the design or activities of an entity and changes in our interests, including our status as the primary beneficiary to determine if the
changes require us to revise our previous conclusions.
LIFO Inventory
The Tyler refinery's inventory consists of crude oil, refined petroleum products and blendstocks which are stated at the lower of cost or market.
Cost is determined under the last-in, first-out ("LIFO") valuation method. The LIFO method requires management to make estimates on an
interim basis of the anticipated year-end inventory quantities, which could differ from actual quantities.
We believe the accounting estimate related to the establishment of anticipated year-end LIFO inventory is a critical accounting estimate,
because it requires management to make assumptions about future production rates in the Tyler refinery, the future buying patterns of our
customers, as well as numerous other factors beyond our control, including the economic viability of the general economy, weather conditions,
the availability of imports, the marketing of competitive fuels and government regulation. The impact of changes in actual performance versus
these estimates could be material to the inventories reported on our quarterly balance sheets, and the impact on the results reported in our
quarterly statements of income could be material. In selecting assumed inventory levels, we use historical trending of production and sales,
recognition of current market indicators of future pricing and value and new regulatory requirements which might impact inventory levels.
Management's assumptions require significant judgment because actual year-end inventory levels have fluctuated in the past and may continue
to do so.
At each year-end, actual physical inventory levels are used to calculate both ending inventory balances and final cost of materials and other for
the year.
Property, Plant and Equipment and Other Intangibles Impairment
Property, plant and equipment and other intangibles are evaluated for impairment whenever indicators of impairment exist. Accounting
standards require that if an impairment indicator is present, we must assess whether the carrying amount of the asset is unrecoverable by
estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. We derive the
required undiscounted cash flow estimates from our historical experience and our internal business plans. We use quoted market prices when
available and our internal cash flow estimates discounted at an appropriate interest rate to determine fair value, as appropriate. If the carrying
amount is more than the recoverable amount, an impairment charge must be recognized based on the fair value of the asset. Our assessment
did not result in impairment during the years ended December 31, 2020, 2019 or 2018.
95 |
Management's Discussion and Analysis
Goodwill
Goodwill in an acquisition represents the excess of the aggregate purchase price over the fair value of the identifiable net assets. Goodwill is
reviewed at least annually for impairment, or more frequently if indicators of impairment exist, such as disruptions in our business, unexpected
significant declines in operating results or a sustained market capitalization decline. Goodwill is evaluated for impairment by comparing the
carrying amount of the reporting unit to its estimated fair value. Prior to the adoption of Accounting Standard Update ("ASU") 2017-04,
Simplifying the Test for Goodwill Impairment, if a reporting unit's carrying amount exceeds its fair value (Step 1), the impairment assessment
leads to the testing of the implied fair value of the reporting unit's goodwill to its carrying amount (Step 2). If the implied fair value is less than the
carrying amount, a goodwill impairment charge is recorded. Subsequent to adoption of ASU 2017-04 (which we adopted during the fourth
quarter of 2018, as permitted by the ASU), Step 2 is no longer required, but rather any impairment is determined based on the results of Step 1.
In assessing the recoverability of goodwill, assumptions are made with respect to future business conditions and estimated expected future
cash flows to determine the fair value of a reporting unit. We may consider inputs such as a market participant weighted average cost of capital
("WACC"), forecasted crack spreads, gross margin, capital expenditures, and long-term growth rate based on historical information and our best
estimate of future forecasts, all of which are subject to significant judgment and estimates. We may also consider a market approach in
determining or corroborating the fair values of the reporting units using a multiple of expected future cash flows, such as those used by third-
party analysts. The market approach involves significant judgment, including selection of an appropriate peer group, selection of valuation
multiples, and determination of the appropriate weighting in our valuation model. If these estimates and assumptions change in the future, due
to factors such as a decline in general economic conditions, sustained decrease in the crack spreads, competitive pressures on sales and
margins and other economic and industry factors beyond management's control, an impairment charge may be required. The most significant
risks to our valuation and the potential future impairment of goodwill are the WACC and the volatility of the crack spread, which is based on the
crude oil and the refined product markets. The crack spread is often unpredictable and may negatively impact our results of operations in ways
that cannot be anticipated and that are beyond management's control.
We may also elect to perform a qualitative impairment assessment of goodwill balances. The qualitative assessment permits companies to
assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying
amount. If a company concludes that, based on the qualitative assessment, it is more likely than not that the fair value of a reporting unit is less
than its carrying amount, the company is required to perform the quantitative impairment test. Alternatively, if a company concludes based on
the qualitative assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it has
completed its goodwill impairment test and does not need to perform the quantitative impairment test.
We performed a qualitative assessment on the reporting units in our logistics segment for the years ended December 31, 2020, 2019 and 2018,
which did not result in an impairment charge nor did our analysis reflect any reporting units at risk.
Our quantitative assessment of goodwill performed on the reporting units in our refining and retail segments during the fourth quarter of 2020,
resulted in an impairment of $126.0 million during the year ended December 31, 2020, related to our Big Spring refinery and Krotz Springs
refinery reporting units. The impairment was predominantly the result of the continued uncertainty regarding the impact of the COVID-19
Pandemic, which impacted various components of our assessment, including the WACC. The Pandemic has resulted in government-imposed
temporary business closures and shelter-at-home directives. This has had the secondary effect of impacting prices of crude oil and refined
products as well as supply and demand for crude oil and refined products, and triggered several identified uncertainties, as discussed in the
'Business Overview' section of Management's Discussion and Analysis. As part of our assessment, the aggregate fair value of all reporting
units have been reconciled to our market capitalization for reasonableness. Each of the remaining reporting units have a fair value that is
substantially in excess of its carrying value. There was no impairment during the years ended December 31, 2019 and 2018.
Details of remaining goodwill balances by segment are included in Note 18 to the consolidated financial statements in Item 8. Financial
Statements and Supplementary Data, of this Annual Report on Form 10-K.
Environmental Liabilities
It is our policy to accrue environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been
incurred and the amount can be reasonably estimated. Environmental
liabilities represent the current estimated costs to investigate and
remediate contamination at sites where we have environmental exposure. This estimate is based on assessments of the extent of the
contamination, the selected remediation methodology and review of applicable environmental regulations, typically considering estimated
activities and costs for 15 years, and up to 30 years if a longer period is believed reasonably necessary. Such estimates may require judgment
with respect to costs, time frame and extent of required remedial and clean-up activities. Accruals for estimated costs from environmental
remediation obligations generally are recognized no later than completion of the remedial feasibility study and include, but are not limited to,
costs to perform remedial actions and costs of machinery and equipment that are dedicated to the remedial actions and that do not have an
alternative use. Such accruals are adjusted as further information develops or circumstances change. We discount environmental liabilities to
their present value if payments are fixed or reliably determinable. Expenditures for equipment necessary for environmental issues relating to
ongoing operations are capitalized.
Changes in laws and regulations and actual remediation expenses compared to historical experience could significantly impact our results of
operations and financial position. We believe the estimates selected, in each instance, represent our best estimate of future outcomes, but the
actual outcomes could differ from the estimates selected.
96 |
Management's Discussion and Analysis
Asset Retirement Obligations
Delek recognizes liabilities which represent the fair value of a legal obligation to perform asset retirement activities, including those that are
conditional on a future event, when the amount can be reasonably estimated. If a reasonable estimate cannot be made at the time the liability is
incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.
In the refining segment, we have asset retirement obligations with respect to our refineries due to various legal obligations to clean and/or
dispose of these assets at the time they are retired. However, the majority of these assets can be used for extended and indeterminate periods
of time provided that they are properly maintained and/or upgraded. It is our practice and intent to continue to maintain these assets and make
improvements based on technological advances. In the logistics segment, these obligations relate to the required cleanout of the pipeline and
terminal tanks and removal of certain above-grade portions of the pipeline situated on right-of-way property. In the retail segment, we have
asset retirement obligations related to the removal of underground storage tanks and the removal of brand signage at owned and leased retail
sites which are legally required under the applicable leases. The asset retirement obligation for storage tank removal on leased retail sites is
accreted over the expected life of the owned retail site or the average retail site lease term.
In order to determine fair value, management must make certain estimates and assumptions including, among other things, projected cash
flows, a credit-adjusted risk-free rate and an assessment of market conditions that could significantly impact the estimated fair value of the asset
retirement obligations. We believe the estimates selected, in each instance, represent our best estimate of future outcomes, but the actual
outcomes could differ from the estimates selected.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K for a discussion of new accounting pronouncements applicable to us.
Non-GAAP Measures
Our management uses certain “non-GAAP” operational measures to evaluate our operating segment performance and non-GAAP financial
measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance
with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability
and include:
•
•
•
Refining margin - calculated as the difference between net refining revenues and total cost of materials and other;
Refined product margin - calculated as the difference between net revenues attributable to refined products (produced and purchased) and
related cost of materials and other (which is applicable to both the refining segment and the West Texas wholesale marketing activities
within our logistics segment); and
Refining margin per barrels sold - calculated as refining margin divided by our average refining sales in barrels per day (excluding
purchased barrels) multiplied by 1,000 and multiplied by the number of days in the period.
We believe these non-GAAP operational and financial measures are useful to investors, lenders, ratings agencies and analysts to assess our
ongoing performance because, when reconciled to their most comparable GAAP financial measure, they provide improved comparability
between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and they may
obscure our underlying results and trends.
Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and
operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.
Non-GAAP Reconciliations
The following table provides a reconciliation of refining margin to the most directly comparable U.S. GAAP measure, gross margin:
Reconciliation of refining margin to gross margin
Refining Segment
Net revenues
Cost of sales
Gross margin
Add back (items included in cost of sales):
Operating expenses (excluding depreciation and amortization)
Depreciation and amortization
Refining margin
97 |
Year Ended December 31,
2019
2018
2020
$
5,817.7
6,346.5
(528.8)
$
8,798.5
8,154.9
643.6
402.7
198.3
492.4
134.3
9,610.4
8,904.6
705.8
465.4
133.7
72.2
$
1,270.3
$
1,304.9
$
$
Management's Discussion and Analysis
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in commodity prices (mainly crude oil and unleaded gasoline) and interest rates are our primary sources of market risk. When we
make the decision to manage our market exposure, our objective is generally to avoid losses from adverse price changes, realizing we will not
obtain the gains of beneficial price changes.
Impact of Changing Prices
Our revenues and cash flows, as well as estimates of future cash flows, are sensitive to changes in energy prices. Major shifts in the cost of
crude oil, the prices of refined products and the cost of ethanol can generate large changes in the operating margin in each of our segments.
We maintain, at both company-owned and third-party facilities, inventories of crude oil, feedstocks and refined petroleum products, the values of
which are subject to wide fluctuations in market prices driven by world economic conditions, regional and global inventory levels and seasonal
conditions. At December 31, 2020 and 2019, we held approximately 3.8 million and 3.7 million barrels, respectively, of crude and product
inventories associated with the Tyler refinery valued under the LIFO valuation method, with an average cost of $52.50 and $61.56 per barrel,
respectively. At December 31, 2020 and 2019, the excess of replacement cost over the carrying value (LIFO) of refinery inventories was $3.4
million and $14.9 million, respectively. At December 31, 2020 and 2019, we held approximately 9.1 million and 9.4 million barrels, respectively,
of crude and product inventories associated with the El Dorado, Big Spring and Krotz Springs refineries valued under the FIFO valuation
method, with an average cost of $49.31 and $63.25 per barrel, respectively. Due to a lower crude oil and refined product pricing environment,
market prices have declined to a level below the average cost of our inventories. At December 31, 2020, we recorded a pre-tax inventory
valuation reserve of $31.1 million, $30.3 million of which related to LIFO inventory, which is subject to reversal in subsequent periods, not to
exceed LIFO cost, should market prices recover. At December 31, 2019, we recorded a pre-tax inventory valuation reserve of $1.7 million, of
which $1.2 million related to LIFO inventory, which is subject to reversal in subsequent periods, not to exceed LIFO cost, when those physical
inventory quantities are sold. For the years ended December 31, 2020, 2019 and 2018, we recognized net inventory valuation (losses) gains of
$(31.1) million, $37.6 million and $(52.5) million, respectively, which were recorded as a component of cost of materials and other in the
consolidated statements of income.
From time to time, we also may enter into forward purchase or sale derivative contracts for trading purposes (primarily in our Canadian
business) and, as a result, may have trading investment commodities on hand related to the purchased inventory. Such derivative contracts and
related investment commodities are recorded at fair value and subject to pricing risk each period with changes in fair value reflected in other
operating income, net in the profit and loss section of our consolidated financial statements. For the years ended December 31, 2020, 2019 and
2018, all of our forward purchase and sales contracts that were accounted for as derivative instruments consisted of contracts related to our
Canadian trading activities.
Price Risk Management Activities
At times, we enter into the following instruments/transactions in order to manage our market-indexed pricing risk: commodity derivative
contracts which we use to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of
refined products or to fix margins on future production; and future commitments to purchase or sell RINs at fixed prices and quantities, which
are used to manage the costs associated with our RINs obligations and meet the definition of derivative instruments under Accounting
Standards Codification 815, Derivatives and Hedging ("ASC 815"). In accordance with ASC 815, all of these commodity contracts and future
purchase commitments are recorded at fair value, and any change in fair value between periods has historically been recorded in the profit and
loss section of our consolidated financial statements. Occasionally, at inception, the Company will elect to designate the commodity derivative
contracts as cash flow hedges under ASC 815. Gains or losses on commodity derivative contracts accounted for as cash flow hedges are
recognized in other comprehensive income on the consolidated balance sheets and, ultimately, when the forecasted transactions are completed
in net revenues or cost of materials and other in the consolidated statements of income.
98 |
Management's Discussion and Analysis
The following table sets forth information relating to our open commodity derivative contracts, excluding our trading derivative contracts (which
are presented separately below), as of December 31, 2020 ($ in millions).
Contract Description
Fair Value
Notional
Contract Volume
2021
2022
2023
2024
2025
Total Outstanding
Notional Contract Volume by Year of Maturity
Contracts not designated as hedging
instruments:
Crude oil price swaps - long(1)
Crude oil price swaps - short(1)
Inventory, refined product and crack
spread swaps - long(1)
Inventory, refined product and crack
spread swaps - short(1)
Natural gas forward contracts - long (3)
Natural gas forward contracts - short (3)
RINs commitment contracts - long(2)
RINs commitment contracts - short(2)
Total
$
$
41.8
(36.2)
57.8
(72.4)
26.4
(7.2)
33.6
(197.2)
(153.4)
21,236,000
18,174,000
21,086,000
18,174,000
150,000
—
—
—
59,217,000
29,617,000
22,200,000
7,400,000
58,996,000
11,280,000
10,850,000
182,650,000
563,400,000
925,803,000
29,396,000
11,280,000
10,850,000
—
—
120,403,000
22,200,000
—
—
—
—
44,550,000
7,400,000
—
—
—
—
14,800,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) Volume in barrels. (2) Volume in RINs. (3) Volume in MMBTU
Interest Rate Risk
We have market exposure to changes in interest rates relating to our outstanding floating rate borrowings, which totaled approximately $2,059.2
million as of December 31, 2020. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt
outstanding as of December 31, 2020 would be to change interest expense by approximately $20.6 million.
LIBOR Transition
LIBOR is a commonly used indicative measure of the average interest rate at which major global banks could borrow from one another. The
United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has publicly announced that it intends to discontinue the reporting of
certain LIBOR rates after 2021, with a complete cessation for all USD LIBOR rates after June 2023. Certain of our agreements use LIBOR as a
“benchmark” or “reference rate” for various terms. Some agreements contain an existing LIBOR alternative. Where there is not an alternative,
we expect to replace the LIBOR benchmark with an alternative reference rate. While we do not expect the transition to an alternative rate to
have a significant impact on our business or operations, it is possible that the move away from LIBOR could materially impact our borrowing
costs on our variable rate indebtedness.
Commodity Derivatives Trading Activities
We enter into active trading positions in a variety of commodity derivatives, which include forward physical contracts, swap contracts, and
futures contracts. These trading activities are undertaken by using a range of contract types in combination to create incremental gains by
capitalizing on crude oil supply and pricing seasonality. These contracts all had remaining durations of less than one year as of December 31,
2020, and are classified as held for trading and are recognized at fair value with changes in fair value recognized in the income statement.
The following table sets forth information relating to commodity derivative contracts held for trading purposes as of December 31, 2020.
Contract Description
Over the counter forward sales contracts (crude)
Notional contract volume (1)
Weighted-average market price (per barrel)
Contractual volume at fair value (in millions)
Over the counter forward purchase contracts (crude)
Notional contract volume (1)
Weighted-average market price (per barrel)
Contractual volume at fair value (in millions)
(1)
Volume in barrels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference to the section beginning on page F-1.
99 |
Less than 1 year
1,092,298
33.07
36.1
967,308
33.00
31.9
$
$
$
$
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Controls and Procedures, and Other Information
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act that are designed to
provide reasonable assurance that the information that we are required to disclose in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, our disclosure controls and procedures,
however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls
and procedures are met.
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this report.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over
financial reporting is a process that is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by
our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those
policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP and that receipts and expenditures recorded by us are being made only in accordance with authorizations of our management
and Board of Directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies and procedures may deteriorate.
Management has conducted its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2020, based on
the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing the
operational effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit
Committee of the Board of Directors. Based on its assessment and review with the Audit Committee, management concluded that, at December
31, 2020, we maintained effective internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of our internal control over financial
reporting as of December 31, 2020, as stated in their report, which is included in the section beginning on page F-1.
The information required by Item 8 is incorporated by reference to the section beginning on page F-1.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as described in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
100 |
Directors, Executive Officers, Corporate Governance and Security Ownership
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors Governance Guidelines, our charters for our Audit, Compensation, Nominating and Corporate Governance and
Environmental, Health and Safety Committees and our Code of Business Conduct & Ethics covering all employees, including our principal
executive officer, principal financial officer, principal accounting officer and controllers, are available on our website, www.DelekUS.com, under
the "About Us - Corporate Governance" caption. A print copy of any of these documents will be mailed upon a written request made by a
stockholder to the Corporate Secretary, Delek US Holdings, Inc. 7102 Commerce Way, Brentwood, Tennessee 37027. We intend to disclose
any amendments to or waivers of the Code of Business Conduct & Ethics on behalf of our Chief Executive Officer, Chief Financial Officer and
persons performing similar functions on our website, at www.DelekUS.com, under the "Investor Relations" caption, promptly following the date
of any such amendment or waiver.
The information required by Item 401 of Regulation S-K regarding directors will be included under "Election of Directors" in the definitive Proxy
Statement for our Annual Meeting of Stockholders expected to be held May 6, 2021 (the "Definitive Proxy Statement"), and is incorporated
herein by reference. The information required by Item 401 of Regulation S-K regarding executive officers will be included under "Corporate
Governance" in the Definitive Proxy Statement and is incorporated herein by reference. The information required by Item 405 of Regulation S-K
will be included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Definitive Proxy Statement and is incorporated herein
by reference. The information required by Items 406, 407(c)(3), (d)(4), and (d)(5) of Regulation S-K will be included under "Corporate
Governance" in the Definitive Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K will be included under "Executive
Compensation" and "Corporate Governance" in the Definitive Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 201(d) and Item 403 of Regulation S-K will be included under "Equity Compensation Plan Information" and
"Security Ownership of Certain Beneficial Owners and Management" in the Definitive Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 404 of Regulation S-K will be included under "Certain Relationships and Related Transactions" in the
Definitive Proxy Statement and is incorporated herein by reference.
The information required by Item 407(a) of Regulation S-K will be included under "Election of Directors" and "Corporate Governance" in the
Definitive Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be included under “Independent Public Accountants” in the Definitive Proxy Statement and is
incorporated herein by reference.
101 |
Financial Statements and Schedules
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Certain Documents Filed as Part of this Annual Report on Form 10-K:
PART IV
1.
2.
Financial Statements. The accompanying Index to Financial Statements on page F-1 of this Annual Report on Form 10-K is provided in
response to this item.
List of Financial Statement Schedules. All schedules are omitted because the required information is either not present, not present in
material amounts, included within the Consolidated Financial Statements or is not applicable.
3.
Exhibits - See below.
102 |
Financial Statements and Schedules
Exhibit No.
<
2.1
2.2
2.3
2.4
3.1
3.2
4.1
4.2
4.3
10.1
10.2(a)
10.2(b)
10.2(c)
10.2(d)
10.2(e)
10.2(f)
10.2(g)
10.3
10.4
10.5
10.6(a)
10.6(b)
#
*
*
*
*
*
*
*
*
EXHIBIT INDEX
Description
Agreement and Plan of Merger dated as of January 2, 2017, among Delek US Holdings, Inc., Delek Holdco, Inc., Dione
Mergeco, Inc., Astro Mergeco, Inc. and Alon USA Energy, Inc. (incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K filed on January 3, 2017).
First Amendment to Agreement and Plan of Merger dated as of February 27, 2017, among Delek US Holdings, Inc., Delek
Holdco, Inc., Dion Mergeco, Inc., Astro Mergeco, Inc., and Alon USA Energy, Inc. (incorporated by reference to Exhibit 2.6 to
the Company’s Form 10-K filed on February 28, 2017).
Second Amendment to Agreement and Plan of Merger dated as of April 21, 2017, among Delek US Holdings, Inc., Delek
Holdco, Inc., Dion Mergeco, Inc., Astro Mergeco, Inc., and Alon USA Energy, Inc. (incorporated by reference to Annex B-2 to
the Company’s Proxy Statement/Prospectus filed pursuant to Rule 424(b)(3) on May 30, 2017).
Agreement and Plan of Merger dated as of November 8, 2017, among Delek US Holdings, Inc., Sugarland Mergeco, LLC,
Alon USA Partners, LP, and Alon USA Partners GP, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-
K filed on November 9, 2017).
Amended and Restated Certificate of Incorporation, as amended by that certain Certificate of Designations of Series A Junior
Participating Preferred Stock of Delek US Holdings, Inc., dated March 23, 2020 (incorporated by reference to Exhibit 3.1 of
the Company’s Form 10-Q filed on May 8, 2020).
Amended and Restated Bylaws of Delek US Holdings, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Form
10-Q filed on May 8, 2020).
Indenture, dated as of May 23, 2017, among Delek Logistics, LP, Delek Logistics Finance Corp., the Guarantors named
therein and U.S. Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Partnership's Form 8-
K filed on May 24, 2017, SEC File No. 001-35721).
Form of 6.750% Senior Notes due 2025 (included as Exhibit A in Exhibit 4.1).
Description of Common Stock
Form of Indemnification Agreement for Directors and Officers (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1/A, filed on April 20, 2006, SEC File No. 333-131675).
Delek US Holdings, Inc. 2006 Long-Term Incentive Plan (as amended through May 4, 2010) (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q filed on May 7, 2010, SEC File No. 001-32868).
Form of Delek US Holdings, Inc. 2006 Long-Term Incentive Plan Restricted Stock Unit Agreement (incorporated by reference
to Exhibit 10.13(a) to the Company's Registration Statement on Form S-1/A,
filed on April 20, 2006, SEC File No.
333-131675).
Director Form of Delek US Holdings, Inc. 2006 Long-Term Incentive Plan Stock Option Agreement (incorporated by reference
to Exhibit 10.13(b) to the Company's Registration Statement on Form S-1/A,
filed on April 20, 2006, SEC File No.
333-131675).
Officer Form of Delek US Holdings, Inc. 2006 Long-Term Incentive Plan Stock Option Agreement (incorporated by reference
filed on April 20, 2006, SEC File No.
to Exhibit 10.13(c) to the Company's Registration Statement on Form S-1/A,
333-131675).
Director Form of Delek US Holdings, Inc. 2006 Long-Term Incentive Plan Stock Appreciation Rights Agreement (incorporated
by reference to Exhibit 10.5 to the Company's Form 10-Q filed on August 6, 2010, SEC File No. 001-32868).
Employee Form of Delek US Holdings,
(incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q filed on August 6, 2010, SEC File No. 001-32868).
Form of Delek US Holdings, Inc. 2006 Long-Term Incentive Plan Performance Restricted Stock Unit Agreement (incorporated
by reference to Exhibit 10.4 to the Company's Form 10-Q filed on August 7, 2014, SEC File No. 001-32868).
Tyler Throughput and Tankage Agreement, dated July 26, 2013, between Delek Refining, Ltd. and Delek Marketing &
Supply, LP (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on August 1, 2013).
Pipelines and Tankage Agreement, dated November 7, 2012, by and between Delek Refining, Ltd. and Delek Crude
Logistics, LLC (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed on November 14, 2012, SEC File
No. 001-32868).
Pipelines and Storage Facilities Agreement, dated November 7, 2012, by and among Lion Oil Company, Delek Logistics
Partners, LP, SALA Gathering Systems, LLC, El Dorado Pipeline Company, LLC, Magnolia Pipeline Company, LLC and J.
Aron & Company (incorporated by reference to Exhibit 10.5 to the Company's Form 8-K filed on November 14, 2012, SEC
File No. 001-32868).
El Dorado Throughput and Tankage Agreement, executed as of February 10, 2014, between Lion Oil Company and Delek
Logistics Operating LLC, and, for limited purposes, J. Aron & Company (incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed on February 14, 2014).
Amendment to El Dorado Throughput and Tankage Agreement, executed as of July 22, 2016 but effective as of February 11,
2014, between Lion Oil Company and Delek Logistics Operating LLC, and, for limited purposes, J. Aron & Company
(incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q filed on August 5, 2016).
Inc. 2006 Long-Term Incentive Plan Stock Appreciation Rights Agreement
103 |
Financial Statements and Schedules
10.7(a)
10.7(b)
10.7(c)
10.7(d)
10.8(a)
10.8(b)
10.8(c)
10.8(d)
10.8(e)
10.8(f)
10.8(g)
10.9(a)
10.9(b)
10.9(c)
10.9(d)
10.9(e)
10.9(f)
10.9(g)
10.9(h)
10.1
10.11
10.12
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Third Amended and Restated Omnibus Agreement, dated as of March 31, 2015, among Delek US Holdings, Inc., Lion Oil
Company, Delek Logistics Operating, LLC, Delek Marketing & Supply, LP, Delek Refining, Ltd., Delek Logistics Partners, LP,
Paline Pipeline Company, LLC, SALA Gathering Systems, LLC, Magnolia Pipeline Company, LLC, El Dorado Pipeline
Company, LLC, Delek Crude Logistics, LLC, Delek Marketing-Big Sandy, LLC, DKL Transportation, LLC and Delek Logistics
GP, LLC (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed on May 7, 2015).
First Amendment to Third Amended and Restated Omnibus Agreement, dated as of August 3, 2015, by and among Delek US
Holdings, Inc., Lion Oil Company, Delek Logistics Operating, LLC, Delek Marketing & Supply, LP, Delek Refining, Ltd., Delek
Logistics Partners, LP, Paline Pipeline Company, LLC, SALA Gathering Systems, LLC, Magnolia Pipeline Company, LLC, El
Dorado Pipeline Company, LLC, Delek Crude Logistics, LLC, Delek Marketing-Big Sandy, LLC, DKL Transportation, LLC and
Delek Logistics GP, LLC (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q filed on August 5, 2015).
Second Amendment and Restatement of Schedules to Third Amended and Restated Omnibus Agreement, dated and
effective as of March 31, 2020 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on April 6, 2020).
Third Amendment and Restatement of Schedules to Third Amended and Restated Omnibus Agreement, dated and effective
as of May 15, 2020 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on May 18, 2020).
Delek US Holdings, Inc. 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 filed on June 1, 2016).
First Amendment to the Delek US Holdings, Inc. 2016 Long-Term Incentive Plan, effective May 8, 2018 (incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on Form S-8 filed on May 31, 2018).
Second Amendment to the Delek US Holdings, Inc. 2016 Long-Term Incentive Plan, effective May 5, 2020 (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q filed on May 8, 2020).
General Terms and Conditions for Restricted Stock Unit Awards to Executive Officers and Directors under the 2016 Delek US
Holdings, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q filed on
August 5, 2016).
General Terms and Conditions for Stock Appreciation Right Awards to Executive Officers and Directors under the 2016 Delek
US Holdings, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q filed on
August 5, 2016).
Form of Delek US Holdings, Inc. 2016 Long-Term Incentive Plan Performance Restricted Stock Unit Agreement (incorporated
by reference to Exhibit 10.29(c) to the Company’s Form 10-K filed February 28, 2017).
Form of Delek US Holdings, Inc. 2016 Long-Term Incentive Plan Restricted Stock Unit Agreement (incorporated by reference
to Exhibit 10.29(d) to the Company’s Form 10-K filed February 28, 2017).
Alon USA Energy, Inc. Second Amended and Restated 2005 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.2 to Alon USA Energy, Inc.’s Form 10-Q filed on May 9, 2012, SEC File No. 001-32567).
Form of Restricted Stock Award Agreement relating to Director Grants pursuant to Section 12 of the Alon USA Energy, Inc.
2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Alon USA Energy, Inc.’s Form 8-K filed on
August 5, 2005, SEC File No. 001-32567).
Form of Restricted Stock Award Agreement relating to Participant Grants pursuant to Section 8 of the Alon USA Energy, Inc.
2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Alon USA Energy, Inc.’s Form 8-K filed on
August 23, 2005, SEC File No. 001-32567).
Form II of Restricted Stock Award Agreement relating to Participant Grants pursuant to Section 8 of the Alon USA Energy,
Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to Alon USA Energy, Inc.’s Form 8-K filed
on November 8, 2005, SEC File No. 001-32567).
Alon USA Energy, Inc. Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to Alon USA
Energy, Inc.’s Form 8-K filed on January 12, 2017, SEC File No. 001-32567).
Form of Appreciation Rights Award Agreement relating to Participant Grants pursuant Section 7 of the Alon USA Energy, Inc.
2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Alon USA Energy, Inc.’s Form 8-K filed on
March 12, 2007, SEC File No. 001-32567).
Form of Amendment to Appreciation Rights Award Agreement relating to Participant Grants pursuant to Section 7 of the Alon
USA Energy, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to Alon USA Energy, Inc.’s
Form 8-K filed on January 27, 2010, SEC File No. 001-32567).
Form of Award Agreement relating to Executive Officer Restricted Stock Grants pursuant to the Alon USA Energy, Inc. 2005
Amended and Restated Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to Alon USA Energy, Inc.’s
Form 8-K filed on May 9, 2011, SEC File No. 001-32567).
Amended and Restated Executive Employment Agreement, dated as of May 8, 2020, by and between Delek US Holdings,
Inc. and Ezra Uzi Yemin (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q filed on May 8, 2020).
Amended and Restated Executive Employment Agreement, dated April 6, 2020, between Delek US Holdings, Inc. and Avigal
Soreq (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on April 9, 2020).
Executive Employment Agreement, effective August 6, 2018, by and between Delek US, Energy, Inc. and Louis LaBella
(incorporated by reference to Exhibit 10.38 to the Company's Form 10-K filed on March 1, 2019).
104 |
10.13(a)
10.13(b)
*
*
Offer Letter, dated April 6, 2020, between Delek US Holdings, Inc. and Reuven Spiegel (incorporated by reference to Exhibit
10.1 of the Company’s Form 8-K filed on April 9, 2020).
Executive Employment Agreement, dated August 1, 2020, by and between Delek US Holdings, Inc. and Reuven Spiegel
(incorporated by reference to Exhibit 10.5 of the Company’s Form 10-Q filed on August 7, 2020).
Financial Statements and Schedules
Pipelines, Storage and Throughput Facilities Agreement (Big Spring Refinery Logistics Assets and Duncan Terminal), dated
March 20, 2018 and effective as of March 1, 2018, by and among Alon USA, LP, DKL Big Spring, LLC, for the limited
purposes specified therein, Delek US, and for the limited purposes specified therein, J. Aron & Company LLC (incorporated
by reference to Exhibit 10.1 to the Company's Form 8-K filed on March 26, 2018).
Big Spring Asphalt Services Agreement, dated March 20, 2018 and effective as of March 1, 2018, by and among Alon USA,
LP, DKL Big Spring, LLC, for the limited purposes specified therein, Delek US, and for the limited purposes specified therein,
J. Aron & Company LLC (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed on March 26, 2018).
Marketing Agreement, dated as of March 20, 2018 and effective as of March 1, 2018, by and among Alon USA, LP, DKL Big
Spring, LLC, and for the limited purposes specified therein, Delek US (incorporated by reference to Exhibit 10.3 to the
Company's Form 8-K filed on March 26, 2018).
Term Loan Credit Agreement, dated as of March 30, 2018, by and among Delek US Holdings, Inc., as borrower, the lenders
from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent for each member of the
Lender Group, Wells Fargo Securities, LLC, Barclays Bank PLC, SunTrust Robinson Humphrey, Inc., and Regions Capital
Markets, a division of Regions Bank, each as a joint lead arranger and joint bookrunner, and The Bank of Tokyo-Mitsubishi,
Ltd., Credit Suisse Securities (USA) LLC, PNC Capital Markets LLC and Fifth Third Bank, each as a co-manager
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on April 5, 2018).
Amendment No. 1 to Term Loan Credit Agreement, dated as of October 26, 2018 by and among Delek US Holdings, Inc., as
borrower, the guarantors thereto, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as
administrative agent LLC (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on
November 8, 2019).
Inc., as borrower,
First Incremental Amendment to Term Loan Credit Agreement, dated as of May 22, 2019, by and among Delek US Holdings,
Inc., as borrower, the guarantors party thereto, the lenders party thereto, and Wells Fargo Bank, National Association, as
administrative agent (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on May 29, 2019).
Second Incremental Amendment to Term Loan Credit Agreement, dated as of November 12, 2019, by and among Delek US
Holdings,
the lenders party thereto, and Wells Fargo Bank, National
Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November
15, 2019).
Third Incremental Amendment to Term Loan Credit Agreement, dated as of May 19, 2020, among Delek US Holdings, Inc.,
as borrower, the guarantors party thereto, the lenders party thereto, and Wells Fargo Bank, National Association, as
administrative agent (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 21, 2020).
the guarantors party thereto,
Second Amended and Restated Credit Agreement, dated as of March 30, 2018, by and among Delek US Holdings, Inc., as
borrower, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent for
each member of the Lender Group and the Bank Product Providers, the Subsidiaries of Delek US Holdings, Inc. from time to
time party thereto, as guarantors, Wells Fargo, Barclays Bank PLC, Regions Capital Markets, a division of Regions Bank, and
SunTrust Robinson Humphrey, Inc., each as a joint lead arranger and joint book runner, Barclays Bank PLC, Regions Bank,
and SunTrust Bank, each as a co-syndication agent, and Fifth Third Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., PNC
Bank, National Association, and Credit Suisse AG, Cayman Islands Branch, each as a co-documentation agent (incorporated
by reference to Exhibit 10.2 to the Company's Form 8-K filed on April 5, 2018).
First Amendment to Second Amended and Restated Credit Agreement, dated as of May 14, 2018, by and among Delek US
Holdings, Inc., as borrower, Wells Fargo Bank, National Association, as administrative agent for each member of the Lender
Group and the Bank Product Providers and the lenders from time to time party thereto (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 8, 2019).
Second Amendment to Second Amended and Restated Credit Agreement, dated as of July 13, 2018, by and among Delek
US Holdings, Inc., as borrower, Wells Fargo Bank, National Association, as administrative agent for each member of the
Lender Group and the Bank Product Providers and the lenders from time to time party thereto (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 8, 2019).
Third Amendment to Second Amended and Restated Credit Agreement, dated October 18, 2019 (incorporated by reference
to Exhibit 10.31 of the Company’s Form 10-K filed on February 28, 2020).
Fourth Amendment to Second Amended and Restated Credit Agreement, dated December 18, 2019 (incorporated by
reference to Exhibit 10.32 of the Company’s Form 10-K filed on February 28, 2020).
Third Amended and Restated Limited Liability Company Agreement of Wink to Webster Pipeline LLC, a Delaware limited
liability company, dated as of July 30, 2019, by and among Delek US Energy, Inc., ExxonMobil Permian Logistics LLC, Plains
Pipeline, L.P., MPLX W2W Pipeline Holdings, LLC, Centurion Permian Logistics, LLC, and Rattler Midstream Operating LLC
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on August 5, 2019).
10.14
10.15
10.16
10.17(a)
10.17(b)
10.17(c)
10.17(d)
10.17(e)
10.18(a)
10.18(b)
10.18(c)
10.18(d)
10.18(e)
10.19
105 |
Financial Statements and Schedules
Throughput and Deficiency Agreement, dated and effective as of March 31, 2020, by and between Lion Oil Trading &
Transportation, LLC and DKL Permian Gathering, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
filed on April 6, 2020).
Transportation Services Agreement, dated May 15, 2020 and effective as of May 1, 2020, between Delek Refining, Ltd., Lion
Oil Company and DKL Transportation, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on
May 18, 2020).
Third Amended and Restated Supply and Offtake Agreement, dated as of April 7, 2020, between J. Aron & Company LLC
and Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-Q filed on August
7, 2020).
Third Amended and Restated Master Supply and Offtake Agreement, dated as of April 7, 2020, among J. Aron & Company
LLC, Lion Oil Company and Lion Oil Trading & Transportation, LLC (incorporated by reference to Exhibit 10.10 of the
Company’s Form 10-Q filed on August 7, 2020).
Letter Agreement, dated as of December 21, 2020 by and between J. Aron & Company LLC, Lion Oil Company, and Lion Oil
Trading & Transportation, LLC.
Third Amended and Restated Supply and Offtake Agreement, dated as of April 7, 2020, between J. Aron & Company LLC
and Alon USA, LP (incorporated by reference to Exhibit 10.11 of the Company’s Form 10-Q filed on August 7, 2020)
Exchange Agreement, dated as of August 13, 2020, among Delek Logistics Partners, LP, Delek Logistics GP, LLC, and
Delek US Holdings, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 14, 2020).
Letter Agreement, dated as of August 13, 2020, between Delek Logistics GP, LLC and Ezra Uzi Yemin (incorporated by
reference to Exhibit 10.2 of the Company’s Form 8-K filed on August 14, 2020).
Letter Agreement, dated as of August 13, 2020, between Delek Logistics GP, LLC and Frederec Green (incorporated by
reference to Exhibit 10.3 of the Company’s Form 8-K filed on August 14, 2020).
#
##
##
* # Consulting Agreement, dated as of November 3, 2020, by and between Delek US Holdings, Inc. and Frederec Green.
#
#
#
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Certification of the Company's Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange
Act.
Certification of the Company's Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange
Act.
Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Delek US Holdings, Inc.’s Annual Report on Form 10-K for the annual period ended December
31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of
December 31, 2020 and 2019, (ii) Consolidated Statements of Income for the years ended December 31, 2020, 2019 and
2018, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018, (iv)
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018, (v)
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 and (vi) Notes to
Consolidated Financial Statements.
Cover Page Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in
Exhibit 101.
10.20
10.21
10.22
10.23
10.24
#
*
*
10.25
10.26
10.27
10.28
10.29
21.1
23.1
31.1
31.2
32.1
32.2
101
104
#
Management contract or compensatory plan or arrangement.
Filed herewith.
Furnished herewith.
Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to supplementally furnish a copy of any of
the omitted schedules to the United States Securities and Exchange Commission upon request.
Confidential treatment has been requested and granted with respect to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. Omitted portions have been filed separately with the United States Securities and Exchange Commission.
Certain confidential information contained in these exhibits has been omitted because it (i) is not material and (ii) would be competitively harmful if
publicly disclosed.
*
#
##
<
++
~
106 |
Financial Statements and Schedules
Delek US Holdings, Inc.
Consolidated Financial Statements
As of December 31, 2020 and 2019 and
For Each of the Three Years Ended December 31, 2020, 2019 and 2018
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Audited Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-5
F-6
F-7
F-8
F-11
F-13
F-1 |
Report of Independent Registered Public Accounting Firm
Financial Statements and Schedules
To the Stockholders and the Board of Directors of
Delek US Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Delek US Holdings, Inc. (“the Company”) as of December 31, 2020 and
2019, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March
1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of
the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit
matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2 |
Financial Statements and Schedules
Description of the
Matter
Valuation of Goodwill
At December 31, 2020, the Company’s goodwill was $729.7 million and represented approximately 11% of total
assets. As discussed in Notes 2 and 18 of the consolidated financial statements, goodwill is reviewed at the
reporting unit level for impairment at least annually or more frequently if events or changes in circumstances
indicate the goodwill might be impaired. The Company performs its annual goodwill impairment assessment in
the fourth quarter of each year. The Company evaluates the recoverability of goodwill by comparing the carrying
amount of each reporting unit to its estimated fair value. The estimated fair value of each reporting unit is
determined using a combination of a discounted cash flow analysis based upon projected financial information
and a multiple of expected future cash flows, such as those used by third-party analysts. During 2020, the
Company recorded a goodwill impairment charge of $126 million for certain reporting units within the Refining
segment.
Auditing management’s annual goodwill
impairment analysis for reporting units within the Refining segment
requires significant judgment, as the valuation includes subjective estimates and assumptions in determining the
the discounted cash flow analysis is sensitive to
estimated fair value of
significant assumptions such as the weighted average cost of capital and the estimate of future cash flows
including the related gross margin and long-term growth rate. The market approach involves significant judgment
involved in the selection of the appropriate peer group companies and valuation multiples.
the reporting units.
In particular,
How We
Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls relating
to the valuation of the reporting units within the Refining Segment in the goodwill impairment analysis process.
For example, we tested controls over management’s review of the discounted cash flow analysis, the projected
financial information, and the valuation assumptions.
the estimated fair value of
To test
the Company’s reporting units within the Refining segment, our audit
procedures included, among others, assessing valuation methodologies, performing recalculations, and testing
the significant assumptions discussed above and the underlying data used by the Company. We compared the
significant assumptions in the prospective financial data used by management to current industry and economic
trends, analysts’ expectations, historical performance, and other relevant
factors. We performed sensitivity
analyses of significant assumptions to evaluate the change in the fair value of the reporting units resulting from
changes in the significant assumptions. We also involved our valuation specialists to assist in evaluating the fair
value methodologies, assessing the market multiples by comparison to the appropriate peer group companies,
and testing the related components and assumptions that are most significant to the fair value estimates.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Nashville, Tennessee
March 1, 2021
F-3 |
Report of Independent Registered Public Accounting Firm
Financial Statements and Schedules
To the Stockholders and the Board of Directors of
Delek US Holdings, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Delek US Holdings, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
(the COSO criteria). In our opinion, Delek US Holdings, Inc. (the Company) maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of Delek US Holdings, Inc. as of December 31, 2020 and 2019, the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020,
and the related notes, and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 1, 2021
F-4 |
Financial Statements and Schedules
Delek US Holdings, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
ASSETS
December 31,
2020
2019
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net of inventory valuation reserves
Other current assets
Total current assets
Property, plant and equipment:
Property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
Operating lease right-of-use assets
Goodwill
Other intangibles, net
Equity method investments
Other non-current assets
Total assets
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
Current portion of long-term debt
Obligation under Supply and Offtake Agreements
Current portion of operating lease liabilities
Accrued expenses and other current liabilities
Total current liabilities
Non-current liabilities:
Long-term debt, net of current portion
Obligation under Supply and Offtake Agreements
Environmental liabilities, net of current portion
Asset retirement obligations
Deferred tax liabilities
Operating lease liabilities, net of current portion
Other non-current liabilities
Total non-current liabilities
Stockholders’ equity:
955.3
792.6
946.7
268.7
2,963.3
3,362.8
(934.5)
2,428.3
183.6
855.7
110.3
407.3
67.8
7,016.3
$
787.5
$
527.9
727.7
256.4
2,299.5
3,519.5
(1,152.3)
2,367.2
182.0
729.7
107.8
363.6
84.3
6,134.1
$
$
$
1,144.0
$
1,599.7
33.4
129.2
50.2
546.4
36.4
332.5
40.5
346.8
1,903.2
2,355.9
2,315.0
2,030.7
224.9
107.4
37.5
255.5
131.8
33.7
144.8
137.9
68.6
267.9
144.3
30.9
3,105.8
2,825.1
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding
Common stock, $0.01 par value, 110,000,000 shares authorized, 91,356,868 shares and 90,987,025
shares issued at December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Treasury stock, 17,575,527 shares and 17,516,814 shares, at cost, as of December 31, 2020 and 2019,
respectively
Retained earnings
Non-controlling interests in subsidiaries
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
0.9
1,185.1
(7.2)
(694.1)
522.0
118.4
1,125.1
$
6,134.1
$
—
0.9
1,151.9
0.1
(692.2)
1,205.6
169.0
1,835.3
7,016.3
See accompanying notes to the consolidated financial statements
F-5 |
Financial Statements and Schedules
Delek US Holdings, Inc.
Consolidated Statements of Income
(In millions, except share and per share data)
Net revenues
Cost of sales:
Cost of materials and other
Operating expenses (excluding depreciation and amortization presented below)
Depreciation and amortization
Total cost of sales
Operating expenses related to retail and wholesale business (excluding depreciation
and amortization presented below)
General and administrative expenses
Depreciation and amortization
Impairment of goodwill
Other operating income, net
Total operating costs and expenses
Operating (loss) income
Interest expense
Interest income
Income from equity method investments
Gain on sale of business
Gain on sale on non-operating refinery
Impairment loss on assets held for sale
Loss on extinguishment of debt
Other (income) expense, net
Total non-operating expense, net
(Loss) income before income tax (benefit) expense
Income tax (benefit) expense
(Loss) income from continuing operations, net of tax
Discontinued operations:
Income (loss) from discontinued operations, including loss on sale of discontinued
operations
Income tax expense (benefit)
Income (loss) from discontinued operations, net of tax
Net (loss) income
Net income attributed to non-controlling interests
Net (loss) income attributable to Delek
Basic (loss) income per share:
(Loss) income from continuing operations
Income (loss) from discontinued operations
Total basic (loss) income per share
Diluted (loss) income per share:
(Loss) income from continuing operations
Income (loss) from discontinued operations
Total diluted (loss) income per share
Weighted average common shares outstanding:
Basic
Diluted
Dividends declared per common share outstanding
Year Ended December 31,
2019
2020
$
7,301.8
$
9,298.2
$
2018
10,233.1
6,841.2
462.0
241.6
7,544.8
97.8
248.3
26.0
126.0
(13.1)
8,029.8
(728.0)
129.0
(3.3)
(30.3)
—
(56.8)
—
—
(3.5)
35.1
(763.1)
(192.7)
(570.4)
—
—
—
(570.4)
37.6
(608.0) $
(8.26) $
—
(8.26) $
(8.26) $
—
(8.26) $
7,657.2
580.2
170.7
8,408.1
102.0
274.7
23.6
—
(2.5)
8,805.9
492.3
131.1
(11.3)
(34.3)
—
—
—
—
4.1
89.6
402.7
71.7
331.0
6.6
1.4
5.2
336.2
25.6
310.6
4.03
0.07
4.10
3.99
0.07
4.06
73,598,389
73,598,389
0.93
$
75,853,187
76,574,091
1.14
8,560.5
538.5
161.3
9,260.3
106.5
247.6
38.1
—
(31.3)
9,621.2
611.9
125.9
(5.8)
(9.7)
(13.3)
—
27.5
9.1
(7.3)
126.4
485.5
101.9
383.6
(10.9)
(2.2)
(8.7)
374.9
34.8
340.1
4.31
(0.20)
4.11
4.14
(0.19)
3.95
82,797,110
86,768,401
0.96
$
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements
F-6 |
Financial Statements and Schedules
Delek US Holdings, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
Net (loss) income
Other comprehensive income (loss):
Commodity contracts designated as cash flow hedges:
Net (loss) gain related to commodity cash flow hedges
Income tax (benefit) expense
Net comprehensive (loss) income on commodity contracts designated as cash
flow hedges
Loss on interest rate contracts designated as cash flow hedges, net of taxes
Foreign currency translation gain (loss), net of taxes
Postretirement benefit plans:
Unrealized (loss) gain arising during the year related to:
Net actuarial (loss) gain
Curtailment and settlement gains
Reclassified to other expense (income), net:
Gain recognized due to curtailment and settlement
Amortization of net actuarial loss
(Loss) gain related to postretirement benefit plans, net
Income tax (benefit) expense
Net comprehensive (loss) gain on postretirement benefit plans
Total other comprehensive (loss) gain
Comprehensive (loss) income
Comprehensive income attributable to non-controlling interest
Comprehensive (loss) income attributable to Delek
Year Ended December 31,
2019
2020
2018
$
(570.4) $
336.2
$
374.9
(1.3)
(0.3)
(1.0)
—
0.6
(8.9)
—
—
0.1
(8.8)
(1.9)
(6.9)
(7.3)
(577.7) $
37.6
(615.3) $
(43.4)
(9.5)
(33.9)
—
0.3
5.8
2.7
(2.7)
0.7
6.5
1.4
5.1
(28.5)
307.7
25.6
282.1
$
$
33.1
6.9
26.2
(0.5)
(0.9)
(6.5)
2.5
(2.5)
0.5
(6.0)
(1.3)
(4.7)
20.1
395.0
34.8
360.2
$
$
See accompanying notes to the consolidated financial statements
F-7 |
.
2
6
2
)
7
4
(
.
)
5
0
(
.
)
9
0
(
.
.
)
1
0
8
(
.
)
7
8
1
(
—
.
4
1
2
)
7
.
7
2
(
.
)
3
5
6
3
(
5
.
3
1
3
.
0
.
)
9
5
3
(
)
4
.
4
4
(
)
3
0
(
.
.
)
5
1
1
(
—
)
4
.
2
(
Financial Statements and Schedules
9
.
4
7
3
.
2
4
6
9
,
1
$
6
.
3
1
3
8
.
4
3
l
a
t
o
T
'
l
s
r
e
d
o
h
k
c
o
t
S
y
t
i
u
q
E
g
n
i
l
l
o
r
t
n
o
C
-
n
o
N
n
i
t
s
e
r
e
t
n
I
i
s
e
i
r
a
d
s
b
u
S
i
.
c
n
I
,
i
l
s
g
n
d
o
H
S
U
k
e
l
e
D
y
t
i
u
q
E
'
l
s
r
e
d
o
h
k
c
o
t
S
n
i
s
e
g
n
a
h
C
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C
)
a
t
a
d
e
r
a
h
s
r
e
p
d
n
a
e
r
a
h
s
t
p
e
c
x
e
,
s
n
o
i
l
l
i
m
n
I
(
s
e
r
a
h
S
y
r
u
s
a
e
r
T
t
n
u
o
m
A
s
e
r
a
h
S
d
e
n
i
a
t
e
R
i
s
g
n
n
r
a
E
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
v
i
s
n
e
h
e
r
p
m
o
C
e
m
o
c
n
I
-
d
i
a
P
l
a
n
o
i
t
i
d
d
A
l
a
t
i
p
a
C
n
i
k
c
o
t
S
n
o
m
m
o
C
t
n
u
o
m
A
s
e
r
a
h
S
—
—
—
—
—
)
7
.
8
1
(
—
5
0
.
—
)
7
.
7
2
(
$
.
)
0
5
2
(
$
)
3
2
6
,
2
6
7
(
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
.
)
3
5
6
3
(
,
)
6
8
3
2
2
0
,
9
(
)
0
.
7
2
1
(
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
.
0
—
—
—
—
—
—
.
)
9
3
2
1
(
)
1
7
7
,
2
9
6
,
2
(
8
.
7
6
7
1
.
0
4
3
$
9
.
6
—
—
—
—
—
—
)
1
.
0
8
(
)
6
.
1
(
—
—
—
—
—
—
)
4
.
4
4
(
—
—
—
—
2
.
6
2
)
7
.
4
(
)
5
.
0
(
)
9
.
0
(
—
—
6
.
1
—
—
—
—
—
—
—
—
—
—
—
$
1
.
0
0
9
—
—
—
—
—
—
—
—
—
—
9
.
0
2
4
.
0
4
1
2
.
4
2
1
)
9
.
5
3
(
—
)
3
.
0
(
)
5
.
1
1
(
—
)
5
.
2
(
—
—
—
—
—
—
—
—
—
—
1
.
0
—
—
—
—
—
—
—
$
8
.
0
—
$
—
—
—
—
—
—
—
—
—
—
—
,
8
4
5
3
3
5
1
8
,
,
3
7
3
9
4
6
5
,
—
—
—
,
8
1
2
2
9
6
2
,
—
—
6
3
9
,
2
0
6
1
.
8
0
8
,
1
$
.
5
5
7
1
$
)
1
.
4
1
5
(
$
)
0
8
7
,
7
7
4
,
2
1
(
8
.
1
8
9
$
6
.
8
2
$
4
.
5
3
1
,
1
$
9
.
0
$
,
5
7
0
8
7
4
0
9
,
:
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
a
B
l
F-8 |
o
t
t
d
e
a
e
r
l
e
m
o
c
n
i
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
t
e
n
,
s
t
c
a
r
t
n
o
c
y
t
i
d
o
m
m
o
c
e
m
o
c
n
i
t
e
N
o
t
o
t
t
d
e
a
e
r
l
s
s
o
l
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
t
e
n
l
,
s
n
a
p
t
i
f
e
n
e
b
t
n
e
m
e
r
i
t
e
r
t
s
o
p
t
d
e
a
e
r
l
s
s
o
l
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
s
t
c
a
r
t
n
o
c
e
t
a
r
t
s
e
r
e
t
n
i
t
e
n
,
s
s
o
l
l
n
o
i
t
a
s
n
a
r
t
y
c
n
e
r
r
u
c
n
g
e
r
o
F
i
)
e
r
a
h
s
r
e
p
6
9
.
0
$
(
i
s
d
n
e
d
v
d
k
c
o
t
s
i
n
o
m
m
o
C
t
s
e
r
e
n
t
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
f
o
n
o
i
t
i
n
g
o
c
e
r
-
e
D
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
y
t
i
u
q
E
t
s
e
r
e
n
t
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
n
o
i
t
u
b
i
r
t
s
D
i
t
c
A
m
r
o
f
e
R
x
a
T
e
h
t
m
o
r
f
g
n
i
t
l
u
s
e
r
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
r
o
f
k
c
o
t
s
f
o
e
c
n
a
u
s
s
I
x
a
t
f
o
t
e
n
,
e
s
a
h
c
r
u
p
e
r
t
s
e
r
e
t
n
i
h
t
i
w
n
o
i
t
c
e
n
n
o
c
n
i
i
d
e
v
e
c
e
r
s
e
r
a
h
S
s
n
o
i
t
p
O
l
l
a
C
f
o
i
e
s
c
r
e
x
e
k
c
o
t
s
n
o
m
m
o
c
f
o
e
s
a
h
c
r
u
p
e
R
d
r
a
w
a
y
t
i
l
i
b
a
i
l
o
t
n
o
i
t
a
c
i
f
i
s
s
a
c
e
r
l
t
n
a
r
r
a
W
g
n
i
t
n
u
o
c
c
a
g
n
i
t
p
o
d
a
f
o
t
c
e
f
f
e
l
e
v
i
t
a
u
m
u
C
f
o
t
c
e
f
f
e
x
a
t
e
m
o
c
n
i
i
g
n
d
r
a
g
e
r
l
i
e
p
c
n
i
r
p
f
o
t
n
e
m
e
l
t
t
e
s
t
e
n
e
h
t
o
t
e
u
d
i
d
a
p
s
e
x
a
T
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
y
t
i
u
q
e
s
d
r
a
w
a
d
e
s
a
b
-
y
t
i
u
q
e
i
f
o
e
s
c
r
e
x
E
:
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
a
B
l
r
e
h
t
O
h
t
i
w
n
o
i
t
c
e
n
n
o
c
n
i
d
e
u
s
s
i
s
e
r
a
h
S
l
s
e
t
o
N
e
b
i
t
r
e
v
n
o
C
f
o
t
n
e
m
e
l
t
t
e
s
s
r
e
f
s
n
a
r
t
y
t
i
u
q
e
-
a
r
t
n
i
s
t
c
e
f
f
e
x
a
t
d
e
d
n
a
r
t
s
r
o
f
n
o
i
t
a
c
i
f
i
s
s
a
c
e
R
l
2
.
6
3
3
)
9
.
3
3
(
1
5
.
3
.
0
.
)
8
6
8
(
.
8
5
2
)
3
.
2
3
(
)
1
.
8
7
1
(
)
2
.
9
(
—
1
0
.
6
.
5
2
—
—
—
—
3
0
.
)
3
.
2
3
(
—
—
—
)
1
.
0
(
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
)
1
.
8
7
1
(
)
4
3
0
,
9
3
0
,
5
(
.
1
8
0
8
,
1
$
.
5
5
7
1
$
)
1
.
4
1
5
(
$
)
0
8
7
,
7
7
4
,
2
1
(
8
.
1
8
9
6
.
0
1
3
—
—
—
)
8
.
6
8
(
—
—
—
—
—
—
$
6
.
8
2
—
)
9
.
3
3
(
1
.
5
3
.
0
—
—
—
—
—
—
—
—
—
—
—
—
—
5
.
5
2
)
2
.
9
(
—
2
.
0
$
4
.
5
3
1
,
1
$
9
.
0
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
—
—
0
5
9
8
0
5
,
,
5
7
0
8
7
4
0
9
,
Financial Statements and Schedules
3
.
5
3
8
,
1
$
0
.
9
6
1
$
.
)
2
2
9
6
(
$
)
4
1
8
,
6
1
5
,
7
1
(
6
.
5
0
2
,
1
$
1
.
0
$
9
.
1
5
1
,
1
$
9
.
0
$
,
5
2
0
7
8
9
0
9
,
l
a
t
o
T
'
l
s
r
e
d
o
h
k
c
o
t
S
y
t
i
u
q
E
g
n
i
l
l
o
r
t
n
o
C
-
n
o
N
n
i
t
s
e
r
e
t
n
I
i
s
e
i
r
a
d
s
b
u
S
i
.
c
n
I
,
l
i
s
g
n
d
o
H
S
U
k
e
l
e
D
)
d
e
u
n
i
t
n
o
C
(
y
t
i
u
q
E
'
l
s
r
e
d
o
h
k
c
o
t
S
n
i
s
e
g
n
a
h
C
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C
)
a
t
a
d
e
r
a
h
s
r
e
p
d
n
a
e
r
a
h
s
t
p
e
c
x
e
,
s
n
o
i
l
l
i
m
n
I
(
k
c
o
t
S
y
r
u
s
a
e
r
T
t
n
u
o
m
A
s
e
r
a
h
S
d
e
n
i
a
t
e
R
i
s
g
n
n
r
a
E
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
v
i
s
n
e
h
e
r
p
m
o
C
e
m
o
c
n
I
-
d
i
a
P
l
a
n
o
i
t
i
d
d
A
l
a
t
i
p
a
C
n
i
k
c
o
t
S
n
o
m
m
o
C
t
n
u
o
m
A
s
e
r
a
h
S
o
t
o
t
:
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
a
B
l
F-9 |
t
d
e
a
e
r
l
s
s
o
l
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
t
e
n
,
s
t
c
a
r
t
n
o
c
y
t
i
d
o
m
m
o
c
e
m
o
c
n
i
t
e
N
l
t
d
e
a
e
r
n
a
g
i
t
e
n
,
s
n
a
p
l
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
t
i
f
e
n
e
b
t
n
e
m
e
r
i
t
e
r
t
s
o
p
t
e
n
,
i
n
a
g
l
n
o
i
t
a
s
n
a
r
t
y
c
n
e
r
r
u
c
i
n
g
e
r
o
F
)
e
r
a
h
s
r
e
p
4
1
.
1
$
(
i
s
d
n
e
d
v
d
k
c
o
t
s
i
n
o
m
m
o
C
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
y
t
i
u
q
E
t
s
e
r
e
n
t
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
n
o
i
t
u
b
i
r
t
s
D
i
k
c
o
t
s
n
o
m
m
o
c
f
o
e
s
a
h
c
r
u
p
e
R
f
o
t
n
e
m
e
l
t
t
e
s
t
e
n
e
h
t
o
t
e
u
d
i
d
a
p
s
e
x
a
T
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
y
t
i
u
q
e
s
d
r
a
w
a
d
e
s
a
b
-
y
t
i
u
q
e
i
f
o
e
s
c
r
e
x
E
:
9
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
a
B
l
r
e
h
t
O
)
5
.
6
(
)
4
.
0
7
5
(
)
0
1
(
.
)
9
6
(
.
6
0
.
.
)
1
9
6
(
.
)
9
2
3
(
)
9
1
(
.
.
8
2
2
.
)
6
3
1
(
)
9
.
8
2
(
)
4
2
(
.
—
—
6
.
7
3
—
—
—
—
1
0
.
—
.
)
9
2
3
(
)
6
4
(
.
.
)
8
0
5
(
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
)
9
.
1
(
)
3
1
7
,
8
5
(
)
5
.
6
(
)
0
.
8
0
6
(
—
—
—
)
1
.
9
6
(
—
—
—
—
—
—
—
—
—
)
0
.
1
(
)
9
.
6
(
6
.
0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7
.
2
2
2
.
7
3
)
3
.
4
2
(
)
4
.
2
(
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
4
8
9
6
3
,
3
.
5
3
8
,
1
$
.
0
9
6
1
$
.
)
2
2
9
6
(
$
)
4
1
8
,
6
1
5
,
7
1
(
6
.
5
0
2
,
1
$
1
.
0
$
9
.
1
5
1
,
1
$
9
.
0
$
,
5
2
0
7
8
9
0
9
,
Financial Statements and Schedules
1
.
5
2
1
,
1
$
.
4
8
1
1
$
.
)
1
4
9
6
(
$
)
7
2
5
,
5
7
5
,
7
1
(
0
.
2
2
5
$
)
2
.
7
(
$
1
.
5
8
1
,
1
$
9
.
0
$
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
h
t
o
t
i
s
e
t
o
n
g
n
y
n
a
p
m
o
c
c
a
e
e
S
,
8
6
8
6
5
3
1
9
,
l
a
t
o
T
'
l
s
r
e
d
o
h
k
c
o
t
S
y
t
i
u
q
E
g
n
i
l
l
o
r
t
n
o
C
-
n
o
N
n
i
t
s
e
r
e
t
n
I
i
s
e
i
r
a
d
s
b
u
S
i
.
c
n
I
,
l
i
s
g
n
d
o
H
S
U
k
e
l
e
D
)
d
e
u
n
i
t
n
o
C
(
y
t
i
u
q
E
'
l
s
r
e
d
o
h
k
c
o
t
S
n
i
s
e
g
n
a
h
C
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C
)
a
t
a
d
e
r
a
h
s
r
e
p
d
n
a
e
r
a
h
s
t
p
e
c
x
e
,
s
n
o
i
l
l
i
m
n
I
(
s
e
r
a
h
S
y
r
u
s
a
e
r
T
t
n
u
o
m
A
s
e
r
a
h
S
d
e
n
i
a
t
e
R
i
s
g
n
n
r
a
E
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
v
i
s
n
e
h
e
r
p
m
o
C
)
s
s
o
L
(
e
m
o
c
n
I
-
d
i
a
P
l
a
n
o
i
t
i
d
d
A
l
a
t
i
p
a
C
n
i
k
c
o
t
S
n
o
m
m
o
C
t
n
u
o
m
A
s
e
r
a
h
S
t
i
d
e
r
c
f
o
t
n
e
m
e
r
u
s
a
e
m
g
n
d
r
a
g
e
r
i
l
i
e
p
c
n
i
r
p
t
e
n
,
s
t
n
e
m
u
r
t
s
n
i
l
i
a
c
n
a
n
i
f
n
o
s
e
s
s
o
l
o
t
o
t
t
d
e
a
e
r
l
s
s
o
l
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
t
e
n
,
s
t
c
a
r
t
n
o
c
y
t
i
d
o
m
m
o
c
e
m
o
c
n
i
)
s
s
o
l
(
t
e
N
t
d
e
a
e
r
l
s
s
o
l
t
e
n
,
s
n
a
p
l
i
e
v
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
t
i
f
e
n
e
b
t
n
e
m
e
r
i
t
e
r
t
s
o
p
t
e
n
,
i
n
a
g
l
n
o
i
t
a
s
n
a
r
t
y
c
n
e
r
r
u
c
i
n
g
e
r
o
F
)
e
r
a
h
s
r
e
p
3
9
.
0
(
s
d
n
e
d
v
d
i
i
k
c
o
t
s
n
o
m
m
o
C
s
t
s
e
r
e
n
t
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
o
t
s
n
o
i
t
u
b
i
r
t
s
D
i
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
y
t
i
u
q
E
k
c
o
t
s
n
o
m
m
o
c
f
o
e
s
a
h
c
r
u
p
e
R
n
o
i
t
c
a
s
n
a
r
t
n
o
i
t
a
c
i
f
i
l
i
p
m
S
R
D
I
m
o
r
f
t
c
a
p
m
I
s
t
s
e
r
e
n
t
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
f
o
s
e
s
a
h
c
r
u
p
e
R
f
o
t
n
e
m
e
l
t
t
e
s
t
e
n
e
h
t
o
t
e
u
d
i
d
a
p
s
e
x
a
T
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
y
t
i
u
q
e
s
d
r
a
w
a
d
e
s
a
b
-
y
t
i
u
q
e
i
f
o
e
s
c
r
e
x
E
:
0
2
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
a
B
l
P
L
i
s
c
i
t
s
g
o
L
k
e
e
D
l
f
o
g
n
i
t
n
u
o
c
c
a
g
n
i
t
p
o
d
a
f
o
t
c
e
f
f
e
l
e
v
i
t
a
u
m
u
C
:
9
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
a
B
l
F-10 |
Financial Statements and Schedules
Delek US Holdings, Inc.
Consolidated Statements of Cash Flows
(In millions, except per share data)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating
activities:
Year Ended December 31,
2019
2018
2020
$
(570.4) $
336.2
$
374.9
Depreciation and amortization
Other amortization/accretion
Non-cash lease expense
Deferred income taxes
Impairment of goodwill
Income from equity method investments
Dividends from equity method investments
Non-cash lower of cost or market/net realizable value adjustment
Loss on extinguishment of debt
Gain on sale of business
Gain on sale of non-operating refinery
Impairment of assets held for sale
Equity-based compensation expense
Other
Changes in assets and liabilities:
Accounts receivable
Inventories and other current assets
Fair value of derivatives
Accounts payable and other current liabilities
Obligation under Supply and Offtake Agreements
Non-current assets and liabilities, net
Cash (used in) provided by operating activities - continuing operations
Cash used in operating activities - discontinued operations
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Equity method investment contributions
Distributions from equity method investments
Purchases of property, plant and equipment
Asset acquisitions
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
Proceeds from sale of retail stores
Proceeds from sale of non-operating refinery
Proceeds from sale of business
Proceeds from sales of discontinued operations
Cash used in investing activities - continuing operations
Cash provided by investing activities - discontinued operations
Net cash used in investing activities
267.6
10.8
59.7
(32.1)
126.0
(30.3)
33.2
29.2
—
—
(56.8)
—
22.8
3.1
259.7
244.4
(23.1)
(480.3)
(129.6)
(16.8)
(282.9)
—
(282.9)
(31.2)
72.0
(269.4)
—
(2.8)
0.2
—
39.9
—
—
(191.3)
—
(191.3)
194.3
9.5
34.9
64.6
—
(34.3)
23.9
—
—
—
—
—
25.8
(5.5)
(276.7)
(417.7)
(12.5)
565.2
115.1
(47.6)
575.2
—
575.2
(267.4)
0.8
(413.0)
(8.0)
(19.9)
1.1
15.1
—
—
—
(691.3)
—
(691.3)
199.4
8.2
—
(26.8)
—
(9.7)
8.8
—
9.1
(13.3)
—
27.5
21.4
5.6
112.7
138.7
(52.6)
(128.1)
(84.3)
(1.1)
590.4
(30.1)
560.3
(0.2)
1.2
(322.0)
—
(1.7)
11.1
—
—
110.8
55.5
(145.3)
20.0
(125.3)
F-11 |
Financial Statements and Schedules
Delek US Holdings, Inc.
Consolidated Statements of Cash Flows (Continued)
(In millions, except per share data )
Cash flows from financing activities:
Proceeds from long-term revolvers
Payments on long-term revolvers
Proceeds from term debt
Payments on term debt
Proceeds from product financing agreements
Repayments of product financing agreements
Settlement of warrants unwind agreement
Taxes paid due to the net settlement of equity-based compensation
Repurchase of common stock
Repurchase of non-controlling interest
Distribution to non-controlling interest
Impact of IDR Simplification transaction of Delek Logistics LP
Dividends paid
Deferred financing costs paid
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest of $0.4 million, $1.5 million and $0.8 million in the
2020, 2019 and 2018 periods, respectively
Income taxes
Non-cash investing activities:
Common stock issued in connection with the buyout of Alon Partnership non-
controlling interest
(Decrease) increase in accrued capital expenditures
Non-cash financing activities:
Non-cash lease liability arising from recognition of right of use assets upon adoption of
Accounting Standards Update ("ASU") 2016-02
Non-cash lease liability arising from obtaining right of use assets during the period
Common stock issued in connection with settlement of Convertible Notes
Treasury shares received in connection with exercise of Call Options
Year Ended December 31,
2019
2018
2020
1,883.1
(1,754.9)
185.0
(37.9)
297.2
(128.1)
—
(2.4)
(1.9)
(28.9)
(32.9)
(2.1)
(69.1)
(0.7)
306.4
(167.8)
955.3
787.5
123.7
3.6
$
$
$
1,435.4
(1,553.7)
434.0
(34.3)
40.8
(22.2)
—
(9.2)
(178.1)
—
(32.3)
—
(86.8)
(1.5)
(7.9)
(124.0)
1,079.3
955.3
126.2
94.2
$
$
$
2,124.6
(1,679.8)
690.6
(826.3)
—
(72.4)
(35.9)
(11.5)
(365.3)
—
(27.7)
—
(80.1)
(13.8)
(297.6)
137.4
941.9
1,079.3
120.1
103.9
— $
(30.1) $
— $
$
15.1
127.0
(4.8)
58.1
— $
$
— $
— $
206.0
15.9
$
$
— $
— $
—
—
123.9
(123.9)
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements
F-12 |
Financial Statements and Schedules
1. General
Delek US Holdings, Inc.
Notes to Consolidated Financial Statements
Delek US Holdings, Inc. operates through its consolidated subsidiaries, which include Delek US Energy, Inc. ("Delek Energy") (and its
subsidiaries) and Alon USA Energy, Inc. ("Alon") (and its subsidiaries).
Effective July 1, 2017 (the "Effective Time"), we acquired the outstanding common stock of Alon (previously listed under New York Stock
Exchange ("NYSE"): ALJ) (the "Delek/Alon Merger", as further discussed in Note 3), resulting in a new post-combination consolidated registrant
renamed as Delek US Holdings, Inc.
Unless otherwise noted or the context requires otherwise, the terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer
to Delek and its consolidated subsidiaries for all periods presented. Delek's Common Stock is listed on the NYSE under the symbol "DK."
2. Accounting Policies
Basis of Presentation
Our consolidated financial statements include the accounts of Delek and its subsidiaries. All significant intercompany transactions and account
balances have been eliminated in consolidation. We have evaluated subsequent events through the filing of this Form 10-K. Any material
subsequent events that occurred during this time have been properly recognized or disclosed in our financial statements.
Our consolidated financial statements include Delek Logistics Partners, LP ("Delek Logistics"), which is a variable interest entity ("VIE"). As the
indirect owner of the general partner of Delek Logistics, we have the ability to direct the activities of this entity that most significantly impact its
economic performance. We are also considered to be the primary beneficiary for accounting purposes for this entity and are Delek Logistics'
primary customer. As Delek Logistics does not derive an amount of gross margin material to us from third parties, there is limited risk to Delek
associated with Delek Logistics' operations. However, in the event that Delek Logistics incurs a loss, our operating results will reflect such loss,
net of intercompany eliminations, to the extent of our ownership interest in this entity.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") and in accordance with the
rules and regulations of the Securities and Exchange Commission ("SEC") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of
management, all adjustments necessary for a fair presentation of the financial condition and the results of operations have been included. All
adjustments are of a normal, recurring nature.
Reclassifications
Certain immaterial reclassifications have been made to prior period presentation in order to conform to the current year presentation.
Risks and Uncertainties Arising from the COVID-19 Pandemic and the OPEC Production Disputes
The outbreak of COVID-19 and its development into a pandemic in March 2020 (the "COVID-19 Pandemic") has resulted in significant
economic disruption globally, including in the U.S. and specific geographic areas where we operate. Actions taken by various governmental
authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel,
many business operations, public gatherings and the overall level of individual movement and in-person interaction across the globe. This has
in turn significantly reduced global economic activity and resulted in airlines dramatically cutting back on flights and a decrease in motor vehicle
use. As a result, there has also been a decline in the demand for, and thus also the market prices of, crude oil and certain of our products. In
April and June 2020, an agreement was reached to cut oil production between the members of the Organization of Petroleum Exporting
Countries ("OPEC") and other leading oil producing countries (together with OPEC, “OPEC+”), as part of the efforts to resolve the oil production
disputes ("OPEC Production Disputes") that significantly affected crude oil prices beginning in first quarter of 2020 and to provide stability in the
oil markets. While OPEC+ have reached an agreement to cut oil production, uncertainty about the duration of the COVID-19 Pandemic has
caused storage constraints in the United States resulting from over-supply of produced oil. Therefore, downward pressure on commodity prices
has remained and could continue for the foreseeable future.
Uncertainties related to the impact of the COVID-19 Pandemic and other events exist that could impact our future results of operations and
financial position, the nature of which and the extent to which are currently unknown. To the extent these uncertainties have been identified and
are believed to have an impact on our current period results of operations or financial position based on the requirements for assessing such
financial statement impact under GAAP, we have considered them in the preparation of our consolidated financial statements as of and for the
year ended December 31, 2020. The application of accounting policies impacted by such considerations include (but are not necessarily limited
to) the following:
•
The evaluation of indefinite-lived intangibles and goodwill for potential impairment during our annual assessment or where indicators
exist, as defined by GAAP;
F-13 |
•
•
•
•
•
•
•
•
The evaluation of long-lived assets for potential impairment, where indicators exist, as defined by GAAP;
The evaluation of joint ventures for potential impairment, where indicators exist, as defined by GAAP;
The evaluation of derivatives and hedge accounting for counterparty risk and changes in forecasted transactions, as provided for
under GAAP;
The evaluation of inventory valuation allowances that may be warranted under the lower of cost or net realizable value analysis, for
first-in, first-out (“FIFO”), and the lower of cost or market analysis, for last-in, first-out ("LIFO"), pursuant to GAAP;
The consideration of debt modifications and/or covenant requirements, as applicable;
The evaluation of commitments and contingencies, including changes in concentrations, as applicable;
The evaluation of the impact of changing forecasts on our assessment of deferred tax asset valuation allowances and annual effective
tax rates; and
The evaluation of our ability to continue as a going concern.
Segment Reporting
Delek is an integrated downstream energy business based in Brentwood, Tennessee, and has three primary lines of business: petroleum
refining; the transportation, storage and wholesale distribution of crude oil, intermediate and refined products; and convenience store retailing.
For the periods presented, we have aggregated our operating segments into three reportable segments: Refining, Logistics and Retail.
Operations that are not specifically included in the reportable segments are included in Corporate, Other and Eliminations, which consists of the
following:
•
•
•
•
•
•
our corporate activities;
results of certain immaterial operating segments, including our Canadian crude trading operations (as discussed in Note 12);
Alon's asphalt terminal operations acquired as part of the Delek/Alon Merger and subsequently disposed in the second quarter of 2018
(see Note 8 for further discussion);
wholesale crude operations;
results and assets of discontinued operations; and
intercompany eliminations.
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 the reportable segments based on the segment contribution margin. Segment
contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and
amortization. All inter-segment transactions have been eliminated in consolidation.
The refining segment operates high conversion, independent refineries located in Tyler, Texas (the "Tyler refinery"), El Dorado, Arkansas (the
"El Dorado refinery"), Big Spring, Texas (the "Big Spring refinery"), Krotz Springs, Louisiana (the "Krotz Springs refinery") and a non-operating
refinery located in Bakersfield, California (the "Bakersfield refinery"), which was sold May 7, 2020. In addition, the refining segment owns and
operates three biodiesel facilities involved in the production of biodiesel fuels and related activities, located in Crossett, Arkansas, Cleburne,
Texas and New Albany, Mississippi. The logistics segment owns and operates crude oil and refined products logistics and marketing assets.
The retail segment markets gasoline, diesel and other refined petroleum products, and convenience merchandise through a network of
company-operated retail fuel and convenience stores.
Segment reporting is more fully discussed in Note 4.
Cash and Cash Equivalents
Delek maintains cash and cash equivalents in accounts with large, U.S. or multi-national financial institutions. All highly liquid investments
purchased with a term of three months or less are considered to be cash equivalents. As of December 31, 2020 and 2019, these cash
investments in
equivalents consisted primarily of bank money market accounts and bank certificates of deposit, as well as overnight
U.S. Government or its agencies' obligations and bank repurchase obligations collateralized by U.S. Government or its agencies' obligations.
Accounts Receivable
Accounts receivable primarily consists of trade receivables generated in the ordinary course of business, but may also include receivables on
commodity sales contracts that are part of crude optimization and are, therefore, related to transactions that are reflected as reductions of cost
of materials and other rather than revenue. Such other receivables are with the same or similar customers as our trade receivables, and are
subject to the same characteristics regarding the nature, timing, pricing and risk. Delek recorded an allowance for doubtful accounts related to
accounts receivable of $7.2 million and $3.7 million and as of December 31, 2020 and 2019, respectively.
F-14 |
Credit is extended based on evaluation of the customer’s financial condition. We perform ongoing credit evaluations of our customers and
require letters of credit, prepayments or other collateral or guarantees as management deems appropriate. Allowance for doubtful accounts is
based on a combination of historical experience and specific identification methods.
Credit risk is minimized as a result of the ongoing credit assessment of our customers and a lack of concentration in our customer base. Credit
losses are charged to allowance for doubtful accounts when deemed uncollectible. Our allowance for doubtful accounts is reflected as a
reduction of accounts receivable in the consolidated balance sheets.
One customer accounted for more than 10% of our consolidated accounts receivable balance as of December 31, 2020 and 2019. No
customer accounted for more than 10% of consolidated net sales for the years ended December 31, 2020, 2019 or 2018.
Inventory
Refinery crude oil, work-in-process, refined products, blendstocks and asphalt inventory for all of our operations, excluding the Tyler refinery
and merchandise inventory in our Retail segment, are stated at the lower of cost determined using the first-in, first-out (“FIFO”) basis or net
realizable value. Cost of inventory at the Tyler refinery is determined using the last-in, first-out (“LIFO”) inventory valuation method and
inventory is stated at the lower of LIFO cost or market. Retail merchandise inventory consists of cigarettes, beer, convenience merchandise and
food service merchandise and is stated at estimated cost as determined by the retail inventory method. We are not subject to concentration risk
with specific suppliers, since our crude oil and refined products inventory purchases are commodities that are readily available from a large
selection of suppliers.
Investment Commodities
Investment commodities represent those commodities (generally crude oil) physically on hand as a result of trading activities with physical
forward contracts where such crude will not be used (either directly in production or indirectly through inventory optimization) in the normal
course of our refining business. Such investment commodities are maintained on a weighted average cost basis for determining realized gains
and losses on physical purchases and sales under forward contracts, and ending balances are adjusted to fair value at each reporting date
using published market prices of the commodity on the applicable exchange. The investment commodities are included in other current assets
on the accompanying consolidated balance sheets and changes in fair value are recorded in other operating income in the accompanying
consolidated statements of income.
Property, Plant and Equipment
Assets acquired by Delek in conjunction with business acquisitions are recorded at estimated fair value at the acquisition date in accordance
with the purchase method of accounting as prescribed in Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805").
Other acquisitions of property and equipment are carried at cost. Betterments, renewals and extraordinary repairs that extend the life of an
asset are capitalized. Maintenance and repairs are charged to expense as incurred. Delek owns certain fixed assets on leased locations and
depreciates these assets and asset improvements over the lesser of management's estimated useful lives of the assets or the remaining lease
term.
Depreciation is computed using the straight-line method over management's estimated useful lives of the related assets, which are as follows:
Building and building improvements
Refinery machinery and equipment
Pipelines and terminals
Retail store equipment and site improvements
Refinery turnaround costs
Automobiles
Computer equipment and software
Furniture and fixtures
Asset retirement obligation assets
Other Intangible Assets
Years
15-40
5-40
15-40
7-40
4-6
3-5
3-10
5-15
15-50
Other intangible assets acquired in a business combination and determined to be finite-lived are amortized over their respective estimated
useful lives. The finite-lived intangible assets are amortized on straight-line bases over the estimated useful lives of five to 15 years. The
amortization expense is included in depreciation and amortization on the accompanying consolidated statements of income. Acquired
intangible assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment in connection with our
evaluation of long-lived assets as events and circumstances indicate that the asset might be impaired.
F-15 |
Property, Plant and Equipment and Other Intangibles Impairment
Property, plant and equipment held and used and other intangibles are evaluated for impairment whenever indicators of impairment exist. In
accordance with ASC 360, Property, Plant and Equipment ("ASC 360") and ASC 350, Intangibles - Goodwill and Other ("ASC 350"), Delek
evaluates the realizability of these long-lived assets as events occur that might indicate potential impairment. In doing so, Delek assesses
whether the carrying amount of the asset is recoverable by estimating the sum of the future cash flows expected to result from the asset,
undiscounted and without interest charges. If the carrying amount is more than the recoverable amount, an impairment charge must be
recognized based on the fair value of the asset. These impairment charges are included in other operating income in our consolidated
statements of income. There were no impairment charges for the years ended December 31, 2020, 2019 or 2018.
Equity Method Investments
For equity investments that are not required to be consolidated under the variable or voting interest model, we evaluate the level of influence we
are able to exercise over an entity’s operations to determine whether to use the equity method of accounting. Our judgment regarding the level
of influence over an equity method investment includes considering key factors such as our ownership interest, participation in policy-making
and other significant decisions and material intercompany transactions. Equity investments for which we determine we have significant influence
are accounted for as equity method investments. Amounts recognized for equity method investments are included in equity method
investments in our consolidated balance sheets and adjusted for our share of the net earnings and losses of the investee and cash distributions,
which are separately stated in our consolidated statements of income and our consolidated statements of cash flows. We evaluate our equity
method investments presented for impairment whenever events or changes in circumstances indicate that the carrying amounts of such
investments may be impaired. There were no impairment losses recorded on equity method investments for the years ended December 31,
2020, 2019 or 2018. See Note 7 for further information on our equity method investments.
Variable Interest Entities
Our consolidated financial statements include the financial statements of our subsidiaries and variable interest entities, of which we are the
primary beneficiary. We evaluate all legal entities in which we hold an ownership or other pecuniary interest to determine if the entity is a VIE.
Variable interests can be contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the VIE’s
assets. If we are not the primary beneficiary, the general partner or another limited partner may consolidate the VIE, and we record the
investment as an equity method investment.
Capitalized Interest
Delek capitalizes interest on capital projects associated with the refining and logistics segments.
Refinery Turnaround Costs
Refinery turnaround costs are incurred in connection with planned shutdowns and inspections of our refineries' major units to perform necessary
repairs and replacements. Refinery turnaround costs are deferred when incurred, classified as property, plant and equipment and amortized on
a straight-line basis over that period of time estimated to lapse until the next planned turnaround occurs. Refinery turnaround costs include,
among other things, the cost to repair, restore, refurbish or replace refinery equipment such as vessels, tanks, reactors, piping, rotating
equipment, instrumentation, electrical equipment, heat exchangers and fired heaters.
Goodwill and Impairment
Goodwill in an acquisition represents the excess of the aggregate purchase price over the fair value of the identifiable net assets. Goodwill is
reviewed at least annually during the fourth quarter for impairment, or more frequently if indicators of impairment exist, such as disruptions in
our business, unexpected significant declines in operating results or a sustained market capitalization decline. Goodwill
is evaluated for
impairment by comparing the carrying amount of the reporting unit to its estimated fair value. The Company adopted ASU 2017-04, Goodwill
and Other (Topic 350); Simplifying the Test for Goodwill Impairment, during the fourth quarter of 2018. In accordance with this guidance, a
goodwill impairment charge is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value,
limited to the total amount of goodwill allocated to that reporting unit.
In assessing the recoverability of goodwill, assumptions are made with respect to future business conditions and estimated expected future
cash flows to determine the fair value of a reporting unit. We may consider inputs such as a market participant weighted average cost of capital,
gross margin, capital expenditures and long-term growth rates based on historical information and our best estimate of future forecasts, all of
which are subject to significant judgment and estimates. We may also consider a market approach in determining or corroborating the fair
values of the reporting units using a multiple of expected future cash flows, such as those used by third-party analysts, which is also subject to
significant judgment and estimates. If these estimates and assumptions change in the future, due to factors such as a decline in general
economic conditions, competitive pressures on sales and margins and other economic and industry factors beyond management's control, an
impairment charge may be required. A significant risk to our future results and the potential future impairment of goodwill is the volatility of the
crude oil and the refined product markets which is often unpredictable and may negatively impact our results of operations in ways that cannot
be anticipated and that are beyond management's control.
F-16 |
Our annual assessment of goodwill resulted in an impairment of $126.0 million during the year ended December 31, 2020, and no impairment
during the years ended December 31, 2019 and 2018. Details of remaining goodwill balances by segment are included in Note 18.
Derivatives
Delek records all derivative financial
instruments, including any interest rate swap and cap agreements, fuel-related derivatives, over the
counter ("OTC") future swaps, forward contracts and future RIN purchase and sales commitments that qualify as derivative instruments, at
estimated fair value in accordance with the provisions of ASC 815. Changes in the fair value of the derivative instruments are recognized in
operations, unless we elect to apply and qualify for the hedging treatment permitted under the provisions of ASC 815 allowing such changes to
be classified as other comprehensive income for cash flow hedges. We determine the fair value of all derivative financial instruments utilizing
exchange pricing and/or price index developers such as Platts, Argus or OPIS. On a regular basis, Delek enters into commodity contracts with
counterparties for the purchase or sale of crude oil, blendstocks, and various finished products. We evaluate these contracts under ASC 815
and do not measure at fair value if they qualify for, and we elect, the normal purchase / normal sale exception.
Delek's policy under the guidance of ASC 815-10-45, Derivatives and Hedging - Other Presentation Matters ("ASC 815-10-45"), is to net the fair
value amounts recognized for multiple derivative instruments executed with the same counterparty and offset these values against the cash
collateral arising from these derivative positions.
Fair Value of Financial Instruments
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar
instruments. Management estimates that the carrying value approximates fair value for all of Delek's assets and liabilities that fall under the
scope of ASC 825, Financial Instruments ("ASC 825"). Delek also applies the provisions of ASC 825 as it pertains to the fair value option with
respect to certain financial instruments. This option permits the election to carry financial instruments and certain other items similar to financial
instruments at fair value on the balance sheet, with all changes in fair value reported in earnings.
Delek applies the provisions of ASC 820, Fair Value Measurements and Disclosure ("ASC 820"), which defines fair value, establishes a
framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to our commodity and other
derivatives that are measured at fair value on a recurring basis, and to our supply and offtake agreements and environmental credit obligations
that are accounted for under the fair value election. ASC 820 also applies to the measurement of our equity method investment, goodwill and
long-lived tangible and intangible assets when determining whether or not an impairment exists, when circumstances require evaluation. This
standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material to
our financial statements as of December 31, 2020 and 2019.
Inventory Supply and Offtake Obligations
Delek has Supply and Offtake Agreements (the "Supply and Offtake Agreements" or the "J. Aron Agreements") with J. Aron & Company ("J.
Aron") in connection with its El Dorado, Big Spring and Krotz Springs refineries, which provide a financing mechanism on contractual baseline
inventory volumes and also revolving over and short volumes. We account for the market-indexed obligations under our Supply and Offtake
Agreements as product (in this case, crude oil and refined product inventory) financing arrangements under the fair value option pursuant to
ASC 825 and the fair value guidance provided by ASC 820, and recognize all changes in the fair value in cost of materials and other in the
accompanying statements of
income. During periods where we had fixed price components that were subject to interest rate risk and not
market price risk, the changes in fair value of those components was recognized in interest expense. By electing the fair value option, the
changes in fair value provide a natural economic hedge to our FIFO cost of sales recognition without having to bifurcate any embedded
derivatives and consider the complex hedge accounting rules. See Notes 10 and 13 for further discussion.
Environmental Credits and Related Regulatory Obligations
As part of our refining operations, we generate certain regulatory environmental credit obligations due to the U.S. Environmental Protection
Agency (“EPA”) or other regulatory agencies. Additionally, we may generate, during the operation of our refining or other activities, or purchase
on a market, environmental credits for purposes of ultimately meeting expected environmental credit obligations. These resultant net
environmental credit obligations are financial
instruments where (1) there are consistently
instruments under ASC 825. For those financial
available observable market inputs or market-corroborated inputs; and (2) there continues to be (or is reasonably expected to be) sustained
liquidity in the applicable credits market, we generally apply the fair value option, as available pursuant to ASC 825. We recognize a current
liability at the end of each reporting period in which we do not have sufficient environmental credits to cover the current environmental credits
obligation (a “deficit”), and we recognize a current asset at the end of each reporting period in which we have generated or acquired
environmental credits meeting our recognition criteria in excess of our current environmental credits obligation (a “surplus”). Any obligation
surplus or deficit would be measured at fair value either directly through the observable inputs or indirectly through the market-corroborated
inputs. The net cost of environmental credits used each period as well as changes to fair value attributable to our environmental credit
obligations (surplus or deficit) are charged to cost of materials and other in the consolidated statements of income.
Our environmental credit obligations predominantly relate to EPA’s Renewable Fuel Standard - 2 ("RFS-2"), which requires that certain refiners
generate environmental credits, called Renewable Identification Numbers ("RINs"), by blending renewable fuels into the fuel products they
produce, or else purchasing RINs on the market, and that such RINs shall be used to satisfy the related environmental credit obligation. Each
F-17 |
of our refineries is an obligated party under RFS-2. To the extent that any of our refineries is unable to blend renewable fuels to generate
sufficient RINs, it must purchase RINs to satisfy its annual requirement ("RINs Obligation"). To the extent that we have purchased RINs or
transferred RINs to our refineries, each refinery’s RINs Obligation may be a surplus or deficit at the end of each reporting period (their
respective “Net RINs Obligation”). Because our Net RINs Obligations exceed the RINs we are able to generate annually on a consolidated
basis, and because we have the legal ability to transfer RINs generated or purchased through any of our entities to our obligated parties as
needed, we view and manage the Company’s individual Net RINs Obligations, as well as any non-obligated party RINs holdings, on a
consolidated basis. Therefore, the sum of our individual obligated parties’ Net RINs Obligations as well as RINs held by our non-obligated
parties which meet our recognition criteria, comprises the Company’s “Consolidated Net RINs Obligation.” For all periods presented in these
consolidated financial statements, the individual financial
instruments relating to specific category and vintage requirements under RFS-2
comprising our Consolidated Net RINs Obligation are subject to market risk and meet the criteria set forth above. Therefore, we have elected to
apply the fair value option to the individual financial instruments comprising our Consolidated Net RIN Obligation, using the fair value guidance
provided by ASC 820.
Other Related Transactions
From time to time, Delek enters into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the
costs associated with our RINs Obligation. These future RINs commitment contracts meet the definition of derivative instruments under ASC
815, Derivatives and Hedging ("ASC 815"), and are measured at fair value based on quoted prices from an independent pricing service.
Changes in the fair value of these future RINs commitment contracts are recorded in cost of materials and other on the consolidated statements
of income. See Note 12 for further information.
Additionally, from time to time, we may elect to sell surplus environmental credits and contemporaneously enter into a corresponding obligation
to repurchase substantially identical environmental credits at a future date to provide an additional source of short-term financing and to take
advantage of market liquidity for holdings that are not currently required for operations. We account for such transactions as product financing
arrangements. In such cases, the sale is not recognized, but rather the proceeds are treated as product financing proceeds where a
corresponding product financing obligation is recorded, while the subsequent repurchase is treated as repayment of the product financing
obligation, with the difference recorded as interest expense over the intervening period. Such transactions are included in our cash flows from
financing transactions.
Self-Insurance Reserves
Delek has varying deductibles or self-insured retentions on our workers’ compensation, general
liability, automobile liability insurance and
medical claims for certain employees with coverage above the deductibles or self-insured retentions in amounts management considers
adequate. We maintain an accrual for these costs based on claims filed and an estimate of claims incurred but not reported. Differences
between actual settlements and recorded accruals are recorded in the period identified.
Environmental Expenditures
the selected remediation technology and review of applicable environmental regulations,
It is Delek's policy to accrue environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been
liabilities represent the current estimated costs to investigate and
incurred and the amount can be reasonably estimated. Environmental
remediate contamination at sites where we have environmental exposure. This estimate is based on assessments of the extent of the
contamination,
typically considering estimated
activities and costs for 15 years, and up to 30 years if a longer period is believed reasonably necessary. Such estimates may require judgment
with respect to costs, time frame and extent of required remedial and clean-up activities. Accruals for estimated costs from environmental
remediation obligations generally are recognized no later than completion of the remedial feasibility study and include, but are not limited to,
costs to perform remedial actions and costs of machinery and equipment that are dedicated to the remedial actions and that do not have an
alternative use. Such accruals are adjusted as further information develops or circumstances change. We discount environmental liabilities to
their present value if payments are fixed or reliably determinable. Expenditures for equipment necessary for environmental issues relating to
ongoing operations are capitalized. Provisions for environmental liabilities generally are recognized in operating expenses.
Changes in laws and regulations and actual remediation expenses compared to historical experience could significantly impact our results of
operations and financial position. We believe the estimates selected, in each instance, represent our best estimate of future outcomes, but the
actual outcomes could differ from the estimates selected.
Asset Retirement Obligations
Delek initially recognizes liabilities which represent the fair value of a legal obligation to perform asset retirement activities, including those that
If a reasonable estimate cannot be made at the time the
are conditional on a future event, when the amount can be reasonably estimated.
liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.
In the refining segment, we have asset retirement obligations with respect to our refineries due to various legal obligations to clean and/or
dispose of these assets at the time they are retired. In the logistics segment, these obligations relate to the required cleanout of the pipeline and
terminal tanks and removal of certain above-grade portions of the pipeline situated on right-of-way property. In the retail segment, we have
asset retirement obligations related to the removal of underground storage tanks and the removal of brand signage at owned and leased retail
F-18 |
sites which are legally required under the applicable leases. The asset retirement obligation for storage tank removal on leased retail sites is
accreted over the expected life of the owned retail site or the average retail site lease term.
In order to determine fair value, management must make certain estimates and assumptions including, among other things, projected cash
flows, a credit-adjusted risk-free rate and an assessment of market conditions that could significantly impact the estimated fair value of the asset
retirement obligations. We believe the estimates selected, in each instance, represent our best estimate of future outcomes, but the actual
outcomes could differ from the estimates selected.
Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or by providing services to a
customer.
Refining
Revenues for products sold are recorded at the point of sale upon delivery of product, which is the point at which title to the product is
transferred, the customer has accepted the product and the customer has significant risks and rewards of owning the product. We typically
have a right to payment once control of the product is transferred to the customer. Transaction prices for these products are typically at market
rates for the product at the time of delivery. Payment terms require customers to pay shortly after delivery and do not contain significant
financing components.
Logistics
Revenues for products sold are generally recognized upon delivery of the product, which is when title and control of the product is transferred.
Transaction prices for these products are typically at market rates for the product at the time of delivery. Service revenues are recognized as
crude oil, intermediate and refined product are shipped through, delivered by or stored in our pipelines, trucks, terminals and storage facility
assets, as applicable. We do not recognize product revenues for these services as the product does not represent a promised good in the
context of ASC 606. All service revenues are based on regulated tariff rates or contractual rates. Payment terms require customers to pay
shortly after delivery and do not contain significant financing components.
Retail
Fuel and merchandise revenue is recognized at the point of sale, which is when control of the product is transferred to the customer. Payments
from customers are received at the time sales occur in cash or by credit or debit card. We derive service revenues from the sale of lottery
tickets, money orders, car washes and other ancillary product and service offerings. Service revenue and related costs are recorded at gross
amounts or net amounts, as appropriate, in accordance with the principal versus agent provisions in ASC 606.
Other
In the first quarter of 2020, we began selling crude barrels through supply agreements predominantly in the gulf coast region. The transaction
price for these products is based on contractual rates. Revenue is recognized based on consideration specified in such agreements when
performance obligations are satisfied by transferring control of crude oil to the customer.
The transaction prices of our contracts with customers are either fixed or variable, with variable pricing generally based on various market
indices. For our contracts that include variable consideration, we utilize the variable consideration allocation exception, whereby the variable
consideration is only allocated to the performance obligations that are satisfied during the period. Refer to Note 4 for disclosure of our revenue
disaggregated by segment, as well as a description of our reportable segment income.
Credit Losses
Under ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments as codified in ASC 326, Financial
Instruments - Credit Losses ("ASC 326"), we have applied the expected credit loss model for recognition and measurement of impairments in
financial assets measured at amortized cost or at fair value through other comprehensive income including accounts receivables. The expected
credit loss model is also applied for notes receivables and contractual holdbacks to which ASU 2016-13 applies and which are not accounted
for at fair value through profit or loss. The loss allowance for the financial asset is measured at an amount equal to the lifetime expected credit
losses. If the credit risk on the financial asset has decreased significantly since initial recognition, the loss allowance for the financial asset is re-
measured. Changes in loss allowances are recognized in profit and loss. For trade receivables, a simplified impairment approach is applied
recognizing expected lifetime losses from initial recognition.
Cost of Materials and Other and Operating Expenses
For the refining segment, cost of materials and other includes the following:
the direct cost of materials (such as crude oil and other refinery feedstocks, refined petroleum products and blendstocks, and ethanol
feedstocks and products) that are a component of our products sold;
costs related to the delivery (such as shipping and handling costs) of products sold;
•
•
F-19 |
•
•
costs related to our environmental credit obligations to comply with various governmental and regulatory programs (such as the cost of
RINs as required by the EPA's Renewable Fuel Standard and emission credits under various cap-and-trade systems); and
gains and losses on our commodity derivative instruments.
Operating expenses for the refining segment include the costs to operate our refineries and biodiesel facilities, excluding depreciation and
amortization. These costs primarily include employee-related expenses, energy and utility costs, catalysts and chemical costs, and repairs and
maintenance expenses.
For the logistics segment, cost of materials and other includes the following:
•
•
•
•
all costs of purchased refined products, additives and related transportation of such products,
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,
the cost of pipeline capacity leased from a third-party, and
gains and losses related to our commodity hedging activities.
Operating expenses for the logistics segment 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.
For the retail segment, cost of materials and other comprises the costs related to specific products sold at retail sites, primarily consisting of
motor fuels and merchandise. Retail fuel cost of sales represents the cost of purchased fuel, including transportation costs. Merchandise cost of
sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions. Operating expenses related to the
retail business include costs such as wages of employees, lease expense, utility expense and other costs of operating the stores, excluding
depreciation and amortization, and are excluded from cost of sales because they primarily relate to costs associated with selling the products
through our retail sites.
Depreciation and amortization is separately presented in our statement of
income and disclosed by reportable segment in Note 4.
Interest Expense
Interest expense includes interest expense on debt, letters of credit, financing fees (including certain J. Aron fees associated with our Supply
and Offtake Agreements), the amortization, net of accretion, of debt discounts or premium and amortization of deferred debt issuance costs,
and interest rate swap settlements, but excludes capitalized interest. Original issuance discount and debt issuance costs are amortized ratably
over the term of the related debt when it is not materially different from the effective interest method.
Sales, Use and Excise Taxes
Delek's policy is to exclude from revenue all taxes assessed by a governmental authority, including sales, use and excise taxes, that are both
imposed on and concurrent with a specific revenue-producing transaction and collected from a customer.
Deferred Financing Costs
facilities are included in other non-current assets in the accompanying
Deferred financing costs associated with our revolving credit
consolidated balance sheets. Deferred financing costs associated with our term loan facilities are included as a reduction to the associated debt
balance in the accompanying consolidated balance sheets. These costs represent expenses related to issuing our long-term debt and obtaining
our lines of credit and are amortized ratably over the remaining term of the respective financing when it is not materially different from the
effective interest method and included in interest expense in the accompanying consolidated statements of income. See Note 11 for further
information.
Advertising Costs
Delek expenses advertising costs as the advertising space is utilized. Advertising expense for the years ended December 31, 2020, 2019 and
2018 was $1.9 million, $3.4 million and $4.1 million, respectively.
Leases
In accordance with ASC 842-20, Leases - Lessee ("ASC 842-20"), we classify leases with contractual terms longer than twelve months as
either operating or finance. Finance leases are generally those leases that are highly specialized or allow us to substantially utilize or pay for the
entire asset over its useful life. All other leases are classified as operating leases.
Delek leases land, buildings and various equipment under primarily operating lease arrangements, most of which provide the option, after the
initial lease term, to renew the leases. Some of these lease arrangements include fixed lease rate increases, while others include lease rate
increases based upon such factors as changes, if any, in defined inflationary indices.
F-20 |
leases that include fixed rental rate increases, these are included in our fixed lease payments. Our leases may include variable
For all
payments, based on changes on price or other indices, that are expensed as incurred.
Delek calculates the total lease expense for the entire noncancelable lease period, considering renewals for all periods for which it is reasonably
certain to be exercised, and records lease expense on a straight-line basis in the accompanying consolidated statements of
income.
Accordingly, a lease liability is recognized for these leases and is calculated to be the present value of the fixed lease payments, as defined by
ASC 842-20, using a discount rate based on our incremental borrowing rate. A corresponding right-of-use asset is recognized based on the
lease liability and adjusted for certain costs and prepayments. The right-of-use asset is amortized over the noncancelable lease period,
considering renewals for all periods for which it is reasonably certain to be exercised. See Note 25 for further information.
Income Taxes
Income taxes are accounted for under the provisions of ASC 740, Income Taxes ("ASC 740"). This standard generally requires Delek to record
deferred income taxes for the differences between the book and tax bases of its assets and liabilities, which are measured using enacted tax
rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax expense or benefit represents the net
change during the year in our deferred income tax assets and liabilities, exclusive of the amounts held in other comprehensive income.
ASC 740 also prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial
statements uncertain tax positions taken or expected to be taken on a tax return and prescribes the minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. Finally, ASC 740 requires an annual tabular roll-forward of
unrecognized tax benefits.
The Tax Cuts and Jobs Act (the "Tax Reform Act") was enacted on December 22, 2017. The Tax Reform Act reduces the U.S. federal
corporate tax rate from 35% to 21%, provides for immediate deduction of qualified capital assets placed in service, requires companies to pay a
one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign
sourced earnings. Adjustments made upon finalization of our accounting analysis were not material to our consolidated financial statements.
See Note 15 for further discussion.
On March 27, 2020, the Coronavirus Aid Relief, and Economic Security Act (the "CARES Act") was enacted into law. The CARES Act includes
several significant provisions for corporations, including the usage of net operating losses, interest deductions and payroll benefits.
Equity-Based Compensation
ASC 718, Compensation - Stock Compensation ("ASC 718"), requires the cost of all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement and establishes fair value as the measurement objective in accounting for
share-based payment arrangements. ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards on the
date of grant. Delek uses the Black-Scholes-Merton option-pricing model to determine the fair value of stock option and stock appreciation right
(SAR) awards.
Restricted stock units ("RSUs") are valued based on the fair market value of the underlying stock on the date of grant. Performance-based
RSUs ("PRSUs") include a market condition based on the Company's total shareholder return over the performance period and are valued
using a Monte-Carlo simulation model. We record compensation expense for these awards based on the grant date fair value of the award,
recognized ratably over the measurement period. Vested RSUs and PRSUs are not
the minimum statutory withholding
requirements have been remitted to us for payment to the taxing authority. As a result, the actual number of shares accounted for as issued
may be less than the number of RSUs vested, due to any withholding amounts which have not been remitted.
issued until
We generally recognize compensation expense related to stock-based awards with graded or cliff vesting on a straight-line basis over the
vesting period. It is our practice to issue new shares when share-based awards are exercised. Our equity-based compensation expense
includes estimates for forfeitures and volatility based on our historical experience. If actual forfeitures differ from our estimates, we adjust equity-
based compensation expense accordingly.
Postretirement Benefits
In connection with the Delek/Alon Merger, we assumed defined benefit pension and postretirement medical plans for certain former Alon
employees. We recognize the underfunded status of our defined benefit pension and postretirement medical plans as a liability. Changes in the
funded status of our defined benefit pension and postretirement medical plans are recognized in other comprehensive income in the period
when the changes occur. The funded status represents the difference between the projected benefit obligation and the fair value of the plan
assets. The projected benefit obligation is the present value of benefits earned to date by plan participants, including the effect of assumed
future salary increases. Plan assets are measured at fair value. We use December 31 of each year, or more frequently as necessary, as the
measurement date for plan assets and obligations for all of our defined benefit pension and postretirement medical plans. We straight-line
amortize prior service costs and actuarial gains and losses over the average future service of members expected to receive benefits and use a
10% corridor in regards to the actuarial gains and losses. See Note 23 for more information regarding our postretirement benefits.
is included as part of general and administrative expenses in the accompanying
The service cost component of net periodic benefit
consolidated statements of income. The other components of net periodic benefit are included as part of other expense (income), net in the
accompanying consolidated statements of income.
F-21 |
New Accounting Pronouncements Adopted During 2020
ASU 2018-15, Intangible - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract
In August 2018, the Financial Accounting Standards Board (the "FASB") issued guidance related to customers’ accounting for implementation
costs incurred in a cloud computing arrangement that is considered a service contract. This pronouncement aligns the requirements for
capitalizing implementation costs in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2019. We adopted this guidance prospectively on January 1, 2020 and the adoption did not have a material impact on our
business, financial condition or results of operations.
ASU 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. The pronouncement eliminates,
modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods
within those fiscal years, beginning after December 15, 2019. We adopted this guidance on January 1, 2020 and the adoption did not have a
material impact on our business, financial condition or results of operations. See Note 13.
ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance requiring the measurement of all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. Organizations will now use forward-looking
information to better inform their credit loss estimates. This guidance is effective for interim and annual periods beginning after December 15,
2019. We adopted this guidance on January 1, 2020 using the modified retrospective approach as of the adoption date. The adoption did not
have a material impact on the Company’s operating results, financial position or disclosures.
Accounting Pronouncements Not Yet Adopted
ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's
Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued ASU 2020-06, which is intended to simplify the accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and contracts in an entity's own equity. The guidance allows for either full retrospective
adoption or modified retrospective adoption. The pronouncement is effective for fiscal years and interim periods within those fiscal years
beginning after December 15, 2021, and early adoption is permitted. The Company is evaluating the impact of this guidance but does not
currently expect adopting this new guidance will have a material impact on its consolidated financial statements and related disclosures.
ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
In March 2020, the FASB issued an amendment which is intended to provide temporary optional expedients and exceptions to GAAP guidance
on contracts, hedge accounting and other transactions affected by the expected market transition from the London Interbank Offered Rate
("LIBOR") and other interbank rates. This guidance is effective for all entities at any time beginning on March 12, 2020 through December 31,
2022 and may be applied from the beginning of an interim period that includes the issuance date of the ASU. The Company is currently
evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
ASU 2020-01,
Investments—Equity Securities (Topic 321),
Investments—Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
In January 2020, the FASB issued ASU 2020-01 which is intended to clarify interactions between the guidance to account for certain equity
securities under Topics 321, 323 and 815, and improve current GAAP by reducing diversity in practice and increasing comparability of
accounting. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020.
We expect to adopt this guidance on the effective date and do not expect adopting this new guidance will have a material impact on our
business, financial condition and results of operations.
ASU 2019-12, Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance which is intended to simplify various aspects related to accounting for income taxes, eliminate
certain exceptions within ASC 740 and clarify certain aspects of the current guidance to promote consistency among reporting entities. The
pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. We expect to
adopt this guidance on the effective date and do not expect adopting this new guidance will have a material impact on our business, financial
condition and results of operations.
F-22 |
ASU 2018-14, Compensation - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued guidance related to disclosure requirements for defined benefit plans. The pronouncement eliminates,
modifies and adds disclosure requirements for defined benefit plans. The pronouncement is effective for fiscal years beginning after December
15, 2020. We expect to adopt this guidance on the effective date and do not expect adopting this new guidance will have a material impact on
our business, financial condition or results of operations.
3. Acquisitions
Alon
Effective July 1, 2017, we acquired the outstanding common stock of Alon resulting in a new post-combination consolidated registrant renamed
as Delek US Holdings, Inc. In connection with the Delek/Alon Merger, Alon, Delek and U.S. Bank National Association, as trustee (the
“Trustee”) entered into a First Supplemental Indenture (the “Supplemental Indenture”), effective as of July 1, 2017, which provided that Alon's
3.0% Convertible Senior Notes due 2018, which were previously convertible into Alon common stock, would thereafter be convertible into Delek
common stock based on the exchange rate applied in the Delek/Alon Merger (the “Convertible Notes”). Additionally, in connection with the
Convertible Notes, Alon also entered into equity instruments, including call options (the "Call Options") and warrants (the "Warrants"), designed,
in combination, to hedge a portion of the risk associated with the potential exercise of the conversion feature of the Convertible Notes and to
mitigate the dilutive effect of such potential conversion. These instruments were exchanged in connection with the Delek/Alon Merger into
instruments that were indexed to Delek common stock. See Note 11 for further discussion of these instruments and subsequent activity.
The Delek/Alon Merger was accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired
and liabilities assumed be recognized on the balance sheet at their fair value as of the acquisition date. During the year ended December 31,
2018, we continued our procedures to determine the fair value of assets acquired and liabilities assumed in the Delek/Alon Merger, all of which
were completed by June 30, 2018. Transaction costs incurred by the Company in connection with the Delek/Alon Merger totaled approximately
$6.6 million for the year ended December 31, 2018. Such costs were included in general and administrative expenses in the accompanying
consolidated statements of income.
4. Segment Data
We aggregate our operating segments into three reportable segments: Refining, Logistics and Retail. Operations that are not specifically
included in the reportable segments are included in Corporate, Other and Eliminations, which consists of the following:
•
•
•
•
•
•
our corporate activities;
results of certain immaterial operating segments, including our Canadian crude trading operations (as discussed in Note 12);
wholesale crude operations;
Alon's asphalt terminal operations;
our discontinued Paramount and Long Beach, California refinery and California renewable fuels facility operations (acquired as part of the
Delek/Alon Merger) (see Note 8 for further discussion); and
intercompany eliminations.
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 the reportable segments based on the segment contribution margin. Segment
contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and
amortization.
During the first quarter of 2020, we revised the structure of the internal financial information reviewed by management and began allocating the
results of hedging activity associated with managing risks of our refineries, previously reported in corporate, other and eliminations, to our
refining segment. The historical results of this hedging activity have been reclassified to conform to the current presentation. The assets and/or
liabilities associated with this hedging activity have not been allocated to the refining segment.
Refining Segment
The refining segment processes crude oil and other feedstocks for the manufacture of transportation motor fuels, including various grades of
gasoline, diesel fuel and aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-party product
terminals. The refining segment has a combined nameplate capacity of 302,000 bpd as of December 31, 2020, including the following:
75,000 bpd Tyler, Texas refinery (the "Tyler refinery");
80,000 bpd El Dorado, Arkansas refinery (the "El Dorado refinery");
73,000 bpd Big Spring, Texas refinery (the "Big Spring refinery");
•
•
•
F-23 |
•
•
74,000 bpd Krotz Springs, Louisiana refinery (the "Krotz Springs refinery"); and
a non-operating refinery located in Bakersfield, California, which was sold May 7, 2020.
As of December 31, 2020, the refining segment also owns and operates three biodiesel facilities involved in the production of biodiesel fuels
and related activities, located in Crossett, Arkansas, Cleburne, Texas and New Albany, Mississippi. The biodiesel industry has historically been
substantially aided by federal and state tax incentives. One tax incentive program that has been significant to our renewable fuels facilities is
the federal blender's tax credit (also known as the biodiesel tax credit or "BTC"). The BTC provides a $1.00 refundable tax credit per gallon of
pure biodiesel to the first blender of biodiesel with petroleum-based diesel fuel. The blender's tax credit was re-enacted in December 2019 for
the years 2020 through 2022 and was retroactively reinstated for 2018 and 2019.
On May 7, 2020, we sold our equity interests in Alon Bakersfield Property, Inc., an indirect wholly-owned subsidiary that owns our non-operating
refinery located in Bakersfield, California, to a subsidiary of Global Clean Energy Holdings, Inc. (“GCE”) for total cash consideration of
$40.0 million. As a result of this sale, we recognized a gain of $56.8 million, largely due to the buyer assuming substantially all of the asset
retirement obligations and environmental liabilities associated with this refinery, which is included in gain on sale of non-operating refinery on
the accompanying consolidated statements of income. As part of the transaction, GCE granted a call option to Delek to acquire up to a 33 1/3%
limited member interest in the acquiring subsidiary of GCE for $400 per unit (up to $13.3 million), subject to certain adjustments. Such option is
exercisable by Delek through the 90th day after GCE demonstrates commercial operations, as contractually defined.
The refining segment's petroleum-based products are marketed primarily in the south central, southwestern and western regions of the United
States. This segment also ships and sells gasoline into wholesale markets in the southern and eastern United States. Motor fuels are sold
under the Alon or Delek brand through various terminals to supply Alon or Delek branded retail sites. In addition, we sell motor fuels through its
wholesale distribution network on an unbranded basis.
Logistics Segment
Our logistics segment owns and operates crude oil and refined products logistics and marketing assets. The logistics segment generates
revenue by charging fees for gathering, transporting and storing crude oil and for marketing, distributing, transporting and storing intermediate
and refined products in select regions of the southeastern United States and West Texas for our refining segment and third parties, and sales of
wholesale products in the West Texas market.
Retail Segment
Our retail segment includes the operations of owned and leased convenience store sites located primarily in Central and West Texas and New
Mexico. These convenience stores typically offer various grades of gasoline and diesel under the Alon or Delek brand name and food products,
food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money orders to the public, primarily
under the 7-Eleven and Alon brand names. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring
refinery, which is transferred to the retail segment at prices substantially determined by reference to published commodity pricing information.
We operated 253 and 252 stores as of December 31, 2020 and 2019, respectively.
In November 2018, we terminated the license agreement with 7-Eleven, Inc. The terms of such agreement and subsequent amendments
require the removal of all 7-Eleven branding on a store-by-store basis by December 31, 2023. Merchandise sales at our convenience store
sites will continue to be sold under the 7-Eleven brand name until 7-Eleven branding is removed at such convenience store sites. In connection
with certain strategic initiatives, we closed one store in 2020 and for the year ended December 31, 2019, we closed or sold 30 under-performing
or non-strategic store locations for total proceeds of $15.1 million.
Significant Inter-segment Transactions
All inter-segment transactions have been eliminated in consolidation and consists primarily of the following:
•
•
•
•
•
refining segment refined product sales to the retail segment to be sold through the store locations;
refining segment sales of asphalt and refined product to entities included in corporate, other and eliminations;
logistics segment service fee revenue under service agreements with the refining segment based on the number of gallons sold and to
share a portion of the margin achieved in return for providing marketing, sales and customer services;
logistics segment sales of wholesale finished product to our refining segment; and
logistics segment crude transportation, terminalling and storage fee revenue from our refining segment for the utilization of pipeline,
terminal and storage assets.
Business Segment Operating Performance
The following is a summary of business segment operating performance as measured by contribution margin for the year ended indicated (in
millions):
F-24 |
(In millions)
Refining
Logistics
Retail
Net revenues (excluding intercompany fees and revenues)
$
5,363.1
$
Inter-segment fees and revenues
Operating costs and expenses:
Cost of materials and other
Operating expenses (excluding depreciation and
amortization presented below)
Segment contribution margin
Depreciation and amortization
Impairment of goodwill
General and administrative expenses
Other operating income, net
Operating loss
Capital spending (excluding business combinations)
(In millions)
Net revenues (excluding intercompany fees and
revenues)
Inter-segment fees and revenues
Operating costs and expenses:
Cost of materials and other
Operating expenses (excluding depreciation and
amortization presented below)
Segment contribution margin
Depreciation and amortization
General and administrative expenses
Other operating income, net
Operating income
$
$
$
$
$
$
$
Year Ended December 31, 2020
183.6
379.8
269.1
56.2
238.1
35.7
$
$
$
681.7
$
—
523.6
90.5
67.6
13.2
$
$
— $
— $
Corporate,
Other and
Eliminations
1,073.4
$
(834.4)
303.0
10.4
(74.4)
20.4
—
454.6
5,745.5
402.7
(330.5) $
198.3
126.0
$
$
201.0
$
15.8
$
9.1
$
13.7
$
$
Year Ended December 31, 2019
Refining (1) (2)
Logistics
Retail
Corporate,
Other and
Eliminations (2)
Consolidated
8,095.9
702.6
7,528.2
492.4
777.9
134.3
$
$
$
323.0
261.0
336.5
74.1
173.4
26.7
$
$
$
838.0
—
684.7
94.8
58.5
11.2
$
$
$
$
41.3
(963.6)
(892.2)
20.9
(51.0)
22.1
Consolidated
7,301.8
—
6,841.2
559.8
(99.2)
267.6
126.0
248.3
(13.1)
(728.0)
239.6
9,298.2
—
7,657.2
682.2
958.8
194.3
274.7
(2.5)
492.3
428.1
$
$
Capital spending (excluding business combinations)
$
266.6
$
9.9
$
20.5
$
131.1
Year Ended December 31, 2018
(In millions)
Net revenues (excluding intercompany fees and
revenues)
Inter-segment fees and revenues
Operating costs and expenses:
Cost of materials and other
Operating expenses (excluding depreciation and
amortization presented below)
Segment contribution margin
Depreciation and amortization
General and administrative expenses
Other operating income, net
Operating income
Refining (1) (2)
Logistics
Retail
$
$
$
8,771.4
839.0
8,305.5
465.4
839.5
133.7
$
$
$
416.8
240.8
429.1
58.7
169.8
26.0
$
$
$
915.4
—
755.8
100.7
58.9
24.6
$
$
$
Capital spending (excluding business combinations)
$
203.9
$
11.6
$
10.0
$
Corporate,
Other and
Eliminations (2)
Consolidated
$
129.5
(1,079.8)
10,233.1
—
(929.9)
20.2
(40.6)
15.1
$
$
91.7
8,560.5
645.0
1,027.6
199.4
247.6
(31.3)
611.9
317.2
(1) Refining segment contribution margin for the year ended December 31, 2019 includes $77.6 million of BTC that was re-enacted in 2019, $36.0 million of which related to 2018
renewable blending activities. Refining segment contribution margin for the year ended December 31, 2018 includes $24.9 million of BTC that was enacted in 2018 all of which
related to 2017 renewable blending activities.
(2) The refining segment results of operations for the years ended December 31, 2019 and 2018, includes hedging gains (losses), a component of cost of materials and other, of
$16.3 million and $(25.6) million, respectively, which was previously included and reported in corporate, other and eliminations.
F-25 |
Other Segment Information
Total assets by segment were as follows as of:
Total assets
Less:
Inter-segment notes receivable
Inter-segment right of use lease assets
Total assets, excluding inter-segment notes
receivable and right of use assets
Total assets
Less:
Inter-segment notes receivable
Inter-segment right of use lease assets
Total assets, excluding inter-segment notes
receivable and right of use assets
5. Earnings (Loss) Per Share
Earnings (Loss) Per Share
December 31, 2020
Refining
Logistics
Retail
Corporate,
Other and
Eliminations
Consolidated
5,848.9
$
956.5
$
258.9
$
(930.2) $
6,134.1
(1,285.8)
(370.6)
—
—
—
—
1,285.8
370.6
—
—
4,192.5
$
956.5
$
258.9
$
726.2
$
6,134.1
December 31, 2019
Refining
Logistics
Retail
Corporate,
Other and
Eliminations
Consolidated
6,549.4
$
744.4
$
344.9
$
(622.4) $
7,016.3
(1,586.8)
(441.3)
—
—
—
—
1,586.8
441.3
—
—
4,521.3
$
744.4
$
344.9
$
1,405.7
$
7,016.3
$
$
$
$
Basic earnings per share (or "EPS") is computed by dividing net income (loss) by the weighted average common shares outstanding. Diluted
earnings per share is computed by dividing net income (loss), as adjusted for changes to income that would result from the assumed settlement
of the dilutive equity instruments included in diluted weighted average common shares outstanding, by the diluted weighted average common
shares outstanding. For all years presented, we have outstanding various equity-based compensation awards that are considered in our diluted
EPS calculation (when to do so would not be anti-dilutive), and is inclusive of awards disclosed in Note 21 to these consolidated financial
statements. For those instruments that are indexed to our common stock, they are generally dilutive when the market price of the underlying
indexed share of common stock is in excess of the exercise price. Additionally, in connection with the Delek/Alon Merger, we assumed certain
equity instruments, including conversion options (associated with Convertible Notes) and Warrants, that were dilutive in certain periods in which
they were outstanding (see discussion of these instruments in Note 11). The Convertible Notes conversion options were dilutive during the
period they were outstanding when the incremental EPS calculated by dividing the increase in income associated with the elimination of interest
expense on the convertible debt, net of tax, by the number of shares that would be issued upon conversion using the treasury stock method
(which is applicable because of the cash settlement feature associated with the underlying principal) is dilutive to the overall diluted EPS
calculation. The Warrants were generally dilutive during the periods they were outstanding when the market price of the underlying indexed
share of common stock was in excess of the exercise price. All such instruments that may otherwise be dilutive may not be dilutive when there
is net loss for the period. We also assumed Call Options in connection with the Delek/Alon Merger which were not reflected in the diluted
weighted average common shares outstanding because to do so would have been antidilutive. On September 17, 2018, Delek settled the
Convertible Notes for a combination of cash and shares of Delek common stock (See Note 11) and in November 2018, Delek entered into
Warrant Unwind Agreements (the "Unwind Agreements" - See Note 11) with the holders of our outstanding common stock warrants; therefore,
these instruments were only potentially dilutive for EPS for the year ended December 31, 2018. The following table sets forth the computation
of basic and diluted earnings per share.
F-26 |
Numerator:
Numerator for EPS - continuing operations
(Loss) Income from continuing operations
Less: Income from continuing operations attributed to non-controlling interest
(Loss) income from continuing operations attributable to Delek (numerator for basic EPS -
continuing operations attributable to Delek)
Interest on convertible debt, net of tax
Numerator for diluted EPS - continuing operations attributable to Delek
Numerator for EPS - discontinued operations
Income (loss) from discontinued operations, including gain (loss) on sale of discontinued
operations
Less: Income tax expense (benefit)
Income (loss) from discontinued operations, net of tax
Less: Income from discontinued operations attributed to non-controlling interest
Income (loss) from discontinued operations attributable to Delek
Denominator:
Weighted average common shares outstanding (denominator for basic EPS)
Dilutive effect of convertible debt
Dilutive effect of warrants
Dilutive effect of stock-based awards
Weighted average common shares outstanding, assuming dilution
EPS:
Basic (loss) income per share:
(Loss) income from continuing operations
Income (loss) from discontinued operations
Total basic (loss) income per share
Diluted (loss) income per share:
(Loss) income from continuing operations
Income (loss) from discontinued operations
Total diluted (loss) income per share
Year Ended December 31,
2020
2019
2018
$
(570.4)
$
331.0
$
37.6
(608.0)
—
25.6
305.4
—
(608.0)
$
305.4
$
— $
—
—
—
— $
6.6
1.4
5.2
—
5.2
$
$
383.6
26.7
356.9
2.6
359.5
(10.9)
(2.2)
(8.7)
8.1
(16.8)
73,598,389
75,853,187
82,797,110
—
—
720,904
1,525,846
967,352
1,478,093
—
—
73,598,389
76,574,091
86,768,401
(8.26)
—
(8.26)
(8.26)
—
(8.26)
$
$
$
$
4.03
0.07
4.10
3.99
0.07
4.06
$
$
$
$
4.31
(0.20)
4.11
4.14
(0.19)
3.95
$
$
$
$
$
$
$
The following equity instruments were excluded from the diluted weighted average common
shares outstanding because their effect would be anti-dilutive:
Antidilutive stock-based compensation (because average share price is less than exercise price)
Antidilutive due to loss
Total antidilutive stock-based compensation
466,254
3,616,690
4,082,944
1,932,179
1,462,112
—
—
1,932,179
1,462,112
F-27 |
6. Delek Logistics and the Alon Partnership
Delek Logistics
Delek Logistics is a publicly traded limited partnership that was formed by Delek in 2012 to own, operate, acquire and construct crude oil and
refined products logistics and marketing assets. A substantial majority of Delek Logistics' assets are integral to Delek’s refining and marketing
operations. As of December 31, 2020, we owned an 80.0% interest in Delek Logistics, consisting of 34,745,868 common limited partner units
and the non-economic general partner interest. The limited partner interests in Delek Logistics not owned by us are reflected in net income
attributable to non-controlling interest in the accompanying consolidated statements of income and in non-controlling interest in subsidiaries in
the accompanying consolidated balance sheets.
On August 13, 2020, Delek Logistics completed a transaction to eliminate the incentive distribution rights ("IDRs") held by Delek Logistics GP,
LLC ("Logistics GP"), the general partner, and convert the 2.0% economic general partner interest into a non-economic general partner interest
in exchange for
total consideration consisting of $45.0 million cash and 14.0 million newly issued common limited partner units.
Contemporaneously, we repurchased 5.2% ownership interest in the general partner from affiliates, who are also members of the general
partner's management and board of directors, for $23.1 million, increasing our ownership interest in the general partner to 100.0%. As a result
of these transactions, the non-controlling interest in our consolidated balance sheets decreased by $50.8 million, with a $37.2 million increase to
additional paid-in capital which is net of $11.5 million related to deferred income taxes and $2.1 million of transaction costs.
In August 2020, Delek Logistics filed a shelf registration statement, which subsequently became effective, with the U.S. Securities and
Exchange Commission for the proposed re-sale or other disposition from time to time by Delek of up to 14.0 million common limited partner
units representing our limited partner interests in Delek Logistics. No units were sold for the year ended December 31, 2020.
We have agreements with Delek Logistics that, among other things, establish fees for certain administrative and operational services provided
by us and our subsidiaries to Delek Logistics, provide certain indemnification obligations and establish terms for fee-based commercial logistics
and marketing services provided by Delek Logistics and its subsidiaries to us. The revenues and expenses associated with these agreements
are eliminated in consolidation.
Delek Logistics is a variable interest entity, as defined under GAAP, and is consolidated into our consolidated financial statements, representing
our logistics segment. The assets of Delek Logistics can only be used to settle its own obligations and its creditors have no recourse to our
assets. Exclusive of intercompany balances and the marketing agreement intangible asset between Delek Logistics and Delek which are
eliminated in consolidation, the Delek Logistics consolidated balance sheets are included in the consolidated balance sheets of Delek. The
Delek Logistics consolidated balance sheets are presented below (in millions):
ASSETS
LIABILITIES AND DEFICIT
Cash and cash equivalents
Accounts receivable
Accounts receivable from related parties
Inventory
Other current assets
Property, plant and equipment, net
Equity method investments
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Other non-current assets
Total assets
Accounts payable
Accounts payable to related parties
Current portion of operating lease liabilities
Accrued expenses and other current liabilities
Long-term debt
Asset retirement obligations
Operating lease liabilities, net of current portion
Deferred tax liabilities
Other non-current liabilities
Deficit
Total liabilities and deficit
F-28 |
December 31,
2020
2019
$
$
$
$
$
$
$
4.2
15.7
5.9
3.1
0.4
464.8
253.7
24.2
12.2
160.1
12.1
956.4
6.7
—
8.7
12.9
992.3
6.0
15.4
0.6
22.1
(108.3)
956.4
$
5.5
13.2
—
12.6
2.3
295.0
247.0
3.7
12.2
146.6
6.3
744.4
12.5
8.9
1.4
12.2
833.1
5.6
2.3
0.2
19.3
(151.1)
744.4
Effective May 1, 2020, Delek through its wholly owned subsidiaries Lion Oil Company (“Lion Oil”) and Delek Refining, Ltd. (“Delek Refining”)
contributed certain leased and owned tractors and trailers and related assets used in the provision of trucking and transportation services for
crude oil, petroleum and certain other products throughout Arkansas, Oklahoma and Texas to Delek Trucking, LLC (“Delek Trucking”), a direct
wholly owned subsidiary of Lion Oil. Following this contribution, Lion Oil sold all of the issued and outstanding membership interests in Delek
Trucking (the “Trucking Acquisition”) to DKL Transportation, LLC (“DKL Transportation”), a wholly owned subsidiary of Delek Logistics. Promptly
following the consummation of the Trucking Acquisition, Delek Trucking merged with and into DKL Transportation, with DKL Transportation
continuing as the surviving entity. Total consideration for the Trucking Acquisition was approximately $48.0 million in cash, subject to certain
post-closing adjustments, financed primarily with borrowings under Delek Logistics’ revolving credit facility. In connection with the Trucking
Acquisition, Delek Refining, Lion Oil and DKL Transportation entered into a Transportation Services Agreement pursuant to which DKL
Transportation will gather, coordinate the pickup of, transport and deliver petroleum products for Delek Refining and Lion Oil, as well as provide
ancillary services as requested. Prior periods have not been recast in our Note 4 - Segment Data, as these assets did not constitute a business
in accordance with ASU 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"), and the transaction was accounted for as an
acquisition of assets between entities under common control.
Effective March 31, 2020, Delek Logistics, through its wholly-owned subsidiary DKL Permian Gathering, LLC, acquired the Big Spring Gathering
System, located in Howard, Borden and Martin Counties, Texas, from Delek, which included the execution of related commercial agreements.
In connection with the closing of the transaction, Delek, Delek Logistics and various of their respective subsidiaries entered into a Throughput
and Deficiency Agreement (the “T&D Agreement”). Under the T&D Agreement, Delek Logistics will operate and maintain the Big Spring
Gathering System connecting our interests in and to certain crude oil production with the Delek Logistics' Big Spring, Texas terminal and
provide gathering, transportation and other related services. The total consideration was subject to certain post-closing adjustments and was
comprised of $100.0 million in cash and 5.0 million common units representing limited partner interest in Delek Logistics. The cash component
of this dropdown was financed with borrowings on the DKL Credit Facility (as defined in Note 11). Prior periods have not been recast in our
Note 4 - Segment Data, as these assets did not constitute a business in accordance with ASU 2017-01 and the transaction was accounted for
as an acquisition of assets between entities under common control.
Additionally, in March 2020, we purchased 451,822 of Delek Logistics limited partner units from an investor pursuant to a Common Unit
Purchase Agreement between Delek Marketing & Supply, LLC and such investor. The purchase price of the units amounted to approximately
$5.0 million.
In March 2018, Delek Logistics, through its wholly-owned subsidiary DKL Big Spring, LLC, completed the acquisition from a subsidiary of Delek
(the Alon Partnership) of storage tanks and terminals that support our Big Spring, Texas refinery (the "Big Spring Logistic Assets Acquisition"),
which included the execution of related commercial agreements. In addition, a new marketing agreement was entered into between the
subsidiary of Delek Logistics and the Alon Partnership pursuant to which the subsidiary of Delek Logistics provides marketing services for
product sales from the Big Spring refinery. The cash paid for the transferred assets was $170.8 million, and the cash paid for the marketing
agreement was $144.2 million. The transactions were financed with borrowings under the 2014 Facility (as defined in Note 11). Additionally, the
transaction resulted in the creation of a deferred tax asset related to the tax-book basis difference in the sold assets totaling $98.8 million,
against which we have recorded a valuation allowance totaling $5.5 million for the portion of the deferred tax asset that relates to basis
difference attributable to the non-controlling interest and therefore may not be realizable. Prior periods have not been recast in our Note 4 -
Segment Data, as these assets did not constitute a business in accordance with the ASU 2017-01, and were accounted for as acquisitions of
assets between entities under common control.
Alon Partnership
As part of the Delek/Alon Merger, we acquired the Alon Partnership which owns the assets and conducts the operations of the Big Spring
refinery and the associated integrated wholesale marketing operations. On February 7, 2018 (the "Merger Date"), Delek acquired from the Alon
Partnership all of the outstanding limited partner units that Delek did not already own in an all-equity transaction (the "Alon Partnership
Merger"). Delek owned approximately 51.0 million limited partner units of the Alon Partnership, or approximately 81.6% of the outstanding units,
immediately prior to the Merger Date. Under terms of the merger agreement, the owners of the remaining outstanding units in the Alon
Partnership that Delek did not own immediately prior to the Merger Date received a fixed exchange ratio of 0.49 shares of Delek common stock
for each limited partner unit of the Alon Partnership, resulting in the issuance of approximately 5.6 million shares of Delek common stock to the
public unitholders of the Alon Partnership. Because the transaction represented a combination of ownership interests under common control,
the transfer of equity from non-controlling interest to owned interest (additional paid-in capital) was recorded at carrying value and no gain or
loss was recognized in connection with the transaction. Additionally, book-tax basis difference was created as a result of the transaction that
resulted in a deferred tax asset of approximately $13.5 million, net of a valuation allowance on certain state income tax components, that also
increased additional paid-in capital. Transaction costs incurred by the Company in connection with the Alon Partnership Merger totaled
approximately $3.0 million for the year ended December 31, 2018. Such costs were included in general and administrative expenses in the
accompanying consolidated statements of income.
F-29 |
7. Equity Method Investments
Wink to Webster Pipeline
On July 30, 2019, we, through our wholly-owned direct subsidiary Delek US Energy, Inc. (“Delek Energy”), entered into a limited liability
company agreement (the “LLCA”) and related agreements with multiple joint venture members of Wink to Webster Pipeline LLC (“WWP”).
Pursuant to the LLCA, Delek Energy acquired a 15% ownership interest in WWP ("WWP Joint Venture"). WWP intends to construct and
operate a crude oil pipeline system from Wink, Texas to Webster, Texas along with certain pipelines from Webster, Texas to other destinations
in the Gulf Coast area. Pursuant to the LLCA, Delek Energy will be required to contribute its percentage interest of the applicable construction
costs (including certain costs previously incurred by WWP) and, at the date we acquired our ownership interest, it was anticipated that Delek
Energy’s capital contributions would total approximately $340 million to $380 million over the course of construction (expected to be two to three
years). Construction of the crude oil pipeline system remains ongoing, where the main segment of the pipeline system connecting the Permian
Basin to Houston, Texas was recently completed and began transporting crude oil in October 2020.
During the years ended December 31, 2020 and 2019, we made capital contributions totaling $18.9 million and $126.7 million, respectively. As
of December 31, 2019, Delek's investment balance in WWP totaled $125.3 million, and our portion of net losses was $1.4 million for the year
ended December 31, 2019.
On February 21, 2020, we through our wholly-owned direct subsidiary Delek Energy, entered into the W2W Holdings LLC Agreement with
MPLX Operations LLC ("MPLX") (collectively, with its wholly-owned subsidiaries, the "WWP Project Financing Joint Venture" or the "WWP
Project Financing JV"). The WWP Project Financing JV was created for the specific purpose of obtaining financing to fund our combined capital
calls resulting from and occurring during the construction period of the pipeline system under the WWP Joint Venture, and to service that debt.
In connection with the arrangement, both Delek Energy and MPLX contributed their respective 15% ownership interests to the WWP Project
Financing JV as collateral for and in service of the related project financing. Accordingly, distributions received from WWP through the WWP
Project Financing JV will first be applied in service of the related project financing debt, with excess distributions being made to the members of
the WWP Project Financing JV as provided for in the W2W Holdings LLC Agreement and as allowed under the project financing debt. The
obligations of the members under the joint venture are guaranteed by the parents of the members of the WWP Project Financing JV.
The Company evaluated Delek's investment in W2W Holdings LLC ("HoldCo") and determined that HoldCo is a variable interest entity. The
Company determined it is not the primary beneficiary since it does not have the power to direct activities that most significantly impact HoldCo.
The Company does not hold a controlling financial interest in HoldCo because no single party has the power to direct the activities that most
significantly impact HoldCo’s economic performance since power to make the decisions about the significant activities is shared equally with
MPLX and all significant decisions require unanimous consent of the Board of Directors. The Company accounts for its investment in HoldCo
using the equity method of accounting due to its significant influence with its 50% membership interest.
The Company's maximum exposure to any losses incurred by HoldCo is limited to its investment. As of December 31, 2020, except for the
guarantee of member obligations under the joint venture, the Company does not have other existing guarantees with or to HoldCo, or any third-
party work contracted with it.
As of December 31, 2020, Delek's investment balance in WWP Project Financing Joint Venture totaled $66.6 million and is included as part of
total assets in corporate, other and eliminations in our segment disclosure. During the year ended December 31, 2020, we received
distributions of $69.3 million from WWP Project Financing Joint Venture to return excess capital contributions made. In addition, we recognized
a loss on the investment of $8.5 million for the year ended December 31, 2020.
Delek Logistics Investments
In May 2019, Delek Logistics, through its wholly owned indirect subsidiary DKL Pipeline, LLC (“DKL Pipeline”), entered into a Contribution and
Subscription Agreement (the “Contribution Agreement”) with Plains Pipeline, L.P. (“Plains”) and Red River Pipeline Company LLC (“Red River”).
Pursuant to the Contribution Agreement, DKL Pipeline contributed $124.7 million, substantially all of which was financed under the Delek
Logistics Credit Facility (as defined in Note 11), to Red River in exchange for a 33% membership interest in Red River and DKL Pipeline’s
admission as a member of Red River ("Red River Pipeline Joint Venture"). Red River owns a 16-inch crude oil pipeline running from Cushing,
Oklahoma to Longview, Texas. In August 2020, Red River completed a planned expansion project to increase the pipeline capacity which
commenced operations on October 1, 2020. Delek Logistics contributed an additional $3.5 million related to such expansion project in May
2019. During the year ended December 31, 2020, we made additional capital contributions totaling $12.2 million based on capital calls received.
As of December 31, 2020 and 2019, Delek's investment balance in Red River totaled $141.8 million and $131.0 million, respectively. We
recognized income on the investment totaling $8.9 million and $8.4 million for the years ended December 31, 2020 and 2019, respectively. This
investment is accounted for using the equity method and is included as part of total assets in our logistics segment.
In addition to Red River, Delek Logistics has two other joint ventures that own and operate logistics assets, and which serve third parties and
subsidiaries of Delek. We own a 50% membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. to operate
one of these pipeline systems (the "Caddo Pipeline") and a 33% membership interest in Andeavor Logistics Rio Pipeline LLC which operates
the other pipeline system (the "Rio Pipeline"). As of December 31, 2020 and 2019, Delek Logistics' investment balance in these joint ventures
was $111.9 million and $116.0 million, respectively, and are accounted for using the equity method. We recognized income on these
investments totaling $13.8 million and $11.5 million for the years ended December 31, 2020 and 2019, respectively.
F-30 |
Other Investments
Effective with the Delek/Alon Merger, we acquired a 50% interest in two joint ventures that own asphalt terminals located in Fernley, Nevada,
and Brownwood, Texas. On May 21, 2018, Delek sold its 50% interest in the asphalt terminal located in Fernley, Nevada. See Note 8 for
further discussion. As of December 31, 2020 and 2019, Delek's investment balance in the Brownwood, Texas joint venture was $39.3 million
and $30.7 million, respectively. We recognized income on this investment totaling $15.4 million and $15.2 million for the years ended December
31, 2020 and 2019, respectively. This investment is accounted for using the equity method and is included as part of total assets in the
corporate, other and eliminations in our segment disclosure.
Delek Renewables, LLC, a wholly-owned subsidiary of Delek, has a 50% interest in a joint venture that owns, operates and maintains a terminal
consisting of an ethanol unit train facility with an ethanol tank in North Little Rock, Arkansas. As of December 31, 2020 and 2019, Delek
Renewables, LLC's investment balance in this joint venture was $4.0 million and $4.3 million, respectively, and was accounted for using the
equity method. We recognized nominal income on this investment for the both years ended December 31, 2020 and 2019. The investment in
this joint venture is reflected in the refining segment.
8. Discontinued Operations and Assets Held for Sale
Asphalt Terminals Held for Sale
On February 12, 2018, Delek announced it had reached a definitive agreement to sell certain assets and operations of four asphalt terminals
(included in corporate, other and eliminations in our segment disclosure), as well as an equity method investment in an additional asphalt
terminal, to an affiliate of Andeavor. This transaction included asphalt terminal assets in Bakersfield, Mojave and Elk Grove, California and
Phoenix, Arizona, as well as Delek’s 50% equity interest in the Paramount-Nevada Asphalt Company, LLC joint venture that operated an
asphalt terminal located in Fernley, Nevada. On May 21, 2018, Delek completed the transaction and received net proceeds of approximately
$110.8 million, inclusive of the $75.0 million base proceeds as well as certain preliminary working capital adjustments. The assets associated
with the owned terminals met the definition of held for sale pursuant to ASC 360 as of February 1, 2018, but did not meet the definition of
discontinued operations pursuant to ASC 205-20, Presentation of Financial Statements - Discontinued Operations ("ASC 205-20"), as the sale
of these asphalt assets did not represent a strategic shift that would have a major effect on the entity's operations and financial results.
Accordingly, depreciation ceased as of February 1, 2018, and the assets to be sold were reclassified to assets held for sale as of that date and
were written down to the estimated fair value less costs to sell, resulting in an impairment loss on assets held for sale of $27.5 million for the
year ended December 31, 2018. All goodwill associated with the asphalt operations sold was written off in connection with the impairment
charge discussed above. In connection with the completion of the sale transaction, we recognized a gain of approximately $13.3 million,
resulting primarily from the recognition of certain additional proceeds at closing associated with the asphalt terminals which were not
previously determinable or probable and the recognition of the gain on the sale of the joint venture which was not previously recognized as
held for sale (as it did not meet the criteria). Such gain on sale of the asphalt assets is reflected in results of continuing operations on the
accompanying consolidated statement of income for the year ended December 31, 2018.
California Discontinued Entities
During the third quarter 2017, we committed to a plan to sell certain assets associated with our Paramount and Long Beach, California
refineries (both non-operating refineries) and our California renewable fuels facility ("AltAir"), which were acquired as part of the Delek/Alon
Merger. Such operations were designated and reported as discontinued operations.
Sale of Paramount Refinery Assets and Altair
On March 16, 2018, Delek sold to World Energy, LLC ("World Energy") (i) all of Delek’s membership interests in AltAir (ii) certain refining assets
and other related assets located in Paramount, California and (iii) certain associated tank farm and pipeline assets and other related assets
located in California. The sale involved initial proceeds due at closing, a subsequent working capital settlement as well as contingent proceeds
for Delek's pro rata portion of any BTC relating to AltAir activities in 2018 earned through the sale date in connection with the re-enactment of
the 2018 BTC that occurred in December 2019, and other final adjustments on retained contingent liabilities. Total proceeds for the sale were
$93.3 million, and we recognized a loss in discontinued operations on the sale before taxes of $33.3 million, $41.4 million of which was
recognized in 2018 with the remainder recognized in 2019.
Sale of Long Beach Refinery Net Assets
The transaction to dispose of certain assets and liabilities associated with our Long Beach, California refinery to Bridge Point Long Beach, LLC
closed July 17, 2018 resulting in initial cash proceeds of approximately $14.5 million, net of expenses, and resulting in a gain on sale of
discontinued operations of approximately $1.4 million during the third quarter of 2018. We retained certain asset retirement obligations in
connection with the disposition of the Long Beach refinery related to work that was required subsequent to the sale. As of December 31, 2019,
the work was completed and the remaining unused asset retirement obligations were written off resulting in additional gain on sale of
discontinued operations of $1.9 million.
F-31 |
Operating Results of Discontinued Operations
The operating results, net of tax, from discontinued operations associated with the California Discontinued Entities are presented separately in
Delek’s consolidated statements of
income and the notes to the consolidated financial statements have been adjusted to exclude the
discontinued operations. Classification as discontinued operations requires retrospective reclassification of the associated assets, liabilities and
results of operations for all periods presented. The loss from discontinued operations, net of tax of $8.7 million for the year ended December 31,
2018, included operating income of $26.1 million and a preliminary loss on sale of California Discontinued Entities of $40.0 million, which was
subsequently adjusted in 2019 by $6.6 million for a final loss on the sale of $33.4 million.
9. Inventory
Carrying value of inventories consisted of the following (in millions):
Refinery raw materials and supplies
Refinery work in process
Refinery finished goods
Retail fuel
Retail merchandise
Logistics refined products
Total inventories
December 31, 2020
December 31, 2019
$
$
270.7
$
92.1
327.1
6.2
28.5
3.1
727.7
$
400.4
109.1
397.5
7.3
19.8
12.6
946.7
At December 31, 2020, we recorded a pre-tax inventory valuation reserve of $31.1 million, $30.3 million of which related to LIFO inventory, due
to a market price decline below our cost of certain inventory products. At December 31, 2019, we recorded a pre-tax inventory valuation reserve
of $1.7 million, $1.2 million of which related to LIFO inventory, which reversed in the first quarter of 2020 due to the sale of inventory quantities
that gave rise to the December 31, 2019 reserve. For the years ended December 31, 2020, 2019 and 2018, we recognized a net reduction
(increase) in cost of materials and other in the accompanying consolidated statements of income related to the change in pre-tax inventory
valuation of $(29.2) million, $52.3 million and $(51.3) million, respectively.
At December 31, 2020 and 2019, the excess of replacement cost compared to the carrying value (LIFO) of the Tyler refinery inventories was
$3.4 million and $14.9 million, respectively.
Permanent Liquidations
We incurred a permanent reduction in a LIFO layer resulting in liquidation (loss) gain in our refinery inventory of $(1.6) million, $9.2 million and
$(7.5) million during the years ended December 31, 2020, 2019 and 2018, respectively. These liquidation (losses) gains were recognized as a
component of cost of materials and other in the accompanying consolidated statements of income.
10. Inventory Supply and Offtake Obligations
Delek has Supply and Offtake Agreements with J. Aron in connection with its El Dorado, Big Spring and Krotz Springs refineries. Pursuant to
the Supply and Offtake Agreements, (i) J. Aron agrees to sell to us, and we agree to buy from J. Aron, at market prices, crude oil for processing
at these refineries and (ii) we agree to sell, and J. Aron agrees to buy, at market prices, certain refined products produced at these refineries.
The Supply and Offtake Agreements also provide for the lease to J. Aron of crude oil and refined product storage facilities, and the identification
of prospective purchasers of refined products on J. Aron’s behalf. At the inception of the Supply and Offtake Agreements, we transferred title to
a certain number of barrels of crude and other inventories to J. Aron (the "Step-In"), and the Supply and Offtake Agreements require the
repurchase of remaining inventory (including certain "Baseline Volumes") at the termination of those Agreements (the "Step-Out"). The Supply
and Offtake Agreements are accounted for as inventory financing arrangements under the fair value election provided by ASC 815 and
ASC 825.
Barrels subject to the Supply and Offtake Agreements are as follows:
(in millions)
Baseline Volumes pursuant to the respective Supply and Offtake Agreements
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of
December 31, 2020 (1)
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of
December 31, 2019 (1)
(1)
Includes Baseline Volumes plus/minus over/short quantities.
El Dorado
Big Spring
Krotz Springs
2.0
4.0
3.5
0.8
1.3
2.0
1.3
1.2
1.7
F-32 |
The Supply and Offtake Agreements have certain termination provisions, which may include requirements to negotiate with third parties for the
assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product,
and pipeline, terminalling, storage and shipping arrangements.
The Supply and Offtake Agreements were amended in December 2018 for Big Spring and in January 2019 for El Dorado and Krotz Springs so
that the repurchase of Baseline Volumes at the end of the Supply and Offtake Agreement term (representing the "Baseline Step-Out Liability"
or, collectively, the "Baseline Step-Out Liabilities") were based upon a fixed price where, prior to those amendments, the Baseline Step-Out
Liabilities were based on market-indexed pricing. As a result of these amendments, the subsequent changes in fair value of the Baseline Step-
Out Liabilities were recorded in interest expense. In September 2019, we amended the Supply and Offtake Agreements to increase the fixed
Step-Out price on Baseline Volumes. As a result of the change in the contractual terms, we received cash, net of estimated fees paid, totaling
approximately $38.9 million. No gain or loss was recognized as a result of these September 2019 amendments. In January 2020, we amended
our three Supply and Offtake Agreements so that the Baseline Step-Out Liabilities were once again based on market-indexed prices subject to
commodity price risk. As a result of the amendment, such Baseline Step-Out Liabilities continued to be recorded at fair value under the fair
value election provided by ASC 815 and ASC 825, where the fair value now reflected changes in commodity price risk rather than interest rate
risk with subsequent changes in fair value being recorded in cost of materials and other.
In April 2020, we amended and restated our three Supply and Offtake Agreements to renew and extend the terms to December 30, 2022, with
J. Aron having the sole discretion to further extend to May 30, 2025 by giving at least 6 months prior notice to the current maturity date. As part
of this amendment, there were changes to the underlying market index, annual fee, the crude purchase fee, crude roll fees and timing of cash
settlements related to periodic price adjustments (the "Periodic Price Adjustments"). The Baseline Step-Out Liabilities continue to be recorded
at fair value under the fair value election included under ASC 815 and ASC 825. The Baseline Step-Out Liabilities have a floating component
whose fair value reflects changes to commodity price risk with changes in fair value recorded in cost of materials and other and a fixed
component whose fair value reflects changes to interest rate risk with changes in fair value recorded in interest expense. There was no
amendment date change in fair value resulting from the modification. The Baseline Step-Out Liabilities are reflected as non-current liabilities on
our consolidated balance sheet to the extent that they are not contractually due within twelve months.
Pursuant to the Periodic Price Adjustments provision in the Supply and Offtake Agreements, the Company may be required to pay down all or a
portion of the fixed component of the Baseline Step-Out Liabilities or may receive additional proceeds depending on the change in fair value of
the inventory collateral subject to a threshold at certain specified Periodic Pricing Dates, which occur on October 1st and May 1st, annually, not
to extend beyond expiration of the Supply and Offtake Agreements. Additionally, at the Periodic Pricing Dates, if a Periodic Price Adjustment is
triggered, the prospective pricing underlying the fixed component of the Baseline Step-Out Liabilities will be adjusted to reflect either the pay-
down or the incremental proceeds, accordingly. On October 1, 2020, the provision was triggered and a paydown amounting to $20.8 million was
made to J. Aron on October 30, 2020. The prospective pricing underlying the fixed component of the Baseline Step-Out liabilities was adjusted
accordingly to reflect this payment, resulting in a reduction to the fixed differential component of our long-term Supply and Offtake Obligation
totaling $20.8 million and a prospective contractual
to future Periodic Price Adjustments.
Contemporaneous with the payment, J. Aron separately refunded to us the $10.0 million of deferred additional monthly fees. As of December
31, 2020, the fixed component of the Baseline Step-Out Liabilities subject to the Periodic Price Adjustments amounted to approximately $33.1
million. All or some portion of that amount may become due or payable in periods occurring within twelve months, if Periodic Price Adjustments
are triggered in May 2021 and October 2021.
the fixed differentials subject
reset of
Monthly activity resulting in over and short volumes continue to be valued using market-indexed pricing, and are included in current liabilities (or
receivables) on our consolidated balance sheet. Net balances payable (receivable) under the Supply and Offtake Agreements were as follows
as of the balance sheet dates:
(in millions)
Balances as of December 31, 2020:
Baseline Step-Out Liability
Revolving over/short product financing liability (receivable)
Total Obligations Under Supply and Offtake Agreements
Less: Current portion (1)
Obligations Under Supply and Offtake Agreements - Noncurrent portion
Other payable for monthly activity true-up
El Dorado
Big Spring
Krotz Springs
Total
$
$
$
106.3
$
102.0
208.3
102.0
106.3
6.6
$
$
47.9
25.3
73.2
25.3
47.9
7.0
$
$
$
70.7
$
(4.5)
66.2
(4.5)
70.7
$
— $
224.9
122.8
347.7
122.8
224.9
13.6
F-33 |
(in millions)
Balances as of December 31, 2019:
Baseline Step-Out Liability
Revolving over/short product financing liability
Total Obligations Under Supply and Offtake Agreements
Less: Current portion
Obligations Under Supply and Offtake Agreements - Noncurrent portion
Other receivable for monthly activity true-up
El Dorado
Big Spring
Krotz Springs
Total
$
$
$
125.5
$
93.0
218.5
218.5
— $
57.2
73.5
130.7
73.5
57.2
$
$
87.6
40.5
128.1
40.5
87.6
$
$
270.3
207.0
477.3
332.5
144.8
(16.4) $
(3.1) $
(3.5) $
(23.0)
(1) Current portion for Krotz Springs includes $1.9 million of current portion of obligations under Supply and Offtake Agreements and $6.4 million of current assets presented in our
consolidated balance sheet.
The Supply and Offtake Agreements require payments of fees which are factored into the interest rate yield under the fair value accounting
model. Recurring cash fees paid during the periods presented were as follows:
(in millions)
Recurring cash fees paid during the year ended December 31, 2020
Recurring cash fees paid during the year ended December 31, 2019
Recurring cash fees paid during the year ended December 31, 2018
El Dorado
Big Spring
Krotz Springs
Total
$
$
$
9.7
11.6
10.7
$
$
$
3.4
6.2
7.1
$
$
$
4.1
10.3
6.7
$
$
$
17.2
28.1
24.5
Interest expense recognized under the Supply and Offtake Agreements includes the yield attributable to recurring cash fees, one-time cash fees
(e.g., in connection with amendments), as well as other changes in fair value, which may increase or decrease interest expense. Total interest
expense incurred during the periods presented was as follows:
(in millions)
Interest expense for the year ended December 31, 2020
Interest expense for the year ended December 31, 2019
Interest expense for the year ended December 31, 2018
El Dorado
Big Spring
Krotz Springs
Total
$
$
$
10.1
15.4
10.7
$
$
$
6.5
5.5
7.1
$
$
$
4.5
12.1
6.7
$
$
$
21.1
33.0
24.5
Reflected in interest expense are losses totaling $3.9 million for the year ended December 31, 2020, and gains totaling $9.3 million for the year
ended December 31, 2019 related to the changes in fair value in the Baseline Step-Out Liabilities component of Obligations Under Supply and
Offtake Agreements.
We maintained letters of credit under the Supply and Offtake Agreements as follows:
(in millions)
Letters of credit outstanding as of December 31, 2020
Letters of credit outstanding as of December 31, 2019
El Dorado
Big Spring and Krotz Springs
$
$
195.0
180.0
$
$
10.0
44.0
F-34 |
11. Long-Term Obligations and Notes Payable
Outstanding borrowings, net of unamortized debt discounts and certain deferred financing costs, under Delek’s existing debt instruments are as
follows (in millions):
Revolving Credit Facility
Term Loan Credit Facility (1)
Hapoalim Term Loan (2)
Delek Logistics Credit Facility
Delek Logistics Notes (3)
Reliant Bank Revolver
Promissory Notes
Less: Current portion of long-term debt and notes payable
December 31, 2020
December 31, 2019
$
— $
1,246.8
39.3
746.6
245.7
50.0
20.0
2,348.4
33.4
$
2,315.0
$
30.0
1,069.5
39.5
588.4
244.7
50.0
45.0
2,067.1
36.4
2,030.7
(1) Net of deferred financing costs of $2.9 million and $3.5 million, respectively, and debt discount of $23.3 million and $12.5 million, respectively, at December 31, 2020 and
December 31, 2019.
(2) Net of deferred financing costs of $0.2 million and $0.3 million, respectively, and debt discount of $0.1 million and $0.2 million, respectively, at December 31, 2020 and
December 31, 2019.
(3) Net of deferred financing costs of $3.3 million and $4.0 million, respectively, and debt discount of $1.0 million and $1.3 million, respectively, at December 31, 2020 and
December 31, 2019.
Delek Revolver and Term Loan
On March 30, 2018 (the "Closing Date"), Delek entered into (i) a new term loan credit agreement with Wells Fargo Bank, National Association,
as administrative agent (the "Term Administrative Agent"), Delek, as borrower, certain subsidiaries of Delek, as guarantors, and the lenders
from time to time party thereto, providing for a senior secured term loan facility in an amount of $700.0 million (the "Term Loan Credit Facility")
and (ii) a second amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent (the "Revolver
Administrative Agent"), Delek, as borrower, certain subsidiaries of Delek, as guarantors, and the other lenders party thereto, providing for a
senior secured asset-based revolving credit facility with commitments of $1.0 billion (the "Revolving Credit Facility" and, together with the Term
Loan Credit Facility, the "New Credit Facilities").
The Revolving Credit Facility permits borrowings in Canadian dollars of up to $50.0 million. The Revolving Credit Facility also permits the
issuance of letters of credit of up to $400.0 million, including letters of credit denominated in Canadian dollars of up to $10.0 million. Delek may
designate restricted subsidiaries as additional borrowers under the Revolving Credit Facility.
The Term Loan Credit Facility was drawn in full for $700.0 million on the Closing Date at an original issue discount of 0.50%. Proceeds under
the Term Loan Credit Facility, as well as proceeds of approximately $300.0 million in borrowings under the Revolving Credit Facility on the
Closing Date, were used to repay certain indebtedness of Delek and its subsidiaries (the “Refinancing”), as well as certain fees, costs and
expenses in connection with the closing of the New Credit Facilities with any remaining proceeds held in cash. Proceeds of future borrowings
under the Revolving Credit Facility will be used for working capital and general corporate purposes of Delek and its subsidiaries.
In connection
with the Refinancing, we recorded a loss on extinguishment of debt totaling approximately $9.1 million during 2018.
On May 22, 2019 (the "First Incremental Effective Date"), we amended the Term Loan Credit Facility agreement pursuant to the terms of the
First Incremental Amendment to Term Loan Credit Agreement (the "Incremental Amendment"). Pursuant to the Incremental Amendment, the
Company borrowed $250.0 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”) at an original issue
discount of 0.75%, increasing the aggregate principal amount of loans outstanding under the Term Loan Credit Facility on the First Incremental
Effective Date to $943.0 million. On November 12, 2019 (the "Second Incremental Effective Date"), we amended the Term Loan Credit facility
agreement pursuant to the terms of the Second Incremental Amendment to the Term Loan Credit Agreement (the "Second Incremental
Amendment") and borrowed $150.0 million in aggregate principal amount of incremental term loans (the "Incremental Loans") at an original
issue discount of 1.21%, increasing the aggregate principal amount of loans outstanding under the Term Loan Credit Facility on the Second
Incremental Effective Date to $1,088.3 million. The terms of the Incremental Term Loans and Incremental Loans are substantially identical to
the terms applicable to the initial term loans under the Term Loan Credit Facility borrowed in March 2018. There are no restrictions on the
Company's use of the proceeds of the Incremental Term Loans and Incremental Loans. The proceeds may be used for (i) reducing utilizations
under the Revolving Credit Facility, (ii) general corporate purposes and (iii) paying transaction fees and expenses associated with the
incremental amendments.
F-35 |
On May 19, 2020, we amended the Term Loan Credit Facility agreement and borrowed $200.0 million in aggregate principal amount of
issue discount of 7.00%. The Third Incremental Term Loan
incremental term loans (the “Third Incremental Term Loan”) at an original
constitutes a separate class of term loan (the "Class B Loan") under the Term Loan Credit Facility from those initially borrowed in March 2018
and the incremental term loans borrowed in May 2019 and November 2019 (collectively, the "Class A Loans"). Delek will be required to pay a
make-whole prepayment fee if the Third Incremental Term Loan is prepaid pursuant to an optional prepayment, in connection with a non-
permitted debt issuance or in connection with an acceleration within one year of the incurrence of the Third Incremental Term Loan. Delek may
voluntarily prepay the outstanding Third Incremental Term Loan at any time subject to customary breakage costs with respect to LIBOR loans
and subject to a prepayment premium of 1.00% in connection with certain customary repricing events that may occur during the period from the
day after the first anniversary of the Third Incremental Term Loan through the second anniversary of the Third Incremental Term Loan. The
other terms of the Third Incremental Term Loan are substantially identical to the terms applicable to the Class A Loans. The proceeds of the
Third Incremental Term Loan may be used (i) for general corporate purposes and (ii) to pay transaction fees and expenses associated with the
Third Incremental Term Loan.
Interest and Unused Line Fees
The interest rates applicable to borrowings under the Term Loan Credit Facility and the Revolving Credit Facility are based on a fluctuating rate
of interest measured by reference to either, at Delek’s option, (i) a base rate, plus an applicable margin, or (ii) a reserve-adjusted LIBOR, plus
an applicable margin (or, in the case of Revolving Credit Facility borrowings denominated in Canadian dollars, the Canadian dollar bankers'
acceptances rate ("CDOR")). The initial applicable margin for all Term Loan Credit Facility borrowings was 1.50% per annum with respect to
base rate borrowings and 2.50% per annum with respect to LIBOR borrowings. On October 26, 2018, Delek entered into an amendment to the
Term Loan Credit Facility (the “First Amendment”) to reduce the margin on borrowings under the Term Loan Credit Facility and incorporate
certain other changes. The First Amendment decreased the applicable margins for Class A Loans under (i) Base Rate Loans from 1.50% to
1.25% and (ii) LIBOR Rate Loans from 2.50% to 2.25%, as such terms are defined in the Term Loan Credit Facility. Class B Loans incurred
under the Third Incremental Term Loan bear interest at a rate that is determined, at the Company’s election, at LIBOR or at base rate, in each
case, plus an applicable margin of 5.50% with respect to LIBOR borrowings and 4.50% with respect to base rate borrowings. Additionally,
Class B loans that are LIBOR borrowings are subject to a minimum LIBOR rate floor of 1.00%.
The initial applicable margin for Revolving Credit Facility borrowings was 0.25% per annum with respect to base rate borrowings and 1.25% per
annum with respect to LIBOR and CDOR borrowings, and the applicable margin for such borrowings after September 30, 2018 is based on
Delek’s excess revolver availability as determined by reference to a borrowing base, ranging from 0.25% to 0.75% per annum with respect to
base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR and CDOR borrowings.
In addition, the Revolving Credit Facility requires Delek to pay an unused line fee on the average amount of unused commitments thereunder in
each quarter, which fee will be at a rate of 0.25% or 0.375% per annum, depending on average commitment usage for such quarter. As of
December 31, 2020, the unused line fee was set at 0.375% per annum.
Maturity and Repayments
The Revolving Credit Facility will mature and the commitments thereunder will terminate on March 30, 2023. The Term Loan Credit Facility
matures on March 30, 2025 and requires scheduled quarterly principal payments on the last business day of the applicable quarter. Pursuant to
the Incremental Amendment, quarterly payments increased from $1.75 million to $2.38 million. Pursuant
to the Second Incremental
Amendment, the quarterly payments increased to $2.75 million commencing with December 31, 2019. Additionally, the Term Loan Credit
Facility requires prepayments by Delek with the net cash proceeds from certain debt incurrences, asset dispositions and insurance or
condemnation events with respect to Delek’s assets, subject to certain exceptions, thresholds and reinvestment rights. The Term Loan Credit
Facility also requires annual prepayments with a variable percentage of Delek’s excess cash flow, ranging from 50% to 0% depending on
Delek’s consolidated fiscal year end secured net leverage ratio. The Third Incremental Term Loan requires quarterly payments on the Class B
Loans of $0.5 million commencing June 30, 2020.
Guarantee and Security
The obligations of the borrowers under the New Credit Facilities are guaranteed by Delek and each of its direct and indirect, existing and future,
wholly-owned domestic subsidiaries, subject to customary exceptions and limitations, and excluding Delek Logistics, Delek Logistics GP, LLC,
and each subsidiary of the foregoing (collectively, the "MLP Subsidiaries"). Borrowings under the New Credit Facilities are also guaranteed by
DK Canada Energy ULC, a British Columbia unlimited liability company and a wholly-owned restricted subsidiary of Delek.
The Revolving Credit Facility is secured by a first priority lien over substantially all of Delek’s and each guarantor's receivables, inventory, RINs,
instruments, intercompany loan receivables, deposit and securities accounts and related books and records and certain other personal property,
subject to certain customary exceptions (the "Revolving Priority Collateral"), and a second priority lien over substantially all of Delek's and each
guarantor's other assets, including all of the equity interests of any subsidiary held by Delek or any guarantor (other than equity interests in
certain MLP Subsidiaries) subject to certain customary exceptions, but excluding real property (such real property and equity interests, the
"Term Priority Collateral"). The Term Loan Credit Facility is secured by a first priority lien on the Term Priority Collateral and a second priority
lien on the Revolving Priority Collateral, all in accordance with an intercreditor agreement between the Term Administrative Agent and the
Revolver Administrative Agent and acknowledged by Delek and the subsidiary guarantors. Certain excluded assets are not included in the Term
Priority Collateral and the Revolving Priority Collateral.
F-36 |
Additional Information
At December 31, 2020,
the weighted average borrowing rate under the Revolving Credit Facility was 3.5% with no principal amount
outstanding. Additionally, there were letters of credit issued of approximately $253.2 million as of December 31, 2020 under the Revolving
Credit Facility. Unused credit commitments under the Revolving Credit Facility, as of December 31, 2020, were approximately $746.8 million.
At December 31, 2020, the weighted average borrowing rate under the Term Loan Credit Facility was approximately 3.04% comprised entirely
of LIBOR borrowings and the principal amount outstanding thereunder was $1,273.0 million. As of December 31, 2020, the effective interest
rate related to the Term Loan Credit Facility was 3.57%.
Delek Hapoalim Term Loan
On December 31, 2019, Delek entered into a term loan credit and guaranty agreement (the "Agreement") with Bank Hapoalim B.M. ("BHI") as
the administrative agent. Pursuant to the Agreement, on December 31, 2019, Delek borrowed $40.0 million (the "BHI Term Loan"). The interest
rate under the Agreement is equal to LIBOR plus a margin of 3.00%. The Agreement has a maturity date of December 31, 2022 and requires
quarterly loan amortization payments of $0.1 million, commencing March 31, 2020. Proceeds may be used for general corporate purposes. The
Agreement has an accordion feature that allows increasing the term loan to maximum size of $100.0 million, subject to receiving increased or
new commitments from lenders and the satisfaction of certain other conditions precedent. Any such additional borrowings must be completed
by December 31, 2021. On December 30, 2020, we amended the BHI Term Loan to modify one of the required quarterly financial covenant
metrics; there were no other changes as a result of this amendment.
At December 31, 2020, the weighted average borrowing rate under the term loan was approximately 3.15% comprised entirely of a LIBOR
borrowing and the principal amount outstanding thereunder was $39.6 million. As of December 31, 2020, the effective interest rate related to the
BHI Term Loan was 3.58%.
Delek Logistics Credit Facility
On September 28, 2018, Delek Logistics and all of its subsidiaries entered into a third amended and restated senior secured revolving credit
agreement with Fifth Third Bank ("Fifth Third") as administrative agent and a syndicate of lenders (hereafter, the "Delek Logistics Credit
Facility") with lender commitments of $850.0 million. The Delek Logistics Credit Facility also contains an accordion feature whereby Delek
Logistics can increase the size of the credit facility to an aggregate of $1.0 billion, subject to receiving increased or new commitments from
lenders and the satisfaction of certain other conditions precedent.
The obligations under the Delek Logistics Credit Facility are secured by first priority liens on substantially all of Delek Logistics' tangible and
intangible assets.
The Delek Logistics Credit Facility has a maturity date of September 28, 2023. Borrowings under the Delek Logistics Credit Facility bear
interest at either a U.S. dollar prime rate, Canadian dollar prime rate, LIBOR, or a CDOR rate, in each case plus applicable margins, at the
election of the borrowers and as a function of draw down currency. The applicable margin, in each case, and the fee payable for the unused
revolving commitments vary based upon Delek Logistics' most recent total leverage ratio calculation delivered to the lenders, as called for and
defined under the terms of the Delek Logistics Credit Facility. At December 31, 2020, the weighted average borrowing rate was approximately
2.44%. Additionally, the Delek Logistics Credit Facility requires Delek Logistics to pay a leverage ratio dependent quarterly fee on the average
unused revolving commitment. As of December 31, 2020, this fee was 0.35% on an annualized basis.
In connection with the elimination of IDRs in August 2020, Delek Logistics entered into a First Amendment to the Delek Logistics Credit Facility
which, among other things, permitted the transfer of cash and equity consideration for the elimination of IDRs. It also modified the total leverage
ratio and the senior leverage ratio (each as defined in the Delek Logistics Credit Facility) calculations to reduce the total funded debt (as defined
in the Delek Logistics Credit Facility) component thereof by the total amount of unrestricted consolidated cash and cash equivalents on the
balance sheet of Delek Logistics and its subsidiaries up to $20.0 million.
As of December 31, 2020, Delek Logistics had $746.6 million of outstanding borrowings under the Delek Logistics Credit Facility, with no letters
of credit in place. Unused credit commitments under the Delek Logistics Credit Facility as of December 31, 2020, were $103.4 million.
Delek Logistics Notes
On May 23, 2017, Delek Logistics and Delek Logistics Finance Corp. (collectively, the “Issuers”) issued $250.0 million in aggregate principal
amount of 6.75% senior notes due in 2025 (the “Delek Logistics Notes”) at a discount. The Delek Logistics Notes are general unsecured senior
obligations of the Issuers. The Delek Logistics Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by Delek
Logistics' existing subsidiaries (other than Delek Logistics Finance Corp., the "Guarantors") and will be unconditionally guaranteed on the same
basis by certain of Delek Logistics' future subsidiaries. The Delek Logistics Notes rank equal in right of payment with all existing and future
senior indebtedness of the Issuers, and senior in right of payment to any future subordinated indebtedness of the Issuers. Interest on the Delek
Logistics Notes is payable semi-annually in arrears on each May 15 and November 15, commencing November 15, 2017.
In May 2018, the Delek Logistics Notes were exchanged for new notes with terms substantially identical in all material respects with the Delek
Logistic Notes except the new notes do not contain terms with respect to transfer restrictions.
F-37 |
Beginning on May 15, 2020, the Issuers may, subject to certain conditions and limitations, redeem all or part of Delek Logistics Notes, at a
redemption price of 105.063% of the redeemed principal for the twelve-month period beginning on May 15, 2020, 103.375% for the twelve-
month period beginning on May 15, 2021, 101.688% for the twelve-month period beginning on May 15, 2022, and 100.00% beginning on May
15, 2023 and thereafter, plus accrued and unpaid interest, if any.
In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions
and limitations, the Issuers will be obligated to make an offer for the purchase of the Delek Logistics Notes from holders at a price equal to
101.00% of the principal amount thereof, plus accrued and unpaid interest.
As of December 31, 2020, we had $250.0 million in outstanding principal amount under the Delek Logistics Notes, and the effective interest rate
was 7.45%.
Alon Convertible Senior Notes (share values in dollars)
In connection with the Delek/Alon Merger, Alon, Delek and U.S. Bank National Association, the Trustee, entered into the Supplemental
Indenture, effective as of July 1, 2017, supplementing the Indenture, dated as of September 16, 2013 (the “Original Indenture”; the Original
Indenture, as amended by the Supplemental Indenture, is referred to as the "Indenture"), pursuant to which Alon issued its 3.0% Convertible
Senior Notes due 2018 (as previously defined, the “Convertible Notes”) in the aggregate principal amount of $150.0 million, which were
convertible into shares of Alon’s common stock, par value $0.01 per share or cash or a combination of cash and Alon common stock, at Alon's
election, all as provided in the Indenture. The Supplemental Indenture provides that, as of the Effective Time, the right to convert each $1,000
principal amount of the Convertible Notes based on a number of shares of Alon common stock equal to the Conversion Rate (as defined in the
Indenture) in effect immediately prior to the Delek/Alon Merger was changed into a right to convert each $1,000 principal amount of Convertible
Notes into or based on a number of shares of Delek common stock (at the exchange rate of 0.504), par value $0.01 per share, equal to the
Conversion Rate in effect immediately prior to the Merger. In addition, the Supplemental Indenture provided that, as of the Effective Time, Delek
fully and unconditionally guaranteed, on a senior basis, Alon’s obligations under the Convertible Notes.
Interest on the Convertible Notes was payable in arrears in March and September of each year. The Convertible Notes were not redeemable at
our option prior to maturity. Under the terms of the Convertible Notes, the holders of the Convertible Notes could not require us to repurchase all
or part of the notes except for instances of a fundamental change, as defined in the Indenture.
The holders of the Convertible Notes could convert their notes at any time after June 15, 2018 into a settlement amount determined in
accordance with the terms of the Indenture. The Convertible Notes could be converted into shares of Delek common stock, into cash, or into a
combination of cash and shares of Delek common stock, at our election. In May 2018, we made the election and notified holders of our intention
to satisfy the principal amount outstanding with cash and the incremental value of the conversion options with shares at maturity. The
conversion rate of the Convertible Notes was subject to adjustment upon the occurrence of certain events, including cash dividend adjustments.
On September 17, 2018, Delek settled the Convertible Notes for a combination of cash and shares of Delek common stock. The maturity
settlement in respect of the Convertible Notes consisted of (i) cash payments totaling approximately $152.5 million which included a cash
payment for outstanding principal of $150.0 million, a cash payment for accrued interest of approximately $2.2 million, a cash payment for
dividends of approximately $0.3 million and a nominal cash payment in lieu of fractional shares, and (ii) the issuance of approximately 2.7
million shares of Delek common stock to holders of the Convertible Notes (the “Conversion Shares”). The issuance of the Conversion Shares
was made in exchange for the Convertible Notes pursuant to an exemption from the registration requirements provided by Section 3(a)(9) of the
Securities Act of 1933, as amended. Prior to the conversion, the conversion feature met the definition for recognition as a bifurcated equity
instrument.
Convertible Note Hedge Transactions
In connection with the Convertible Notes offering, Alon entered into convertible note hedge transactions with respect to Alon common stock (as
previously defined, the “Call Options”) with the initial purchasers of the Convertible Notes (the “Hedge Counterparties”).
In connection with the
Delek/Alon Merger, Alon, Delek and the Hedge Counterparties entered into amended and restated Call Options permitting us to purchase up to
approximately 5.7 million shares of Delek common stock, subject to customary anti-dilution adjustments, that underlie the Convertible Notes
sold in the offering.
On September 17, 2018, we exercised the Call Options in connection with the settlement of the Convertible Notes and received approximately
2.7 million shares of our common stock from the Call Option counterparties, a cash payment for dividends of approximately $0.3 million and a
nominal cash payment in lieu of fractional shares. On a net basis, the settlement of the Convertible Notes and the exercise of the Call Options
resulted in no net dilution to our common stock. Prior to their exercise, the Call Options totaling $23.3 million were included as a reduction of
additional paid-in capital on the consolidated balance sheets.
Warrant Transactions
In connection with the Convertible Notes offering, Alon also entered into warrant transactions whereby warrants to acquire Alon common stock
were sold to the Hedge Counterparties. In connection with the Delek/Alon Merger, Alon, Delek and the Hedge Counterparties entered into
amended and restated Warrants which allowed the Hedge Counterparties to purchase up to approximately 5.7 million shares of Delek common
stock, subject to customary anti-dilution adjustments. In November 2018, Delek entered into Warrant Unwind Agreements with the holders of
our outstanding common stock Warrants. Pursuant to the terms of the Unwind Agreements, we settled for cash all outstanding Warrants with
F-38 |
the holders at various prices per Warrant as provided in the Unwind Agreements. The settlement amount was based on the volume-weighted
average market price of our common stock taking into account an adjustment for the exercise price of the Warrants over a period of sixteen
trading days beginning November 9, 2018 (the “Unwind Period”). Following the Unwind Period and upon the satisfaction of the payment
obligation,
the Unwind
the Warrants were canceled and the associated rights and obligations terminated. Based on the provisions of
Agreements, the amount paid to warrant holders in satisfaction of the payment obligation totaled approximately $36 million.
Reliant Bank Revolver
Delek has an unsecured revolving credit agreement with Reliant Bank (the "Reliant Bank Revolver"). On December 16, 2019, we amended the
Reliant Bank Revolver to extend the maturity date to June 30, 2022, reduce the fixed interest rate from 4.75% to 4.50% per annum and increase
the revolver commitment amount from $30.0 million to $50.0 million. There were no other significant changes to the agreement in connection
with this amendment. On December 9, 2020, we amended the Reliant Bank Revolver to modify one of the required quarterly financial covenant
metrics; there were no other changes as a result of this amendment. The revolving credit agreement requires us to pay a quarterly fee of
0.50% per year on the average unused revolving commitment. As of December 31, 2020, we had $50.0 million outstanding under this facility
and had no unused credit commitments under the Reliant Bank Revolver.
Promissory Notes
Delek has four notes payable (the "Promissory Notes") with various assignees of Alon Israel Oil Company, Ltd., the holder of a predecessor
consolidated promissory note, which bear interest at a fixed rate of 5.50% per annum and which, collectively, requires annual principal
amortization payments of $25.0 million through 2020 followed by a final principal amortization payment of $20.0 million at maturity on January 4,
2021. As of December 31, 2020, a total principal amount of $20.0 million was outstanding under the Promissory Notes.
Restrictive Covenants
Under the terms of our Revolving Credit Facility, Term Loan Credit Facility, Delek Logistics Credit Facility, Delek Logistics Notes, Reliant Bank
Revolver and BHI Agreement, we are required to comply with certain usual and customary financial and non-financial covenants. The terms and
conditions of the Revolving Credit Facility include periodic compliance with a springing minimum fixed charge coverage ratio financial covenant
if excess availability under the revolver borrowing base is below certain thresholds, as defined in the credit agreement. The Term Loan Credit
Facility does not have any financial maintenance covenants. We believe we were in compliance with all covenant requirements under each of
our credit facilities as of December 31, 2020.
facilities contain limitations on the incurrence of additional
Certain of our debt
liens,
dispositions and acquisitions of assets, and making of restricted payments and transactions with affiliates. These covenants may also limit the
payment, in the form of cash or other assets, of dividends or other distributions, or the repurchase of shares with respect to our equity.
Additionally, certain of our debt facilities limit our ability to make investments, including extensions of loans or advances to, or acquisitions of
equity interests in, or guarantees of obligations of, any other entities.
indebtedness, making of
investments, creation of
Restricted Net Assets
Some of Delek's subsidiaries have restrictions in their respective credit facilities limiting their use of assets, as has been discussed above. As of
December 31, 2020, we had no subsidiaries with restricted net assets which would prohibit earnings from being transferred to the parent
company for its use.
Future Maturities
Principal maturities of Delek's existing third-party debt instruments for the next five years and thereafter are as follows as of December 31, 2020
(in millions):
2021
2022
2023
2024
2025
Thereafter
Total
Revolving Credit Facility
$
— $
— $
— $
— $
— $
— $
13.0
39.2
—
—
50.0
—
13.0
—
746.6
—
—
—
13.0
1,221.0
—
—
—
—
—
—
—
250.0
—
—
—
—
—
—
—
—
—
1,273.0
39.6
746.6
250.0
50.0
20.0
$
102.2
$
759.6
$
13.0
$
1,471.0
$
— $
2,379.2
Term Loan Credit Facility
Hapoalim Term Loan
Delek Logistics Credit Facility
Delek Logistics Notes
Reliant Bank Revolver
Promissory Notes
Total
$
13.0
0.4
—
—
—
20.0
33.4
F-39 |
12. Derivative Instruments
We use the majority of our derivatives to reduce normal operating and market risks with the primary objective of reducing the impact of market
price volatility on our results of operations. As such, our use of derivative contracts is primarily aimed at:
•
•
•
•
limiting the exposure to price fluctuations of commodity inventory above or below target levels at each of our segments;
managing our exposure to commodity price risk associated with the purchase or sale of crude oil, feedstocks and finished grade fuel
products at each of our segments;
managing the cost of our RINs Obligation using future commitments to purchase or sell RINs at fixed prices and quantities; and
limiting the exposure to interest rate fluctuations on our floating rate borrowings.
We primarily utilize commodity swaps, futures, forward contracts and options contracts, generally with maturity dates of three years or less, and
from time to time interest rate swap agreements to achieve these objectives. Futures contracts are standardized agreements, traded on a
futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the
obligation to buy or sell the commodity at a specified price in the future. Commodity swap and futures contracts require cash settlement for the
commodity based on the difference between a fixed or floating price and the market price on the settlement date, and options require payment
of an upfront premium. Because these derivatives are entered into to achieve objectives specifically related to our inventory and production
risks, such gains and losses (to the extent not designated as accounting hedges and recognized on an unrealized basis in other comprehensive
income) are recognized in cost of materials and other.
Commodity forward contracts are agreements to buy or sell a commodity at a predetermined price at a specified future date, and for our
transactions, generally require physical delivery. Forward contracts where the underlying commodity will be used or sold in the normal course of
business qualify as normal purchases and normal sales pursuant to ASC 815. If we elect the normal purchases and normal sales exception,
such forward contracts are not accounted for as derivative instruments but rather are accounted for under other applicable GAAP. Commodity
forward contracts accounted for as derivative instruments are recorded at fair value with changes in fair value recognized in earnings in the
period of change. For the years ended December 31, 2020 and 2019, our commodity fixed-price forward contracts that were accounted for as
derivative instruments primarily consisted of contracts related to our Canadian crude trading operations. Since Canadian crude trading activity is
not related to managing supply or pricing risk of the actual inventory that will be used in production, such unrealized and realized gains and
losses are recognized in other operating income, net rather than cost of materials and other on the accompanying consolidated statements of
income.
Futures, swaps or other commodity related derivative instruments that are utilized to specifically provide economic hedges on our Canadian
forward contract or investment positions are recognized in other operating income, net because that is where the related underlying transactions
are reflected.
From time to time, we also enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the
costs associated with our RINs Obligation. These future RINs commitment contracts are forward contracts that meet the definition of derivative
instruments under ASC 815, and are recorded at estimated fair value in accordance with the provisions of ASC 815. Changes in the fair value of
these future RINs commitment contracts are recorded in cost of materials and other on the consolidated statements of income.
At this time, we do not believe there is any material credit risk with respect to the counterparties to any of our derivative contracts.
In accordance with ASC 815, certain of our commodity swap contracts were designated as cash flow hedges and the change in fair value
between the execution date and the end of period was recorded in other comprehensive income. The fair value of these contracts is recognized
in income in the same financial statement line item as hedged transaction at the time the positions are closed and the hedged transactions are
recognized in income.
F-40 |
The following table presents the fair value of our derivative instruments as of December 31, 2020 and 2019. The fair value amounts below are
presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements,
including cash collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative
instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below differ from the
amounts presented in our consolidated balance sheets. See Note 13 for further information regarding the fair value of derivative instruments as
presented below (in millions):
Derivative Type
Balance Sheet Location
Assets
Liabilities
Assets
Liabilities
December 31, 2020
December 31, 2019
Derivatives not designated as hedging instruments:
Commodity derivatives(1)
Commodity derivatives(1)
Commodity derivatives(1)
Commodity derivatives(1)
RINs commitment contracts(2)
RINs commitment contracts(2)
Other current assets
Other current liabilities
Other long-term assets
Other long-term liabilities
Other current assets
Other current liabilities
Derivatives designated as hedging instruments:
Commodity derivatives(1)
Commodity derivatives(1)
Commodity derivatives(1)
Other current assets
Other current liabilities
Other long-term assets
Total gross fair value of derivatives
Less: Counterparty netting and cash collateral(3)
Total net fair value of derivatives
$
48.9
$
(24.8) $
188.9
$
930.7
2.4
415.2
33.6
—
0.5
—
—
1,431.3
1,358.3
(943.8)
(2.3)
(415.8)
—
(22.5)
(0.3)
—
—
(1,409.5)
(1,373.1)
24.4
—
23.4
0.6
—
3.4
—
0.2
240.9
210.7
$
73.0
$
(36.4) $
30.2
$
(202.1)
(34.0)
—
(24.8)
—
(1.9)
(2.0)
—
(0.1)
(264.9)
(249.5)
(15.4)
(1) As of December 31, 2020 and 2019, we had open derivative positions representing 159,682,606 and 86,484,065 barrels, respectively, of crude oil and refined petroleum
products. Of these open positions, contracts representing 600,000 barrels were designated as cash flow hedging instruments as of December 31, 2019. There were no open
positions designated as cash flow hedging instruments as of December 31, 2020. Additionally, as of December 31, 2020 and 2019, we had open derivative positions
representing 22,130,000 and 49,350,000 One Million British Thermal Units ("MMBTU"), respectively, of natural gas products.
(2) As of December 31, 2020 and 2019, we had open RINs commitment contracts representing 746,050,000 and 147,000,000 RINs, respectively.
(3) As of December 31, 2020 and 2019, $14.8 million and $38.8 million, respectively, of cash collateral held by counterparties has been netted with the derivatives with each
counterparty.
Total (losses) gains on our hedging derivatives and RINs commitment contracts recorded in the consolidated statements of income are as
follows (in millions):
(Losses) gains on derivatives not designated as hedging instruments recognized in cost of
materials and other (1)
Gains on commodity derivatives not designated as hedging instruments recognized in other
operating income, net (1) (2)
Realized gains (losses) reclassified out of accumulated other comprehensive income and into cost
of materials and other on commodity derivatives designated as cash flow hedging instruments
Gains recognized in cost of materials and other due to cash flow hedging ineffectiveness on
commodity derivatives designated as hedging instruments
Year Ended December 31,
2020
2019
2018
$
(88.0) $
18.0
$
7.9
4.6
—
—
4.8
—
Total (losses) gains
$
(75.5) $
22.8
$
0.9
7.7
(1.7)
0.9
7.8
Gains (losses) on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of $23.1 million, $(41.0) million
and $32.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
See separate table below for disclosures about "trading derivatives."
(1)
(2)
F-41 |
The effect of cash flow hedge accounting on the consolidated statements of income is as follows (in millions):
Gain (loss) on cash flow hedging relationships recognized in cost of materials and other:
Commodity contracts:
Hedged items
Derivative designated as hedging instruments
Total
Year Ended December 31,
2020
2019
$
$
(4.6) $
4.6
— $
(4.8)
4.8
—
For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness
for the years ended December 31, 2020, 2019 and 2018. Losses of $3.6 million, $3.8 million and $1.5 million, net of tax, on settled commodity
contracts were reclassified into cost of materials and other in the consolidated statements of income during the years ended December 31,
2020, 2019 and 2018, respectively. As of December 31, 2020, we estimate that $0.2 million of deferred gains related to commodity cash flow
hedges will be reclassified into cost of materials and other over the next 12 months as a result of hedged transactions that are forecasted to
occur.
Total (losses) gains on our trading physical forward contract derivatives (none of which were designated as hedging instruments) recorded in
other operating loss (income) expense, net on the consolidated statements of income are as follows (in millions):
Realized (losses) gains
Unrealized (losses) gains
Total
13. Fair Value Measurements
Year Ended December 31,
2020
2019
2018
$
$
(3.1) $
(0.3)
(3.4) $
5.1
3.6
8.7
$
$
23.1
(3.0)
20.1
Our assets and liabilities that are measured at fair value include commodity derivatives, investment commodities, environmental credits
obligations and Supply and Offtake Agreements. ASC 820 requires disclosures that categorizes assets and liabilities measured at fair value into
one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in
active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the
asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability
reflecting our assumptions about pricing by market participants.
Our commodity derivative contracts, which consist of commodity swaps, exchange-traded futures, options and physical commodity forward
purchase and sale contracts (that do not qualify as normal purchases or normal sales exception under ASC 815), are valued based on
exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.
In April 2020, we entered into a contract with the Department of Energy to deposit one million barrels of crude oil into one of the Strategic
Petroleum Reserve ("SPR") storage locations which was stored on our behalf until October 2020 for a fee of approximately 100,000 barrels.
The fee of 100,000 barrels was recorded as a prepaid asset at cost, and the right to receive the 900,000 barrels was recorded as a financial
asset, measured at fair value based on the value of the underlying commodity using published market prices of the commodity on the applicable
exchange. Such asset was, therefore, classified as Level 2. Such barrels were received in the fourth quarter of 2020. The realized gain on the
underlying commodity related to the SPR financial asset for the year ended December 31, 2020 of $10.8 million was recorded in other (income)
expense, net.
Our RINs commitment contracts are future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the
costs associated with our Consolidated Net RINs Obligation. These RINs commitment contracts (which are forward contracts accounted for as
derivatives – see Note 12) are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing
service.
Our environmental credits obligation surplus or deficit includes the Consolidated Net RINs Obligation surplus or deficit, as well as Other
Environmental Credit Obligation surplus or deficit positions subject to fair value accounting pursuant to our accounting policy (see Note 20).
The environmental credits obligation surplus or deficit is categorized as Level 2, if measured at fair value either directly through observable
inputs or indirectly through market-corroborated inputs.
The environmental credits obligation is impacted by government regulation requiring such credits, and the obligation, and likewise the value of
the underlying credits, may be impacted by exemptions granted by the regulatory agencies. During the third quarter of 2019, the Tyler, El
Dorado and Krotz Springs refineries received approval from the EPA for a small refinery exemption from the requirements of the renewable fuel
F-42 |
standard ("RIN Waivers") for the 2018 calendar year, which resulted in a reduction of our Consolidated Net RINs Obligation and related cost of
materials and other of approximately $20.7 million for the year ended December 31, 2019. During the first quarter 2019, the Tyler and Big
Spring refineries received RIN Waivers for the 2017 calendar year, which had an immaterial impact on our results of operations, while the 2017
RIN Waivers for the El Dorado and Krotz Springs refineries received in March 2018 resulted in a reduction of our Consolidated Net RINs
Obligation and related cost of materials and other of approximately $90.9 million for the year ended December 31, 2018. We have not received
any additional RIN Waivers impacting the year ended December 31, 2020.
As of and for the years ended December 31, 2020 and 2019, we elected to account for our J. Aron step-out liability at fair value in accordance
with ASC 825, as it pertains to the fair value option. This standard permits the election to carry financial instruments and certain other items
similar to financial
instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. With respect to the
amended and restated Supply and Offtake Agreements, such amendments being effective April 2020 for all the agreements, we apply fair value
measurement as follows: (1) we determine fair value for our amended variable step-out liability based on changes in fair value related to market
volatility based on a floating commodity-index price, and for our amended fixed step-out liability based on changes to interest rates and the
timing and amount of expected future cash settlements where such obligation is categorized as Level 2. Gains (losses) related to changes in
fair value due to commodity-index price are recorded as a component of cost of materials and other, and changes in fair value due to interest
rate risk are recorded as a component of interest expense in the consolidated statements of income; and (2) we determine fair value of the
commodity-indexed revolving over/short inventory financing liability based on the market prices for the consigned crude oil and refined products
collateralizing the financing/funding where such obligation is categorized as Level 2 and is presented in the current portion of the Obligation
under Supply and Offtake Agreements on our consolidated balance sheets. Gains (losses) related to the change in fair value are recorded as a
component of cost of materials and other in the consolidated statements of income. Before the January 2020 amendments, we determined the
fair value for the fixed price step-out liability based on changes to interest rates reflecting changes to the interest rate risk, with obligation
categorized as Level 2.
For all other financial instruments, the fair value approximates the historical or amortized cost basis comprising our carrying value and therefore
are not included in the table below. The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis
was as follows (in millions):
Level 1
As of December 31, 2020
Level 3
Level 2
Total
Assets
Commodity derivatives
RINs commitment contracts
Total assets
Liabilities
Commodity derivatives
RINs commitment contracts
Environmental credits obligation deficit
J. Aron supply and offtake obligations
Total liabilities
Net assets (liabilities)
Assets
Commodity derivatives
Investment commodities
RINs commitment contracts
Environmental credits obligation surplus
Total assets
Liabilities
Commodity derivatives
RINs commitment contracts
Environmental credits obligation deficit
J. Aron supply and offtake obligations
Total liabilities
Net assets (liabilities)
$
— $
1,397.7
$
— $
—
—
—
—
—
—
—
33.6
1,431.3
(1,387.0)
(22.5)
(59.6)
(354.1)
(1,823.2)
—
—
—
—
—
—
—
— $
(391.9) $
— $
As of December 31, 2019
1,397.7
33.6
1,431.3
(1,387.0)
(22.5)
(59.6)
(354.1)
(1,823.2)
(391.9)
Level 1
Level 2
Level 3
Total
— $
12.1
—
—
12.1
—
—
—
—
240.3
—
0.6
16.8
257.7
(263.0)
(1.9)
(18.5)
(477.3)
$
— $
—
—
—
—
—
—
—
—
—
12.1
$
(760.7)
(503.0) $
—
— $
240.3
12.1
0.6
16.8
269.8
(263.0)
(1.9)
(18.5)
(477.3)
(760.7)
(490.9)
$
$
$
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. In the table
above, derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the
F-43 |
presentation in the financial statements which reflects our policy, wherein we have elected to offset the fair value amounts recognized for
multiple derivative instruments executed with the same counterparty and where the legal right of offset exists. As of December 31, 2020 and
2019, $14.8 million and $38.8 million, respectively, of cash collateral was held by counterparty brokerage firms and has been netted with the net
derivative positions with each counterparty. See Note 12 for further information regarding derivative instruments.
14. Commitments and Contingencies
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims
and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted
against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings
to which we are a party will have a material adverse effect on our financial statements. Certain environmental matters that have or may result in
penalties or assessments are discussed below in the "Environmental, Health and Safety" section of this note.
One of our Alon subsidiaries was the defendant in a legal action related to an easement dispute arising from a purchase of property that
occurred in October 2013, prior to the Delek/Alon Merger. In June 2019, the court found in favor of the plaintiffs and assessed damages against
such subsidiary totaling $6.7 million, which was reduced to $6.4 million in the fourth quarter of 2019 and is included as of December 31, 2020 in
accrued expenses and other current liabilities on the accompanying consolidated balance sheet. As a result of this liability, a $5.7 million
increase in the accrual was recorded during the year ended December 31, 2019. Additionally, we incurred $1.2 million of related legal expenses
during the year ended December 31, 2019 that was recorded in general and administrative expenses in the accompanying consolidated
statements of income. The judgment of $6.4 million is currently stayed while the case is under appeal with the Ninth Circuit Court of Appeals.
The estimated resolution date is indeterminable at this time.
As of December 31, 2019 and 2018, AltAir (one of the California Discontinued Entities) was the party to a lawsuit whereby the plaintiff alleged
breach of contract relating to a supply agreement during the period prior to the Delek/Alon Merger. We recorded a contingent liability
associated with this matter (the "Ten-Tex Litigation") totaling $5.0 million as part of the purchase price allocation, which was finalized in June
2018. In July 2019, we reached a settlement with the plaintiff, whereby we were obligated for $2.3 million of the judgment against AltAir plus
expected legal fees of approximately $0.2 million. Related to this obligation, we reduced our litigation accrual by $2.4 million during the year
ended December 31, 2019, which was recorded in discontinued operations. In August 2019, we reached an agreement with World Energy to
offset amounts payable by Delek under our seller obligations for the Ten-Tex Litigation matter against the working capital settlement receivable,
and to convert the net receivable into a note receivable from World Energy. As a result, this obligation is not reflected in our liabilities on the
consolidated balance sheet as of December 31, 2019. See Note 8 for further discussion of these matters.
Self-insurance
Delek records a self-insurance accrual for workers’ compensation claims up to a $4.0 million deductible on a per accident basis, general liability
claims up to $4.0 million on a per occurrence basis, and medical claims for eligible full-time employees up to $0.3 million per covered individual
per calendar year. We also record a self-insurance accrual for auto liability up to a $4.0 million deductible on a per accident basis.
We have umbrella liability insurance available to each of our segments in an amount determined reasonable by management.
Environmental Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the
EPA, the United States Department of Transportation and the Occupational Safety and Health Administration, as well as numerous state,
regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the
environment, waste management practices, pollution prevention measures and the composition of the fuels we produce, as well as the safe
operation of our plants and pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under
these laws and regulations for the operation of our refineries, renewable fuels facilities, terminals, pipelines, underground storage tanks, trucks,
rail cars and related operations, and may be subject to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters which could include
injury and property damage allegedly caused by substances which we manufactured,
soil and water contamination, air pollution, personal
handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We
believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have
been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities,
including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating
procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate
that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and
new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.
On November 5, 2018, Alon and certain of its subsidiaries including Alon Bakersfield Property, Inc. (which was subsequently sold on May 7,
2020 - See Note 4) (collectively, "ABPI") entered into a Settlement and Release Agreement (the "Settlement Agreement") with Equilon
F-44 |
Enterprises, LLC, doing business as Shell Oil Products, US ("Shell"), a former owner of our non-operating Bakersfield refinery which was
acquired by Delek in connection with the Delek/Alon Merger. The Settlement Agreement resolved certain disputed indemnification matters
related to environmental obligations and asset retirement obligations at the Bakersfield refinery. As a result of this Settlement Agreement, Shell
paid ABPI a lump sum payment of $34.0 million and conveyed to ABPI ownership of a non-operating terminal
located on the site of the
Bakersfield refinery (deemed to have little or no value) and the parties will terminate a nominal lease agreement related to such terminal. Of this
total lump sum settlement payment, $14.0 million was previously recognized as an indemnification receivable in the purchase price allocation
associated with the Delek/Alon Merger as of July 1, 2017, because such amounts represented indemnification that was deemed by the
Company to be probable of realization based on existing indemnification agreements in place on the date of the acquisition and that related to
identified asset retirement obligations that were also recognized in the purchase price allocation. Of the remaining settlement amount received,
$16.0 million is attributable to additional recoveries of remediation costs and is included as a reduction of operating expenses, and $4.0 million
is considered additional consideration for concessions made under the Settlement Agreement and is included as other income in the
accompanying consolidated statements of income for the year ended December 31, 2018.
The Big Spring refinery negotiated an agreement with the EPA for over 10 years under the EPA’s National Petroleum Refinery Initiative
regarding alleged historical violations of the federal Clean Air Act related to emissions and emissions control equipment. A consent decree
resolving these alleged historical violations for the Big Spring refinery was lodged with the United States District Court for the Northern District of
Texas on June 6, 2017. An amendment to such consent decree was agreed upon by the Delek and the EPA/Department of Justice ("DOJ") in
late 2018 and was executed by Delek. That amended consent decree was lodged during the first quarter of 2019, and was entered by the Court
on June 5, 2019. The civil penalty of $0.5 million was paid on June 18, 2019. Per the amended consent decree, the Company will be required to
expend capital for pollution control equipment that may be significant over the next 10 years.
liability of approximately $112.6 million, primarily related to the estimated
As of December 31, 2020, we have recorded an environmental
probable costs of remediating or otherwise addressing certain environmental
issues of a non-capital nature at our refineries, as well as
terminals, some of which we no longer own. This liability includes estimated costs for ongoing investigation and remediation efforts for known
contamination of soil and groundwater. Approximately $5.2 million of the total liability is expected to be expended over the next 12 months, with
most of the balance expended by 2032, although some costs may extend up to 30 years. In the future, we could be required to extend the
expected remediation period or undertake additional investigations of our refineries, pipelines and terminal facilities, which could result in the
recognition of additional remediation liabilities.
Environmental liabilities with payments that are fixed or reliably determinable have been discounted to present value at various rates depending
on their expected payment stream. These discount rates vary from 1.51% to 2.84%.
The table below summaries our environmental liability accruals (in millions):
Discounted environmental liabilities
Undiscounted environmental liabilities
Total accrued environmental liabilities
December 31,
2020
2019
$
$
35.3
77.3
112.6
$
$
59.5
86.6
146.1
As of December 31, 2020, the estimated future payments of environmental obligations for which discounts have been applied are as follows (in
millions):
2021
2022
2023
2024
2025
Thereafter
Discounted environmental liabilities, gross
Less: Discount applied
Discounted environmental liabilities
Crude Oil and Other Releases
$
$
1.8
1.9
1.5
1.5
1.5
32.0
40.2
4.9
35.3
We have experienced several crude oil and other releases involving our assets, including five releases that occurred in 2019 and six releases
that occurred in 2018. There were no material releases that occurred during the year ended December 31, 2020. For releases that occurred in
prior years, we have received regulatory closure or a majority of the cleanup and remediation efforts are substantially complete. For the release
sites that have not yet received regulatory closure, we expect to receive regulatory closure in 2021 and do not anticipate material costs
associated with any fines or penalties or to complete activities that may be needed to achieve regulatory closure.
F-45 |
Expenses incurred for the remediation of these crude oil and other releases are included in operating expenses in our consolidated statements
of income.
Asset Retirement Obligations
The reconciliation of the beginning and ending carrying amounts of asset retirement obligations is as follows (in millions):
Beginning balance
Liabilities settled
Accretion expense
Ending balance
Letters of Credit
December 31,
2020
2019
$
$
68.6
$
(32.5)
1.4
37.5
$
75.5
(8.6)
1.7
68.6
As of December 31, 2020, we had in place letters of credit totaling approximately $253.2 million with various financial institutions securing
obligations primarily with respect to our commodity purchases for the refining segment and certain of our insurance programs. There were no
amounts drawn by beneficiaries of these letters of credit at December 31, 2020.
15. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
On March 27, 2020, the Coronavirus Aid Relief, and Economic Security Act (the "CARES Act") was enacted into law. The CARES Act includes
several significant provisions for corporations, including the usage of net operating losses, interest deductions and payroll benefits. The
Company recognized $16.8 million of current federal income tax benefit for the year ended December 31, 2020, attributable to anticipated tax
refunds from net operating loss carryback to prior 35% tax rate years under the CARES Act. Also, we recorded a federal income tax receivable
specifically related to the net operating loss carryback totaling $156.2 million of which $135.6 million is current and $20.6 million is non-current
as of December 31, 2020.
On December 22, 2017, the U.S. government enacted the Tax Reform Act, which made broad and complex changes to the U.S. tax code,
including a permanent reduction in the U.S. federal corporate tax rate from 35% to 21% (“Rate Reduction”). The Tax Reform Act also put into
place new tax laws that will apply prospectively, which include, but are not limited to, modifying the rules governing the deductibility of certain
executive compensation; extending and modifying the additional first-year depreciation deduction to accelerate expensing of certain qualified
property; creating a limitation on deductible interest expense; and changing rules related to uses and limitations of net operating loss
carryforwards. At December 31, 2018, we finalized our accounting analysis based on the guidance, interpretations, and data available. We
continue to monitor IRS guidance including final regulations, revenue rulings, revenue procedures, and applicable notices.
We applied the guidance in Staff Accounting Bulletin 118 (“SAB 118”), when accounting for the effects of the Tax Reform Act. In 2017, we made
a reasonable estimate of the effects on our existing deferred tax balances, and recognized a provisional benefit amount of $166.9 million, which
was included as a component of income tax expense from continuing operations. We remeasured certain deferred tax assets and liabilities
based on the rates at which they are expected to reverse in the future, which is generally 21% for federal purposes. For the year ended
December 31, 2018, we completed the analysis of the accounting for the tax effects of the Tax Reform Act, resulting in our recording of an
additional tax benefit of $0.6 million during 2018. These adjustments to the previously recorded provisional amounts include the tax effects on
the existing deferred tax balances and executive compensation. We also had a reclassification of $1.6 million from accumulated other
comprehensive income to retained earnings for stranded tax effects as of December 31, 2018 resulting from the Tax Reform Act.
On January 1, 2018, we adopted ASU 2016-16. As a result of the adoption, we decreased prepaid income taxes by $59.4 million, increased
income taxes payable by $3.0 million, increased deferred tax assets by $18.0 million (net of a valuation allowance of $17.2 million), and
decreased retained earnings by $44.4 million for the cumulative effect related to new guidance that requires recognizing the income tax
consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
F-46 |
Significant components of Delek's deferred tax assets (liabilities) reported in the accompanying consolidated financial statements as of
December 31, 2020 and 2019 were as follows (in millions):
Non-Current Deferred Taxes:
Property, plant and equipment, and intangibles
Right-of-use asset
Partnership and equity investments
Deferred revenues
Total deferred tax liabilities
Compensation and employee benefits
Net operating loss carryforwards
Tax credit carryforwards
Lease obligation
Reserves and accruals
Other
Total deferred tax assets
Valuation allowance
Total net deferred tax liabilities (1)
December 31,
2020
2019
(261.0) $
(35.1)
(133.3)
(4.8)
(434.2)
13.6
136.4
17.0
35.2
33.4
4.1
239.7
(55.0)
(249.5) $
(306.3)
(40.7)
(15.5)
(5.3)
(367.8)
14.5
52.4
—
40.7
48.3
9.8
165.7
(65.8)
(267.9)
$
$
(1) Total net deferred tax liabilities includes $6.0 million of state deferred tax assets recorded in other non-current assets in our consolidated balance sheet.
The difference between the actual income tax expense and the tax expense computed by applying the statutory federal income tax rate to
income from continuing operations was attributable to the following (in millions):
Provision for federal income taxes at statutory rate
State income tax (benefit) expense, net of federal tax provision
Income tax benefit attributable to non-controlling interest
Tax credits and incentives (1)
Changes in valuation allowance
Impact of Tax Reform Act
Impact of CARES Act NOL carryback
Goodwill impairment
Other items
Income tax (benefit) expense
Year Ended December 31,
2019
2018
2020
$
$
(160.3) $
(11.3)
(7.9)
(9.6)
(10.8)
—
(16.8)
21.4
2.6
(192.7) $
84.6
6.3
(5.4)
(23.2)
7.3
—
—
—
2.1
71.7
$
$
102.0
3.4
(7.3)
(8.3)
7.7
(0.6)
—
5.3
(0.3)
101.9
(1) Tax credits and incentives include work opportunity and research and development credits, as well as incentives for the Company’s biodiesel blending operations.
Income tax (benefit) expense from continuing operations was as follows (in millions):
Current
Deferred
Year Ended December 31,
2019
2018
2020
$
$
(160.6) $
(32.1)
(192.7) $
7.1
64.6
71.7
$
$
128.7
(26.8)
101.9
We carry valuation allowances against certain state deferred tax assets and net operating losses that may not be recoverable with future
taxable income. We also carry valuation allowances related to basis differences that may not be recoverable. During the years ended
December 31, 2020 and 2019, we recorded decreases to the valuation allowance of $10.8 million and increases of $7.3 million, respectively.
The 2020 decrease in the valuation allowance was primarily driven by the reversal of allowance for deferred tax assets in partnership
investments due to changes in the future realizability of deferred tax basis differences.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes it is
F-47 |
more likely than not Delek will realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of the
deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. Subsequently recognized tax benefit or expense relating to the valuation allowance for deferred tax assets will
be reported as an income tax benefit or expense in the consolidated statement of income.
Federal net operating loss and credit carryforwards at December 31, 2020 totaled $355.2 million and $14.9 million, respectively, a portion of
which are subject to a valuation allowance. Federal net operating losses have an indefinite carryforward life, and federal tax credit carryforwards
will begin expiring in 2028. State net operating loss and credit carryforwards at December 31, 2020 totaled $1,259.9 million and $2.9 million,
respectively, a portion of which are subject to a valuation allowance. State net operating losses and tax credit carryforwards will begin expiring
in 2021.
Delek files a consolidated U.S. federal income tax return, as well as income tax returns in various state jurisdictions. Delek is no longer subject
to U.S. federal income tax examinations by tax authorities for years through 2011. Delek is under Joint Committee of Taxation review for tax
years 2012 through 2017. Pre-acquisition tax returns for Alon USA Energy & Subsidiaries ("Alon") are closed for U.S. federal
income tax
examinations through the tax year ended December 31, 2016 as of December 31, 2020. Alon is currently under Joint Committee of Taxation
review for tax year 2017. Delek is currently under audit in various states for tax years 2014 through 2019. No material adjustments have been
identified at this time.
ASC 740 provides a recognition threshold and guidance for measurement of income tax positions taken or expected to be taken on a tax return.
ASC 740 requires the elimination of the income tax benefits associated with any income tax position where it is not "more likely than not" that
the position would be sustained upon examination by the taxing authorities.
Increases and decreases to the beginning balance of unrecognized tax benefits, which includes interest and penalties were as follows (in
millions):
Balance at the beginning of the year
Additions based on tax positions related to current year
Additions for tax positions related to prior years and acquisitions
Reductions for tax positions related to prior years
Reductions for tax positions related to lapse of applicable statute of limitations
Settlements with taxing authorities
Balance at the end of the year
Year Ended December 31,
2019
2018
2020
12.1
1.9
2.4
(0.8)
(0.2)
(5.8)
9.6
$
$
19.2
0.4
6.4
(13.0)
—
(0.9)
12.1
$
$
6.1
11.2
3.4
(0.9)
—
(0.6)
19.2
$
$
The amount of the unrecognized benefit above, that if recognized would change the effective tax rate, is $6.2 million and $7.4 million as of
December 31, 2020 and 2019, respectively.
Delek recognizes accrued interest and penalties related to unrecognized tax benefits as an adjustment to the current provision for income taxes.
We recognized interest expense (income) of $0.5 million, $(1.1) million, and $2.9 million related to unrecognized tax benefits during the years
ended December 31, 2020, 2019 and 2018. The total recognized liability for interest was $1.4 million and $2.4 million as of December 31, 2020
and 2019, respectively.
Uncertain tax positions have been examined by Delek for any material changes in the next 12 months, and no material changes are expected.
16. Related Party Transactions
Our related party transactions consist primarily of transactions with our equity method investees (See Note 7). Transactions with our related
parties were as follows for the periods presented:
(in millions)
Revenues (1)
Cost of materials and other (2)
(1) Consists primarily of asphalt sales which are recorded in corporate, other and eliminations segment.
(2) Consists primarily of pipeline throughput fees paid by the refining segment and asphalt purchases.
Year Ended December 31,
2019
2018
2020
$
$
69.0
46.7
$
$
86.0
44.9
$
$
33.7
21.4
F-48 |
17. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of the following (in millions):
Land
Building and building improvements
Refinery machinery and equipment
Pipelines and terminals
Retail store equipment and site improvements
Refinery turnaround costs
Other equipment
Construction in progress
Less: accumulated depreciation
December 31,
2020
2019
$
58.0
$
114.3
1,989.5
562.3
53.1
151.7
162.1
428.5
$
$
3,519.5
(1,152.3)
2,367.2
$
$
59.5
108.5
2,019.4
427.3
56.3
179.9
142.7
369.2
3,362.8
(934.5)
2,428.3
Property, plant and equipment, accumulated depreciation and depreciation expense by reporting segment are as follows (in millions):
Property, plant and equipment
Less: Accumulated depreciation
Property, plant and equipment, net
Depreciation expense(1)
Property, plant and equipment
Less: Accumulated depreciation
Property, plant and equipment, net
$
$
$
$
$
As of and For the Year Ended December 31, 2020
Refining
Logistics
Retail
Corporate,
Other and
Eliminations
Consolidated
2,566.0
(811.2)
1,754.8
191.5
$
$
$
692.3
(227.5)
464.8
35.7
$
$
$
165.3
(48.9)
116.4
12.4
$
$
$
95.9
(64.7)
31.2
20.4
$
$
$
3,519.5
(1,152.3)
2,367.2
260.0
As of and For the Year Ended December 31, 2019
Refining
Logistics
Retail
Corporate,
Other and
Eliminations
Consolidated
2,444.4
(658.6)
1,785.8
$
$
461.3
(166.3)
295.0
$
$
156.4
(36.6)
119.8
$
$
300.7
(73.0)
227.7
$
$
3,362.8
(934.5)
2,428.3
Depreciation expense
187.9
(1) Depreciation expense includes accelerated depreciation of $19.0 million taken in the fourth quarter of 2020 primarily due to the decision to abandon certain property and
128.7
26.7
10.4
22.1
$
$
$
$
$
equipment. Of this amount, $11.1 million, $1.6 million and $6.3 million relate to refining, logistics and other segments, respectively.
18. Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the identifiable net assets acquired and is not amortized.
Delek performs an annual assessment of whether goodwill retains its value. This assessment is done more frequently if indicators of potential
impairment exist. We performed our annual goodwill
impairment review in the fourth quarter of 2020, 2019 and 2018. This review was
performed at the reporting unit level, which is at or one level below our operating segment. We estimated the value of each of our reporting units
using a discounted cash flows ("DCF") analysis and a multiple of expected future cash flows, such as those used by third-party analysts. The
DCF analysis included a market participant weighted average cost of capital, forecasted crack spreads, gross margin, capital expenditures, and
long-term growth rate based on historical
information and our best estimate of future forecasts. The market approach involves significant
judgment, including selection of an appropriate peer group, selection of valuation multiples, and determination of the appropriate weighting in
our valuation model. With respect to the goodwill associated with the reporting units within the logistics segment, we performed a qualitative
assessment in 2020, 2019 and 2018. For the year ended December 31, 2020, the annual impairment review resulted in an impairment charge
F-49 |
of $126.0 million. For the years ended December 31, 2019 and 2018, no impairment of goodwill had occurred. Accumulated goodwill
impairment was $126.0 million as of December 31, 2020.
A summary of our goodwill by segment is as follows (in millions):
Balance,
December 31, 2017
$
750.9
$
12.2
$
Refining
Logistics
Retail
Finalization of purchase price allocation for 2017 Delek/Alon Merger
Write-down resulting from asset held for sale impairment (1)
Balance,
December 31, 2018
Write-off of goodwill associated with retail stores sold
Balance,
December 31, 2019
Goodwill Impairment
Balance,
December 31, 2020
50.4
—
801.3
—
801.3
(126.0)
—
—
12.2
—
12.2
—
Corporate,
Other and
Eliminations
$
22.7
$
2.4
(25.1)
—
—
—
—
30.8
13.5
—
44.3
(2.1)
42.2
—
Total
816.6
66.3
(25.1)
857.8
(2.1)
855.7
(126.0)
729.7
$
675.3
$
12.2
$
42.2
$
— $
(1) This write-down of goodwill resulted from the impairment of assets held for sale associated with the asphalt business to net realizable value, as discussed in Note 8.
19. Other Intangible Assets
A summary of our identifiable intangible assets are as follows (in millions):
As of December 31, 2020
Useful Life
Gross
Accumulated
Amortization
Net
Intangible Assets subject to amortization:
Third-party fuel supply agreement
Fuel trade name
Intangible assets not subject to amortization:
Rights-of-way
Line space history
Liquor licenses
Refinery permits
Total
10 years
5 years
Indefinite
Indefinite
Indefinite
Indefinite
$
$
As of December 31, 2019
Useful Life
Gross
Intangible Assets subject to amortization:
Third-party fuel supply agreement
Fuel trade name
Intangible assets not subject to amortization:
Rights-of-way
Line space history
Liquor licenses
Refinery permits
Total
10 years
5 years
Indefinite
Indefinite
Indefinite
Indefinite
$
$
49.0
4.0
(17.2) $
(2.8)
52.1
12.0
8.5
2.2
127.8
49.0
4.0
48.9
12.0
8.5
2.2
124.6
$
(20.0) $
Accumulated
Amortization
Net
(12.3)
(2.0)
$
(14.3) $
31.8
1.2
52.1
12.0
8.5
2.2
107.8
36.7
2.0
48.9
12.0
8.5
2.2
110.3
Amortization of intangible assets was $5.7 million, $5.7 million, and $6.1 million during the years ended December 31, 2020, 2019 and 2018,
respectively, and is included in depreciation and amortization on the accompanying consolidated statements of income.
Amortization expense for the next five years is estimated to be as follows (in millions):
2021
2022
2023
2024
2025
F-50 |
$
$
$
$
$
5.7
5.3
4.9
4.9
4.9
20. Other Current Assets and Liabilities
The detail of other current assets is as follows (in millions):
Other Current Assets
Income and other tax receivables
Short-term derivative assets (see Note 12)
Prepaid expenses
Biodiesel tax credit (see Note 4)
Investment commodities
Consolidated Net RINs Obligation surplus (see Note 13)
Other
Total
December 31, 2020
December 31, 2019
$
$
142.0
$
72.9
21.8
2.9
1.1
—
15.7
61.9
30.2
21.9
97.5
12.1
10.7
34.4
256.4
$
268.7
The detail of accrued expenses and other current liabilities is as follows (in millions):
Accrued Expenses and Other Current Liabilities
December 31, 2020
December 31, 2019
Product financing agreements
Income and other taxes payable
Crude purchase liabilities
Consolidated Net RINs Obligation deficit (see Note 13)
Short-term derivative liabilities (see Note 12)
Employee costs
Other
Total
$
$
198.0
$
109.5
62.1
59.6
35.8
30.2
51.2
546.4
$
21.1
119.6
72.1
—
14.1
47.6
72.3
346.8
21. Equity-Based Compensation
Delek US Holdings, Inc. 2006 Long-Term Incentive Plan
The Delek US Holdings, Inc. 2006 Long-Term Incentive Plan, as amended (the "2006 Plan"), allowed Delek to grant stock options, stock
appreciation rights ("SARs"), restricted stock, restricted common stock units ("RSUs"), performance awards ("PRSUs"), and other stock-based
awards of up to 5,053,392 shares of Delek's common stock to certain directors, officers, employees, consultants and other individuals who
performed services for Delek or its affiliates. Stock options and SARs granted under the 2006 Plan were generally granted at market price or
higher. The vesting of all outstanding awards was subject to continued service to Delek or its affiliates except that vesting of awards granted to
certain executive employees could, under certain circumstances, accelerate upon termination of their employment and the vesting of all
outstanding awards could accelerate upon the occurrence of an Exchange Transaction (as defined in the 2006 Plan). In the second quarter of
2010, Delek's Board of Directors and its Incentive Plan Committee began using stock-settled SARs, rather than stock options, as the primary
form of appreciation award under the 2006 Plan. The 2006 Plan expired in April 2016.
Delek US Holdings, Inc. 2016 Long-Term Incentive Plan
On May 5, 2016, our stockholders approved our 2016 Long-Term Incentive Plan (the “2016 Plan”) to succeed our 2006 Plan. The 2016 Plan
allows Delek to grant stock options, SARs, restricted stock, RSUs, performance awards and other stock-based awards of up to 4,400,000
shares of Delek's common stock to certain directors, officers, employees, consultants and other individuals who perform services for Delek or its
affiliates. On May 18, 2018 and May 5 2020, the Company's stockholders approved an amendment to the 2016 plan that increased the number
of Common Stock available under this plan by 4,500,000 shares and 2,120,000 shares, respectively, to 11,020,000 shares. Stock options and
SARs issued under the 2016 Plan are granted at prices equal to (or greater than) the fair market value of Delek's common stock on the grant
date and are generally subject to a vesting period of one year or more. No awards will be made under the 2016 Plan after May 5, 2026.
Alon USA Energy, Inc. 2005 Long-Term Incentive Plan
In connection with the Delek/Alon Merger, Delek assumed the Alon USA Energy, Inc. Second Amended and Restated 2005 Incentive
Compensation Plan (“the Alon 2005 Plan” and, collectively with the 2006 Plan and the 2016 Plan, the "Incentive Plans") as a component of its
overall executive incentive compensation program. The Alon 2005 Plan permits the granting of awards to Alon's officers and key employees in
the form of options to purchase common stock, SARs, restricted shares of common stock, RSUs, performance shares, performance units and
senior executive plan bonuses. Effective with the Delek/Alon Merger, all contractually unvested share-based awards were converted into share-
F-51 |
based awards denominated in Delek common stock. Committed but unissued share-based awards were exchanged and converted into rights to
receive share-based awards indexed to Delek common stock.
Option and SAR Assumptions
The table below provides the assumptions used in estimating the fair values of our outstanding stock options and SARs under the Incentive
Plans. For all awards granted, we calculated volatility using historical volatility and implied volatility of a peer group of public companies using
weekly stock prices.
Expected volatility
Dividend yield
Expected term
Risk free rate
Fair value per share
Stock Option and SAR Activity
2019 Grants
2018 Grants
(Graded Vesting)
(Graded Vesting)
4 years
4 years
48.16%-48.94%
47.52%-49.42%
2.03%-2.60%
2.00%-2.33%
4.57- 4.62 years
4.38-4.62 years
1.57%-2.41%
1.56%-2.92%
$11.46
$15.00
The following table summarizes the stock option and SAR activity under the Incentive Plans for the years ended December 31, 2020, 2019 and
2018:
Number of
Shares Under
Option
Weighted-
Average Strike
Price
Weighted-
Average
Contractual
Term (in
years)
Average
Intrinsic Value
(in millions)
Options and SARs outstanding, December 31, 2017
Granted
Exercised
Forfeited
Options and SARs outstanding, December 31, 2018
Granted
Exercised
Forfeited
Options and SARs outstanding, December 31, 2019
Granted
Exercised
Forfeited
Options and SARs outstanding, December 31, 2020
Vested options and SARs exercisable, December 31, 2020
Restricted Stock Units
4,191,007
1,497,400
$
$
(1,286,527) $
(827,775) $
3,574,105
593,500
$
$
(466,569) $
(494,826) $
3,206,210
17,000
$
$
(23,675) $
(709,055) $
2,490,480
1,501,155
$
$
26.71
43.49
30.55
29.01
32.67
34.96
29.61
33.47
34.21
36.56
14.68
34.25
34.16
32.60
6.8
6.4
$
$
0.1
0.1
The Incentive Plans provide for the award of RSUs and PRSUs to certain employees and non-employee directors. RSUs granted to employees
vest ratably over three to five years from the date of grant, and RSUs granted to non-employee directors vest quarterly over the year following
the date of grant. The grant date fair value of RSUs is determined based on the closing price of Delek's common stock on the grant date.
PRSUs initially granted to employees will typically vest in one to three tranches, the first of which vests on December 31 of the year following
the grant date, the second and third on the subsequent December 31. PRSUs subsequently granted to employees will typically vest at the end
of a three calendar year performance period. The number of PRSUs that will ultimately vest is based on the Company's total shareholder return
over the performance period. The grant date fair value of PRSUs is determined using a Monte-Carlo simulation model. We record compensation
expense for these awards based on the grant date fair value of the award, recognized ratably over the measurement period.
F-52 |
Performance-Based Restricted Stock Unit Assumptions
The table below provides the assumptions used in estimating the fair values of our outstanding PRSUs under the Plan. For all awards granted,
we calculated volatility using historical volatility and implied volatility of a peer group of public companies using weekly stock prices.
Expected volatility
Expected term
Risk free rate
Fair value per share
2020 Grants
2019 Grants
2018 Grants
45.06%-62.70%
39.67%-39.98%
36.11%-44.66%
2.56-2.81 years
2.06-2.81 years
2.06-2.81 years
0.20%-0.56%
1.64%-2.42%
2.40%-2.73%
$
10.65
$
41.19
$
57.93
The following table summarizes the RSU and PRSU activity under the Incentive Plans for the years ended December 31, 2020, 2019 and 2018:
December 31, 2017
December 31, 2018
December 31, 2019
Balance
Granted
Vested
Forfeited
Balance
Granted
Vested
Forfeited
Performance Achieved
Balance
Granted
Vested
Forfeited
Performance Achieved
Balance
December 31, 2020
Number of RSUs
Weighted-Average
Grant Date Price
1,059,670
440,896
$
$
(341,774) $
(154,780) $
1,004,012
701,875
$
$
(604,971) $
(133,243) $
145,169
1,112,842
1,624,695
$
$
$
(512,914) $
(413,499) $
18,651
1,829,775
$
$
25.68
53.10
25.62
36.96
36.00
36.30
24.88
39.19
16.55
39.31
15.14
29.72
24.98
29.19
23.62
Compensation Expense Related to Equity-based Awards Granted Under the Incentive Plans
Compensation expense for Delek equity-based awards amounted to $22.3 million, $25.2 million and $20.9 million for the years ended
December 31, 2020, 2019 and 2018, respectively. These amounts are included in general and administrative expenses in the accompanying
consolidated statements of income. We recognized income tax expense (benefits) for equity-based awards of $2.3 million, $(2.5) million and
$(2.2) million for the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, there was $33.7 million of total unrecognized compensation cost related to non-vested share-based compensation
arrangements, which is expected to be recognized over a weighted-average period of 1.6 years.
The aggregate intrinsic value, which represents the difference between the underlying stock's market price and the award's exercise price, of
the share-based awards exercised or vested during the years ended December 31, 2020, 2019 and 2018 was $8.4 million, $27.0 million and
$39.4 million, respectively. During the years December 31, 2020, 2019 and 2018, respectively, we issued net shares of common stock of
369,843, 508,950 and 580,455 as a result of exercised or vested equity-based awards. These amounts are net of 167,094, 564,090 and
1,027,398 shares, respectively, withheld to satisfy employee tax obligations related to the exercises and vesting for the years ended December
31, 2020, 2019 and 2018. Delek paid approximately $2.4 million, $9.2 million and $11.5 million of taxes in connection with the settlement of
these awards both for the years ended December 31, 2020, 2019 and 2018. We issue new shares of common stock upon exercise or vesting of
share-based awards.
Delek Logistics GP, LLC 2012 Long-Term Incentive Plan
Logistics GP maintains a unit-based compensation plan for officers, directors and employees of Logistics GP or its affiliates and certain
consultants, affiliates of Logistics GP or other individuals who perform services for Delek Logistics. The Delek Logistics GP, LLC 2012 Long-
Term Incentive Plan ("Logistics LTIP") permits the grant of unit options, restricted units, phantom units, unit appreciation rights, distribution
equivalent rights, other unit-based awards, and unit awards. The Logistics LTIP limits the number of units that may be delivered pursuant to
vested awards to 612,207 common units, subject to proportionate adjustment in the event of unit splits and similar events. Awards granted
under the Logistics LTIP will be settled with Delek Logistics units. Equity-based compensation expense is included in general and administrative
expenses in the accompanying consolidated statements of income and is immaterial for the years ended December 31, 2020, 2019 and 2018.
F-53 |
22. Shareholders' Equity
Stockholder Rights Plan
On March 20, 2020, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of
Delek’s common stock and adopted a stockholder rights plan (the “Rights Agreement”). The dividend was distributed in a non-cash transaction
on March 30, 2020 to the stockholders of record on that date. The Rights initially trade with, and are inseparable from, Delek’s common stock.
Once the Rights become exercisable, each Right will allow its holder to purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share (a “Preferred Share”) for $92.24, subject to adjustment (the “Exercise Price”). This portion of a
Preferred Share will give the stockholder approximately the same dividend, voting and liquidation rights as would one share of Delek’s common
stock. Prior to exercise, the Right does not give its holder any dividend, voting or liquidation rights.
The Rights will not be exercisable until 10 days after the public announcement that a person or group that has become an “Acquiring
If a
Person” (as defined in the Rights Agreement). The point at which these terms are met is otherwise referred to as the "Distribution Date."
person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person may, for the Exercise Price, purchase shares
of the Company’s common stock with a market value of two times the Exercise Price, based on the market price of the common stock prior to
such acquisition. In addition, subject to certain conditions set forth in the Rights Agreement, the Board may extinguish the Rights.
If the
Company is later acquired in a merger or similar transaction after the Distribution Date, all holders of Rights except the Acquiring Person may,
for the Exercise Price, purchase shares of the acquiring corporation with a market value of two times the Exercise Price, based on the market
price of the acquiring corporation’s stock prior to such merger.
In the event the Company receives a fully financed, all-cash tender offer satisfying the conditions set forth in the Rights Agreement (a
“Qualifying Offer”), and certain other events occur, the Rights Agreement provides a mechanism for stockholders holding more than 20% of the
shares of Delek common stock then outstanding (excluding shares beneficially owned by the person making the Qualifying Offer) to demand a
special meeting of the stockholders of the Company to vote on a resolution exempting such Qualifying Offer from the provisions of the Rights
Agreement.
The Rights will expire on March 19, 2021, subject to a possible earlier expiration to the extent provided in the Rights Agreement.
Preferred Stock
On March 20, 2020, our Board of Directors authorized 1,000,000 shares of preferred stock with a par value of $0.01 per share as Series A
Junior Participating Preferred Stock.
Stock Repurchase Program
In December 2016, our Board of Directors authorized a share repurchase program for up to $150.0 million of Delek common stock. Any share
repurchases under the repurchase program may be implemented through open market transactions or in privately negotiated transactions, in
accordance with applicable securities laws. The timing, price and size of repurchases will be made at the discretion of management and will
depend on prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not
obligate us to acquire any particular amount of stock and does not expire.
On February 26, 2018, the Board of Directors approved a new $150.0 million authorization to repurchase Delek common stock. This amount
has no expiration date and is in addition to any remaining amounts previously authorized. On November 6, 2018, the Board of Directors
authorized the repurchase of an additional $500.0 million of Delek common stock. During the year ended December 31, 2018, we repurchased
9,022,386 shares of our common stock for a total of $365.3 million. The purchases included the 2.0 million shares of our common stock
purchased from Alon Israel in connection with Delek’s rights pursuant to a Stock Purchase Agreement dated April 14, 2015, by and between
Delek and Alon Israel. Alon Israel delivered a right of first offer notice to Delek on January 16, 2018, informing Delek of Alon Israel’s intention to
sell the 2.0 million shares, and Delek accepted such offer on January 17, 2018. The total purchase price for the 2.0 million shares was
approximately $75.3 million, or $37.64 per share.
During the years ended December 31, 2020 and 2019, we repurchased 58,713 and 5,039,034 shares of our common stock for a total of $1.9
million and $178.1 million, respectively. As of December 31, 2020, there was approximately $229.7 million of authorization remaining under
Delek's aggregate stock repurchase program (based on repurchases that had settled as of December 31, 2020). During the year ended
December 31, 2020, we suspended the share repurchase program until our internal parameters are met for resuming such repurchases.
23. Employees
Workforce
As of December 31, 2020, operations, maintenance and warehouse hourly employees along with truck drivers at the Tyler refinery were
represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union
F-54 |
and its Local 202. Of the Tyler employees, 51.0% of operations, maintenance and warehouse hourly employees are currently covered by a
collective bargaining agreement that expires January 31, 2022 while 13.2% of Tyler truck drivers are currently covered by a collective
bargaining agreement that expires May 1, 2021. As of December 31, 2020, operations and maintenance hourly employees at the El Dorado
refinery were represented by the International Union of Operating Engineers and its Local 381. Of the El Dorado employees, 40.7% are covered
by a collective bargaining agreement which expires on August 1, 2021. As of December 31, 2020, our El Dorado and Texas based truck drivers
for Lion Oil Company were represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, AFL - CIO while our El Dorado refinery warehouse hourly employees were represented by the International Union
of Operating Engineers and its Local 381; none are currently covered by a collective bargaining agreement. As of December 31, 2020,
approximately 68.9% of employees who work at our Big Spring refinery are covered by a collective bargaining agreement that expires
March 31, 2022. None of our employees in our logistics segment, retail segment or in our corporate office are represented by a union. We
consider our relations with our employees to be satisfactory.
Postretirement Benefits
Pension Plans
Effective with the Delek/Alon Merger on July 1, 2017 (see Note 3), we had four defined benefit pension plans covering substantially all of Alon's
employees, excluding employees of the retail segment. The benefits are based on years of service and the employee’s final average monthly
compensation. Our funding policy is to contribute annually no less than the minimum required nor more than the maximum amount that can be
deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for
those benefits expected to be earned in the future. The plans were frozen for non-union employees effective September 30, 2017.
During 2018, we completely settled the supplemental retirement income plan of the retail segment, had a partial settlement of Alon's executive
non-qualified restoration plan, froze Alon's qualified pension plan for union employees effective July 31, 2018, and entered into an agreement
with the International Union of Operating Engineers (the "Union") to extend the Union agreement to March 31, 2022. As part of the extended
Union agreement, the Company agreed to compensate each pension-eligible employee in the Union for the loss of the pension benefit over the
remaining union contract period in four annual installments beginning July 2018. Payments are contingent upon continued employment at each
annual payment date and are expected to total approximately $6.9 million in the aggregate without considering forfeitures (which cannot yet be
estimated). The related expense (estimated without considering forfeitures) has been or will be recognized over the remaining union contract
period. As of December 31, 2020, estimated remaining expense is approximately $2.0 million during 2021, and approximately $0.1 million in
2022.
On October 1, 2018, we spun off a portion of the Alon's qualified pension plan into a new plan - The Alon USA Pension Plan for Collectively
Bargained Employees. This new plan consists of Union employees. The assets were allocated as required under IRC Section 414. The
remaining accumulated other comprehensive income at that date was split between the two plans based on their respective portions of
projected benefit obligation. The Alon USA Pension Plan for Collectively Bargained Employees was terminated. The plan's obligation was
settled and paid out from the plan's asset on December 20, 2019.
Financial information related to our pension plans is presented below:
Change in projected benefit obligation:
Benefit obligation at beginning of year
Interest cost
Actuarial loss (gain)
Benefits paid
Other (effect of curtailment/settlement)
Projected benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual gain on plan assets
Employer contribution
Benefits paid
Other (effect of curtailment/settlement)
Fair value of plan assets at end of year
Reconciliation of funded status:
Fair value of plan assets at end of year
Less projected benefit obligations at end of year
Under-funded status at end of year
F-55 |
Year Ended December 31,
2020
2019
$
$
$
$
$
$
131.5
4.2
18.3
(5.3)
—
148.7
128.1
15.7
—
(5.3)
—
138.5
$
$
$
$
$
138.5
148.7
(10.2) $
131.0
5.4
13.6
(5.3)
(13.2)
131.5
115.7
29.5
1.4
(5.3)
(13.2)
128.1
128.1
131.5
(3.4)
The pre-tax amounts related to the defined benefit plans recognized as pension benefit liability in the consolidated balance sheets as of
December 31, 2020 was $10.2 million.
The pre-tax amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic
benefit cost were as follows:
Net actuarial loss (gain)
Prior service credit
Projected benefit obligations at end of year
Year Ended December 31,
2020
2019
$
$
9.3
—
9.3
$
$
(0.1)
—
(0.1)
The accumulated benefit obligation for each of our pension plans was in excess of the fair value of plan assets. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for the pension plans were as follows:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
The weighted-average assumptions used to determine benefit obligations were as follows:
Discount rate
Rate of compensation increase
Year Ended December 31,
2020
2019
$
$
$
$
148.7
148.7
138.5
131.5
131.6
128.1
Year Ended December 31,
2020
2019
2.45 %
N/A
3.20 %
N/A
The discount rate used reflects the expected future cash flow based on our funding valuation assumptions and participant data as of the
beginning of the plan period. The expected future cash flow is discounted by the Principal Pension Discount Yield Curve for the fiscal year end
because it has been specifically designed to help pension funds comply with statutory funding guidelines.
The weighted-average assumptions used to determine net periodic benefit costs were as follows:
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
Year Ended December 31,
2019
2018
2020
3.20 %
5.75 %
— %
4.15 %
7.00 %
— %
3.60 %
7.33 %
3.00 %
The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories.
The components of net periodic benefit cost related to our benefit plans consisted of the following:
Components of net periodic benefit:
Service cost
Interest cost
Expected return on plan assets
Recognition of gain due to settlement
Recognition of gain due to curtailment
Net periodic benefit
Year Ended December 31,
2019
2018
2020
$
$
— $
4.2
(6.8)
—
—
(2.6) $
— $
5.4
(7.5)
—
(2.7)
(4.8) $
0.4
5.2
(8.0)
(0.1)
(2.4)
(4.9)
The service cost component of net periodic benefit is included as part of general and administrative expenses in the accompanying statements
of income. The other components of net periodic benefit are included as part of other non-operating expense (income), net.
F-56 |
The weighted-average asset allocation of our pension benefits plan assets were as follows:
Investments in common collective trust consisting of:
U.S. and International companies
Fixed-income
Total
The fair value of our pension assets by category were as follows:
Year Ended December 31,
2020
2019
40.4 %
59.6 %
100.0 %
40.0 %
60.0 %
100.0 %
Year Ended December 31, 2020
U.S. companies
International companies
Fixed-income
Total
Year Ended December 31, 2019
U.S. companies
International companies
Fixed-income
Total
Quoted Prices in
Active Markets For
Identical Assets or
Liabilities (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Consolidated
Total
$
$
$
$
— $
—
—
— $
— $
—
—
— $
36.2
19.7
82.6
138.5
38.5
12.8
76.8
128.1
$
$
$
$
— $
—
—
— $
— $
—
—
— $
36.2
19.7
82.6
138.5
38.5
12.8
76.8
128.1
The investment policies and strategies for the assets of our pension benefits is to, over a five-year period, provide returns in excess of the
benchmark. The portfolio in our common collective trust is expected to earn long-term returns from capital appreciation and a stable stream of
current income. This approach recognizes that assets are exposed to price risk and the market value of the plans’ assets may fluctuate from
year to year. Risk tolerance is determined based on our specific risk management policies. In line with the investment return objective and risk
parameters, the plans’ mix of assets includes a diversified portfolio of underlying securities in companies and fixed-income. The underlying
securities include domestic and international companies of various sizes of capitalization. The asset allocation of the plan is reviewed on at least
an annual basis.
We made no contributions to the pension plans for the year ended December 31, 2020, and expect to contribute $6.1 million to the pension
plans in 2021. There were no employee contributions to the plans.
The benefits expected to be paid in each year 2021–2025 are $6.1 million, $6.6 million, $6.5 million, $7.0 million and $6.9 million, respectively.
The aggregate benefits expected to be paid in the five years from 2026–2030 are $35.4 million. The expected benefits are based on the same
assumptions used to measure our benefit obligation at December 31, 2020 and include estimated future employee service.
401(k) Plans
For the years ended December 31, 2020, 2019 and 2018, we sponsored a voluntary 401(k) Employee Retirement Savings Plans for eligible
employees. Employees must be at least 21 years of age and have 45 days of service to be eligible to participate in the plan. Employee
contributions are matched on a fully-vested basis by us up to a maximum of 8% of eligible compensation. Eligibility for the Company matching
contribution begins on the first of the month following one year of employment. For the years ended December 31, 2020, 2019 and 2018, the
401(k) plans expense recognized was $10.4 million, $9.6 million and $9.6 million, respectively.
Postretirement Medical Plan
In addition to providing pension benefits, Alon has an unfunded postretirement medical plan covering certain health care and life insurance
benefits for certain employees of Alon that retired prior to January 2, 2017, who met eligibility requirements in the plan documents. This plan is
closed to new participants. The health care benefits in excess of certain limits are insured. The accrued benefit liability related to this plan
reflected in the consolidated balance sheet was $1.8 million and $2.6 million at December 31, 2020 and 2019, respectively.
F-57 |
24. Selected Quarterly Financial Data (Unaudited)
Quarterly financial information for the years ended December 31, 2020 and 2019 is summarized below. The sum of the quarterly results may
differ from the annual results presented on our consolidated statements of operations due to rounding. The quarterly financial
information
summarized below has been prepared by Delek's management and is unaudited (in millions, except per share data).
Net revenues
Operating (loss) income
Net (loss) income from continuing operations
Net (loss) income
Net (loss) income attributable to Delek
Basic (loss) income per share from continuing operations
Diluted (loss) income per share from continuing operations
Net revenues
Operating income
Net income from continuing operations
Net income
Net income attributable to Delek
Basic income per share from continuing operations
Diluted income per share from continuing operations
For the Three Month Periods Ended
March 31, 2020
June 30, 2020
1,821.2
$
(361.5) $
(307.0) $
(307.0) $
(314.4) $
(4.28) $
(4.28) $
1,535.5
22.8
98.5
98.5
87.7
1.19
1.18
$
$
$
$
$
$
$
September 30, 2020
2,062.9
$
(75.2) $
(76.9) $
(76.9) $
(88.1) $
(1.20) $
(1.20) $
December 31, 2020
1,882.2
(314.1)
(285.0)
(285.0)
(293.2)
(3.98)
(3.98)
For the Three Month Periods Ended
March 31, 2019
June 30, 2019
2,199.9
222.4
154.4
154.4
149.3
1.92
1.90
$
$
$
$
$
$
$
2,480.3
134.3
84.6
83.8
77.3
1.02
1.01
September 30, 2019
2,334.3
87.4
60.0
60.0
51.3
0.68
0.68
$
$
$
$
$
$
$
December 31, 2019(1)
2,283.7
$
48.2
$
32.0
$
38.0
$
32.7
$
0.36
$
0.36
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The tables above include the following infrequently occurring items:
(1) Net income from continuing operations for the quarter ended December 31, 2019 includes the benefit of retroactive biodiesel tax credits
related to 2019 and 2018 blending activities totaling $77.6 million. Of this amount, $31.1 million related to the first three quarters of 2019
blending activities and $36.0 million related to 2018 blending activities.
F-58 |
The quarterly earnings per share calculations for the three months ended December 31, 2020 and 2019 are presented below:
Numerator:
Numerator for EPS - continuing operations
(Loss) income from continuing operations
Less: Income from continuing operations attributed to non-controlling interest
Numerator for diluted EPS - continuing operations attributable to Delek
Numerator for EPS - discontinued operations
Income from discontinued operations
Denominator:
Weighted average common shares outstanding (denominator for basic EPS)
Dilutive effect of stock-based awards
Weighted average common shares outstanding, assuming dilution
EPS:
Basic income per share:
(Loss) income from continuing operations
Income from discontinued operations
Total basic (loss) income per share
Diluted income per share:
(Loss) income from continuing operations
Income from discontinued operations
Total diluted (loss) income per share
The following equity instruments were excluded from the diluted weighted average common shares outstanding
because their effect would be anti-dilutive:
Antidilutive stock-based compensation
Antidilutive due to loss
Total antidilutive stock-based compensation
25. Leases
Three Months Ended December 31,
2020
2019
$
$
$
$
$
$
$
(285.0) $
8.2
(293.2) $
— $
32.0
5.3
26.7
6.0
73,736,637
—
73,736,637
74,042,343
658,583
74,700,926
(3.98) $
—
(3.98) $
(3.98) $
—
(3.98) $
0.36
0.08
0.44
0.36
0.08
0.44
301,086
3,685,519
3,986,605
1,925,207
—
1,925,207
We lease certain retail stores, land, building and various equipment from others. Leases with an initial term of 12 months or less are not
recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include
one or more options to renew, with renewal terms that can extend the lease term from one to 15 years or more. The exercise of existing lease
renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and
leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of
exercise.
Some of our lease agreements include a rate based on equipment usage and others include a rate with fixed increases or inflationary indices
based increase. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We rent or
sublease certain real estate and equipment to third parties. Our sublease portfolio consists primarily of operating leases within our retail stores
and crude storage equipment.
As of December 31, 2020, $26.4 million of our net property, plant, and equipment balance is subject to an operating lease. This agreement does
not include options for the lessee to purchase our leasing equipment, nor does it include any material residual value guarantees or material
restrictive covenants. The agreement includes a one year renewal option and certain variable payment based on usage.
F-59 |
The following table presents additional information related to our operating leases in accordance ASC 842, Leases ("ASC 842"):
(in millions)
Lease Cost
Operating lease costs (1)
Short-term lease costs (2)
Sublease income
Net lease costs
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)
Leased assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term (years) operating leases
Weighted-average discount rate operating leases (3)
(1) Includes an immaterial amount of financing lease cost.
(2) Includes an immaterial amount of variable lease cost.
(3) Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842.
Year Ended December 31,
2020
2019
49.5
17.4
(6.4)
60.5
(49.5)
15.9
$
$
$
$
64.0
24.4
(7.7)
80.7
(64.0)
58.1
$
$
$
$
December 31, 2020
5.2
6.4 %
The following is an estimate of the maturity of our lease liabilities for operating leases having remaining noncancelable terms in excess of one
year as of December 31, 2020 (in millions) under the new lease guidance ASC 842:
Maturity of Lease Liabilities
12 months or less
13-24 months
25-36 months
37-48 months
49- 50 months
Thereafter
Total future lease payments
Less: Interest
Present Value of Lease Liabilities
26. Subsequent Events
$
$
Total
216.6
214.7
192.8
182.2
94.8
214.4
1,115.5
933.5
182.0
During February 2021, the Company experienced a severe weather event at the Tyler, El Dorado and Krotz Springs refineries, resulting in units
being temporarily shut down and damages to parts of the facilities due to extreme freezing conditions. The Company is currently determining
the financial impact of the event and expects to incur certain recovery costs and repair costs. Additionally, the severe weather conditions and
the resultant industry downtime have caused energy prices to rise in certain regions where we operate, which are expected to result in
additional operating expenses for the refineries impacted until such time that supply is restored and energy prices stabilize.
On February 27, 2021, our El Dorado refinery experienced a fire in its Penex unit. The facility was in the process of undergoing turnaround
activity, so there are no operational disruptions as a result of the fire. We are in the preliminary stages of assessing the extent of the damages.
ITEM 16. FORM 10-K SUMMARY
None.
F-60 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Delek US Holdings, Inc.
By: /s/ Reuven Spiegel
Reuven Spiegel
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Dated: March 1, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by or on behalf of the following persons
on behalf of the registrant and in the capacities indicated on March 1, 2021:
/s/ Ezra Uzi Yemin
Ezra Uzi Yemin
Director (Chairman), President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nilah Staskus
Nilah Staskus
Senior Vice President, Chief Accounting Officer
(Principal Accounting Officer)
/s/ William J. Finnerty
William J. Finnerty
Director
/s/ Richard J. Marcogliese
Richard J. Marcogliese
Director
/s/ Gary M. Sullivan, Jr.
Gary M. Sullivan, Jr.
Director
/s/ Vicky Sutil
Vicky Sutil
Director
107 |
/s/ Laurie Z. Tolson
Laurie Z. Tolson
Director
/s/ David Wiessman
David Wiessman
Director
/s/ Shlomo Zohar
Shlomo Zohar
Director
108 |
Corporate and
Shareholder Information
BOARD OF DIRECTORS
SENIOR MANAGEMENT
Ezra Uzi Yemin
William J. Finnerty
Shlomo Zohar
Gary M. Sullivan, Jr.
David Wiessman
Vicky Sutil
Richard Marcogliese
Laurie Z. Tolson
EZRA UZI YEMIN
Chairman, President
and Chief Executive Officer
REUVEN SPIEGEL
Executive Vice President
and Chief Financial Officer
MARK PAGE
Executive Vice President -
Strategic Projects
SARIT SOCCARY BENYOCHANAN
Managing Partner -
DK Innovation
JARED SERFF
Executive Vice President
and Chief Human Resource Officer
OTHER INFORMATION
HEADQUARTERS
Delek US Holdings, Inc.
7102 Commerce Way
Brentwood, TN 37027
STOCK EXCHANGE LISTING
New York Stock Exchange
Ticker Symbol: DK
ANNUAL MEETING
Annual Meeting of Stockholders expected
to be held May 6, 2021
AUDITORS
Ernst & Young, LLP
Nashville, TN
TRANSFER AGENT
American Stock Transfer &
Trust Company
6201 15th Ave.
Brooklyn, NY 11219
LOUIS LABELLA
Executive Vice President
and President of Refining
ANTHONY L. MILLER
Executive Vice President - Retail
DENISE MCWATTERS
Executive Vice President,
General Counsel and Secretary
TODD O’MALLEY
Executive Vice President,
Chief Commercial Officer
FORM 10K
The Company’s annual report on Form
10-K, which is filed with the Securities and
Exchange Commission, is available upon
request and may be obtained by contacting the
Company’s investor relations department.
INVESTOR RELATIONS CONTACT
Blake Fernandez
SVP - Investor Relations & Market Intelligence
Direct: 615.224.1312
Email: blake.fernandez@delekus.com
FORWARDLOOKING STATEMENTS:
Delek US Holdings, Inc. (“Delek US”) and Delek Logistics Partners, LP (“Delek Logistics”; and collectively with Delek US, “we” or “our”) are traded on the New York Stock Exchange in the United States under
the symbols “DK” and ”DKL”, respectively. These slides and any accompanying oral and written presentations contain forward-looking statements within the meaning of federal securities laws that are based
upon current expectations and involve a number of risks and uncertainties. Statements concerning current estimates, expectations and projections about future results, performance, prospects, opportunities,
plans, actions and events and other statements, concerns, or matters that are not historical facts are “forward-looking statements,” as that term is defined under the federal securities laws.
These forward-looking statements include, but are not limited to, the statements regarding the following: financial and operating guidance for future and uncompleted financial periods; financial strength
and flexibility; potential for and projections of growth; return of cash to shareholders, stock repurchases and the payment of dividends, including the amount and timing thereof; cost reductions; crude oil
throughput; crude oil market trends, including production, quality, pricing, demand, imports, exports and transportation costs; the performance of our joint venture investments, including Red River and Wink
to Webster, and the benefits, flexibility, returns and EBITDA therefrom; the potential for, and estimates of cost savings and other benefits from, acquisitions, divestitures, dropdowns and financing activities;
the attainment of certain regulatory benefits; long-term value creation from capital allocation; execution of strategic initiatives and the benefits therefrom, including cash flow stability from business model
transition; and access to crude oil and the benefits therefrom. 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.
Investors are cautioned that the following important factors, among others, may affect these forward-looking statements: uncertainty related to timing and amount of value returned to shareholders; risks and
uncertainties with respect to the quantities and costs of crude oil we are able to obtain and the price of the refined petroleum products we ultimately sell, including uncertainties regarding future decisions
by OPEC regarding production and pricing disputes between OPEC members and Russia; uncertainty relating to the impact of the COVID-19 outbreak on the demand for crude oil, refined products and
transportation and storage services; Delek US’ ability to realize cost reductions; risks related to Delek US’ exposure to Permian Basin crude oil, such as supply, pricing, production and transportation capacity;
g
gains and losses from derivative instruments; management’s ability to execute its strategy of growth through acquisitions and the transactional risks associated with acquisitions and dispositions; acquired
assets may suffer a diminishment in fair value as a result of which we may need to record a write-down or impairment in carrying value of the asset; changes in the scope, costs, and/or timing of capital
and maintenance projects; the ability of the Wink to Webster joint venture to construct the long-haul pipeline; the ability of the Red River joint venture to expand the Red River pipeline; the ability to grow
the Big Spring Gathering System; operating hazards inherent in transporting, storing and processing crude oil and intermediate and finished petroleum products; our competitive position and the effects of
competition; the projected growth of the industries in which we operate; general economic and business conditions affecting the geographic areas in which we operate; and other risks contained in Delek US’
and Delek Logistics’ filings with the United States Securities and Exchange Commission.
gy
g
g
g
q
q
p
q
y
g
Forward-looking statements should not be read as a guarantee of future performance or results, and will not 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. Neither Delek US nor Delek Logistics undertakes any obligation to update or revise any such forward-looking
statements.
g
p
p
y
DELEK US HOLDINGS | 7102 Commerce Way Brentwood, TN 37027 | www.delekus.com