Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Organization and Basis of Presentation
Delek US Holdings, Inc. operates through its consolidated subsidiaries, which include Delek US Energy, Inc. (and its subsidiaries) and Alon USA Energy, Inc. ("Alon") (and its subsidiaries). The terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Delek and its consolidated subsidiaries. Delek's Common Stock is listed on the NYSE under the symbol "DK."
Our condensed consolidated financial statements include the accounts of Delek and its subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP applied on a consistent basis with those of the annual audited consolidated financial statements included in our Annual Report on Form 10-K as amended and filed with the Securities and Exchange Commission ("SEC") on June 27, 2019 (the "Annual Report on Form 10-K") and in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K.
Our condensed consolidated financial statements include Delek Logistics Partners, LP ("Delek Logistics"), which is a variable interest entity. 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.
In the opinion of management, all adjustments necessary for a fair presentation of the financial condition and the results of operations for the interim periods have been included. All significant intercompany transactions and account balances have been eliminated in consolidation. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the current period presentation.
New Accounting Pronouncements Adopted During 2019
Accounting Standards Update ("ASU") 2016-02, Leases
In February 2016, the Financial Accounting Standards Board (the "FASB") issued guidance that requires the recognition of a lease liability and a right-of-use asset, initially measured at the present value of the lease payments, in the statement of financial condition for all leases with terms longer than one year. The guidance was subsequently amended to consider the impact of practical expedients and provide additional clarifications. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted the new lease standard on January 1, 2019. We elected the package of practical expedients which, among other things, allows us to carry forward the historical lease classification. For certain lease classes, we have elected the practical expedient not to separate lease and non-lease components, which allows us to combine the components if certain criteria are met. Further, we elected the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings at the date of adoption and to not recast our comparative periods. We have not elected the hindsight practical expedient, which would have allowed us to use hindsight in determining the reasonably certain lease term. The adoption of the lease accounting guidance had no impact on January 1, 2019 retained earnings and resulted in the recognition of a $211.0 million lease liability and a corresponding right-of-use asset on our consolidated balance sheet. The adoption did not have a material impact on our consolidated income statement. See Note 20 for further information.
ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued guidance to better align financial reporting for hedging activities with the economic objectives of those activities for both financial (e.g., interest rate) and commodity risks. The guidance was intended to create more transparency in the presentation of financial results, both on the face of the financial statements and in the footnotes, and simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Companies are required to apply the guidance on a modified retrospective transition method in which the cumulative effect of the change is recognized within equity in the consolidated balance sheet as of the date of adoption. We adopted this guidance on January 1, 2019 and the adoption did not have a material impact on our business, financial condition or results of operations. See Note 11 for further information.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accounting Pronouncements Not Yet Adopted
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 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. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. We expect to adopt this guidance on the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
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 ending after December 15, 2020, and early adoption is permitted. 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.
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, with early adoption permitted. 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.
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. We are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations, which includes scoping, accounting, and disclosure considerations and historical analysis of applicable assets. This guidance is effective for interim and annual periods beginning after December 15, 2019. We expect to adopt this guidance on the effective date.
Note 2 - Acquisitions
In January 2017, we announced that Delek (and various related entities) ("Old Delek") entered into a merger agreement with Alon, as amended (the "Merger Agreement"). The related Merger (the "Delek/Alon Merger") was effective July 1, 2017 (the “Effective Time”), resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc. (“New Delek”, or "Delek"), with Alon and Old Delek surviving as wholly-owned subsidiaries of New Delek. New Delek is the successor issuer to Old Delek and Alon pursuant to Rule 12g-3(c) under the Exchange Act, as amended. In addition, as a result of the Delek/Alon Merger, the shares of common stock of Old Delek and Alon were delisted from the NYSE in July 2017, and their respective reporting obligations under the Exchange Act were terminated.
In connection with the Delek/Alon Merger, Alon, New 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 for Alon's 3.00% Convertible Senior Notes due 2018, which were previously convertible into Alon Common Stock, to thereafter be convertible into New 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 also exchanged in connection with the Delek/Alon Merger into instruments that were indexed to New Delek Common Stock. See Note 10 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 values as of the acquisition date. Transaction costs incurred by the Company in connection with the Delek/Alon Merger totaled $6.6 million for the nine months ended September 30, 2018 (none were incurred during the three months then ended). Such costs were included in general and administrative expenses in the accompanying condensed consolidated statements of income.
The final allocation of the aggregate purchase price (which was finalized as of June 30, 2018) is summarized as follows (in millions), and is inclusive of our discontinued Paramount and Long Beach, California refinery and California renewable fuels facility operations (collectively, the "California Discontinued Entities," discussed in Note 7):
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Delek common stock issued
|
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19,250,795
|
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|
|
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Ending price per share of Delek Common Stock immediately before the Effective Time
|
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$
|
26.44
|
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|
|
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Total value of common stock consideration
|
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|
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$
|
509.0
|
|
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Additional consideration (1)
|
|
|
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21.7
|
|
|
Fair value of Delek's pre-existing equity method investment in Alon (2)
|
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|
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449.0
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|
|
|
|
|
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979.7
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Less: Fair value of net assets acquired
|
|
|
|
109.0
|
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Goodwill (excess of purchase price over fair value of net assets acquired)
|
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$
|
870.7
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(1)
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Additional consideration includes the fair value of certain equity instruments originally indexed to Alon stock that were exchanged for instruments indexed to New Delek's stock, as well as the fair value of certain share-based payments that were required to be exchanged for awards indexed to New Delek's stock in connection with the Delek/Alon Merger.
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(2) The fair value of Delek's pre-existing equity method investment in Alon was based on the quoted market price of shares of Alon.
During the nine months ended September 30, 2018, certain immaterial purchase price accounting adjustments were recorded related to accretion of environmental liabilities and amortization of leasehold intangibles identified and valued during the final months of the measurement period (none were made during the three months then ended).
Note 3 - Segment Data
We aggregate our operating units 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 consist of the following:
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•
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our corporate activities;
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•
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results of certain immaterial operating segments, including our Canadian crude trading operations (as discussed in Note 11);
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•
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Alon's asphalt terminal operations acquired as part of the Delek/Alon Merger and subsequently substantially disposed in the second quarter of 2018 (see Note 7 for further discussion);
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•
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the California Discontinued Entities which were acquired as part of the Delek/Alon Merger and subsequently disposed over the first seven months of 2018 (see Note 7 for further discussion); and
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•
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intercompany eliminations.
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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.
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 barrels per day ("bpd") as of September 30, 2019, including the following:
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•
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75,000 bpd Tyler, Texas refinery (the "Tyler refinery");
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•
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80,000 bpd El Dorado, Arkansas refinery (the "El Dorado refinery");
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•
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73,000 bpd Big Spring, Texas refinery (the "Big Spring refinery");
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•
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74,000 bpd Krotz Springs, Louisiana refinery (the "Krotz Springs refinery"); and
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•
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a non-operating refinery located in Bakersfield, California
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As of September 30, 2019, the refining segment also owns and operates two biodiesel facilities involved in the production of biodiesel fuels and related activities, located in Crossett, Arkansas and Cleburne, Texas. 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 consists of 263 owned and leased convenience store sites as of September 30, 2019, located primarily in central and west Texas and New Mexico. These convenience stores typically offer various grades of gasoline and diesel primarily 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. In November 2018, we terminated the license agreement with 7-Eleven, Inc. and the terms of such termination require the removal of all 7-Eleven branding on a store-by-store basis by the earlier of December 31, 2021 or the date upon which our last 7-Eleven store is de-identified or closed. 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 pursuant to the termination. In connection with certain strategic initiatives, we closed or sold 20 under-performing or non-strategic store locations during the nine months ended September 30, 2019 for total proceeds of $9.9 million.
Significant Inter-segment Transactions
Inter-segment transactions consist primarily of the following:
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•
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refining segment refined product sales to the retail segment to be sold through the store locations;
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•
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refining segment sales of asphalt and refined product to entities included in corporate, other and eliminations;
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•
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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;
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•
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logistics segment sales of wholesale finished product to our refining segment; and
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•
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logistics segment crude transportation, terminalling and storage fee revenue from our refining segment for the utilization of pipeline, terminal and storage assets.
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Business Segment Operating Performance
The following is a summary of business segment operating performance as measured by contribution margin for the period indicated (in millions):
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Three Months Ended September 30, 2019
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(In millions)
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Refining
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Logistics
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Retail
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Corporate,
Other and Eliminations
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Consolidated
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Net revenues (excluding inter-segment fees and revenues)
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$
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2,036.9
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|
$
|
71.4
|
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$
|
218.5
|
|
|
$
|
7.5
|
|
|
$
|
2,334.3
|
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Inter-segment fees and revenues
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139.9
|
|
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66.2
|
|
|
—
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(206.1
|
)
|
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—
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Operating costs and expenses:
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|
|
|
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|
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Cost of materials and other
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1,928.6
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72.6
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176.4
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(213.5
|
)
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1,964.1
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Operating expenses (excluding depreciation and amortization presented below)
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120.7
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18.4
|
|
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23.5
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4.3
|
|
|
166.9
|
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Segment contribution margin
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$
|
127.5
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$
|
46.6
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|
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$
|
18.6
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$
|
10.6
|
|
|
203.3
|
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Depreciation and amortization
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34.6
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|
|
6.6
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|
|
3.0
|
|
|
5.6
|
|
|
49.8
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General and administrative expenses
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65.6
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Other operating expense, net
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0.5
|
|
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Operating income
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$
|
87.4
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|
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Capital spending (excluding business combinations)
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$
|
63.3
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|
|
$
|
4.0
|
|
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$
|
3.8
|
|
|
$
|
39.4
|
|
|
$
|
110.5
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Three Months Ended September 30, 2018
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Refining (1)
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Logistics
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Retail
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Corporate,
Other and Eliminations
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Consolidated (1)
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Net revenues (excluding inter-segment fees and revenues)
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$
|
2,420.5
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$
|
100.3
|
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$
|
246.4
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$
|
1.7
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$
|
2,768.9
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Inter-segment fees and revenues
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228.8
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|
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63.8
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—
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(292.6
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)
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—
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Operating costs and expenses:
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|
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Cost of materials and other
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2,211.0
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105.6
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204.4
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(276.8
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)
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2,244.2
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Operating expenses (excluding depreciation and amortization presented below)
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118.8
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15.4
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26.7
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3.1
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|
|
164.0
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Segment contribution margin
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$
|
319.5
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$
|
43.1
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$
|
15.3
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|
$
|
(17.2
|
)
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360.7
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Depreciation and amortization
|
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33.8
|
|
|
6.7
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|
5.3
|
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|
3.4
|
|
|
49.2
|
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|
General and administrative expenses
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58.0
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Other operating income, net
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(1.7
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)
|
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Operating income
|
|
|
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|
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$
|
255.2
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Capital spending (excluding business combinations)
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$
|
51.1
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|
|
$
|
2.9
|
|
|
$
|
1.9
|
|
|
$
|
30.2
|
|
|
$
|
86.1
|
|
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Nine Months Ended September 30, 2019
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(In millions)
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Refining
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Logistics
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Retail
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|
Corporate,
Other and Eliminations
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Consolidated
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|
Net revenues (excluding inter-segment fees and revenues)
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$
|
6,096.7
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|
|
$
|
254.3
|
|
|
$
|
640.2
|
|
|
$
|
23.3
|
|
|
$
|
7,014.5
|
|
|
Inter-segment fees and revenues
|
|
539.9
|
|
|
191.1
|
|
|
—
|
|
|
(731.0
|
)
|
|
—
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
5,679.8
|
|
|
262.7
|
|
|
521.9
|
|
|
(733.2
|
)
|
|
5,731.2
|
|
|
Operating expenses (excluding depreciation and amortization presented below)
|
|
356.7
|
|
|
51.8
|
|
|
71.9
|
|
|
15.5
|
|
|
495.9
|
|
|
Segment contribution margin
|
|
$
|
600.1
|
|
|
$
|
130.9
|
|
|
$
|
46.4
|
|
|
$
|
10.0
|
|
|
787.4
|
|
|
Depreciation and amortization
|
|
98.9
|
|
|
19.8
|
|
|
11.5
|
|
|
16.5
|
|
|
146.7
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
197.3
|
|
|
Other operating income, net
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
444.1
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
193.8
|
|
|
$
|
6.2
|
|
|
$
|
14.3
|
|
|
$
|
110.5
|
|
|
$
|
324.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Refining (1)
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations (4)
|
|
Consolidated (1)
|
|
Net revenues (excluding inter-segment fees and revenues)
|
|
$
|
6,678.2
|
|
|
$
|
319.8
|
|
|
$
|
700.8
|
|
|
$
|
60.2
|
|
|
$
|
7,759.0
|
|
|
Inter-segment fees and revenues
|
|
640.2
|
|
|
178.5
|
|
|
—
|
|
|
(818.7
|
)
|
|
—
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
6,341.9
|
|
|
330.6
|
|
|
578.5
|
|
|
(713.8
|
)
|
|
6,537.2
|
|
|
Operating expenses (excluding depreciation and amortization presented below)
|
|
346.7
|
|
|
42.9
|
|
|
76.5
|
|
|
13.5
|
|
|
479.6
|
|
|
Segment contribution margin
|
|
$
|
629.8
|
|
|
$
|
124.8
|
|
|
$
|
45.8
|
|
|
$
|
(58.2
|
)
|
|
742.2
|
|
|
Depreciation and amortization
|
|
99.1
|
|
|
19.7
|
|
|
16.8
|
|
|
10.8
|
|
|
146.4
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
176.1
|
|
|
Other operating income, net
|
|
|
|
|
|
|
|
|
|
(9.4
|
)
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
$
|
429.1
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
136.3
|
|
|
$
|
7.4
|
|
|
$
|
6.0
|
|
|
$
|
61.2
|
|
|
$
|
210.9
|
|
|
|
|
|
(1)
|
Refining segment and consolidated net revenues and cost of materials and other for the three and nine months ended September 30, 2018 reflect a correction of an intercompany elimination which resulted in an increase in those accounts of $273.7 million and $347.1 million, respectively, not previously reflected on the unaudited consolidated financial statements in our September 30, 2018 Quarterly Report on Form 10-Q filed on November 9, 2018. Such amounts are not considered material to the financial statements and had no impact to operating income or segment contribution margin for those periods. See Note 23 to our annual audited consolidated financial statements included in Part II, Item 8 of our 2018 Annual Report on Form 10-K, as amended and filed on June 27, 2019, for further discussion.
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other Segment Information
Total assets by segment were as follows as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
|
|
Consolidated
|
|
Total assets
|
|
$
|
7,036.8
|
|
|
$
|
767.8
|
|
|
$
|
354.2
|
|
|
$
|
(1,365.5
|
)
|
|
$
|
6,793.3
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment notes receivable
|
|
(1,731.0
|
)
|
|
—
|
|
|
—
|
|
|
1,731.0
|
|
|
—
|
|
|
Inter-segment right of use lease assets
|
|
(387.8
|
)
|
|
—
|
|
|
—
|
|
|
387.8
|
|
|
—
|
|
|
Total assets, excluding inter-segment notes receivable and right of use assets
|
|
$
|
4,918.0
|
|
|
$
|
767.8
|
|
|
$
|
354.2
|
|
|
$
|
753.3
|
|
|
$
|
6,793.3
|
|
Property, plant and equipment and accumulated depreciation as of September 30, 2019 and depreciation expense by reporting segment for the three and nine months ended September 30, 2019 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
|
|
Consolidated
|
|
Property, plant and equipment
|
|
$
|
2,417.9
|
|
|
$
|
457.7
|
|
|
$
|
154.3
|
|
|
$
|
280.0
|
|
|
$
|
3,309.9
|
|
|
Less: Accumulated depreciation
|
|
(679.0
|
)
|
|
(159.6
|
)
|
|
(38.7
|
)
|
|
(67.4
|
)
|
|
(944.7
|
)
|
|
Property, plant and equipment, net
|
|
$
|
1,738.9
|
|
|
$
|
298.1
|
|
|
$
|
115.6
|
|
|
$
|
212.6
|
|
|
$
|
2,365.2
|
|
|
Depreciation expense for the three months ended September 30, 2019
|
|
$
|
34.1
|
|
|
$
|
6.6
|
|
|
$
|
2.8
|
|
|
$
|
5.6
|
|
|
$
|
49.1
|
|
|
Depreciation expense for the nine months ended September 30, 2019
|
|
$
|
95.0
|
|
|
$
|
19.8
|
|
|
$
|
10.9
|
|
|
$
|
16.5
|
|
|
$
|
142.2
|
|
In accordance with Accounting Standards Codification ("ASC") 360, Property, Plant and Equipment ("ASC 360"), Delek evaluates the realizability of property, plant and equipment as events occur that might indicate potential impairment. There were no indicators of impairment related to our property, plant and equipment as of September 30, 2019.
Note 4 - Earnings (Loss) Per Share
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 periods presented, we have outstanding various equity-based compensation awards that are considered in our diluted EPS calculation (when to do so would be dilutive), and is inclusive of awards disclosed in Note 17 to these condensed 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 the Convertible Notes) and Warrants, that were dilutive in certain periods (see discussion of these instruments in Note 10). 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 period they were outstanding when the market price of the underlying indexed share of common stock is in excess of the exercise price. All such instruments that may otherwise be dilutive may not be dilutive when there is a net loss for the period. On September 17, 2018, Delek settled the Convertible Notes for a combination of cash and shares of New Delek Common Stock (See Note 10) and in November 2018, Delek entered into Warrant Unwind Agreements (the "Unwind Agreements" - See Note 10) with the holders of our outstanding common stock warrants; therefore, these instruments were only potentially dilutive for EPS for the three and nine months ended September 30, 2018.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table sets forth the computation of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator for EPS - continuing operations
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
60.0
|
|
|
$
|
185.8
|
|
|
$
|
299.0
|
|
|
$
|
256.0
|
|
|
Less: Income from continuing operations attributed to non-controlling interest
|
|
8.7
|
|
|
6.5
|
|
|
20.3
|
|
|
20.9
|
|
|
Income from continuing operations attributable to Delek (numerator for basic EPS - continuing operations attributable to Delek)
|
|
51.3
|
|
|
179.3
|
|
|
278.7
|
|
|
235.1
|
|
|
Interest on convertible debt, net of tax
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
2.5
|
|
|
Numerator for diluted EPS - continuing operations attributable to Delek
|
|
$
|
51.3
|
|
|
$
|
180.0
|
|
|
$
|
278.7
|
|
|
$
|
237.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for EPS - discontinued operations
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
(0.8
|
)
|
|
$
|
(8.5
|
)
|
|
Less: Loss from discontinued operations attributed to non-controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.1
|
|
|
Income (loss) from discontinued operations attributable to Delek
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
(0.8
|
)
|
|
$
|
(16.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (denominator for basic EPS)
|
|
75,028,562
|
|
|
83,575,122
|
|
|
76,463,435
|
|
|
83,294,473
|
|
|
Dilutive effect of convertible debt
|
|
—
|
|
|
2,176,140
|
|
|
—
|
|
|
2,183,186
|
|
|
Dilutive effect of warrants
|
|
—
|
|
|
1,683,722
|
|
|
—
|
|
|
1,291,156
|
|
|
Dilutive effect of stock-based awards
|
|
673,749
|
|
|
1,586,276
|
|
|
704,399
|
|
|
1,600,298
|
|
|
Weighted average common shares outstanding, assuming dilution (denominator for diluted EPS)
|
|
75,702,311
|
|
|
89,021,260
|
|
|
77,167,834
|
|
|
88,369,113
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.68
|
|
|
$
|
2.15
|
|
|
$
|
3.64
|
|
|
$
|
2.82
|
|
|
Income (loss) from discontinued operations
|
|
$
|
—
|
|
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
(0.20
|
)
|
|
Total basic income per share
|
|
$
|
0.68
|
|
|
$
|
2.16
|
|
|
$
|
3.63
|
|
|
$
|
2.62
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.68
|
|
|
$
|
2.02
|
|
|
$
|
3.61
|
|
|
$
|
2.69
|
|
|
Income (loss) from discontinued operations
|
|
$
|
—
|
|
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
(0.19
|
)
|
|
Total diluted income per share
|
|
$
|
0.68
|
|
|
$
|
2.03
|
|
|
$
|
3.60
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
The following equity instruments were excluded from the diluted weighted average common shares outstanding because their effect would be antidilutive:
|
|
|
|
|
|
|
|
|
|
Antidilutive stock-based compensation (because average share price is less than exercise price)
|
|
1,846,919
|
|
|
1,014,057
|
|
|
2,003,283
|
|
|
1,208,648
|
|
Note 5 - 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 September 30, 2019, we owned a 61.4% limited partner interest in Delek Logistics, consisting of 15,294,046 common units, and a 94.6% interest in Delek Logistics GP, LLC, which owns the entire 2.0% general partner interest, consisting of 498,312 general partner units, in Delek Logistics and all of the incentive distribution rights.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The limited partner interests in Delek Logistics not owned by us are reflected in net income attributable to non-controlling interest in the accompanying condensed consolidated statements of income and in non-controlling interest in subsidiaries in the accompanying condensed consolidated balance sheets.
In March 2018, a subsidiary of Delek Logistics completed the acquisition from a subsidiary of Delek (the "Alon Partnership") of storage tanks and terminals that support the Big Spring 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, subject to certain post-closing adjustments, and the cash paid for the marketing agreement was $144.2 million. The transactions were financed with borrowings under the 2014 Facility revolving credit agreement (as defined in Note 10). 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 Segment Data Note 3, as these assets did not constitute a business in accordance with ASU 2017-01, Clarifying the Definition of a Business, and were accounted for as acquisitions of assets between entities under common control.
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, including new agreements related to the Big Spring Logistic Assets Acquisition. 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 condensed consolidated financial statements, representing our logistics segment. Exclusive of intercompany balances and the marketing agreement intangible asset between Delek Logistics and Delek which are eliminated in consolidation, the Delek Logistics condensed consolidated balance sheets as presented below are included in the condensed consolidated balance sheets of Delek (unaudited, in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6.4
|
|
|
$
|
4.5
|
|
|
Accounts receivable
|
|
20.0
|
|
|
21.6
|
|
|
Inventory
|
|
7.7
|
|
|
5.5
|
|
|
Other current assets
|
|
2.7
|
|
|
1.0
|
|
|
Property, plant and equipment, net
|
|
298.1
|
|
|
312.6
|
|
|
Equity method investments
|
|
247.0
|
|
|
104.8
|
|
|
Operating lease right-of-use assets
|
|
18.3
|
|
|
—
|
|
|
Goodwill
|
|
12.2
|
|
|
12.2
|
|
|
Intangible assets, net
|
|
132.8
|
|
|
138.2
|
|
|
Other non-current assets
|
|
22.7
|
|
|
24.2
|
|
|
Total assets
|
|
$
|
767.9
|
|
|
$
|
624.6
|
|
|
LIABILITIES AND DEFICIT
|
|
|
|
|
|
Accounts payable
|
|
$
|
12.5
|
|
|
$
|
14.2
|
|
|
Accounts payable to related parties
|
|
2.8
|
|
|
7.8
|
|
|
Current portion of operating lease liabilities
|
|
4.8
|
|
|
—
|
|
|
Accrued expenses and other current liabilities
|
|
12.2
|
|
|
14.5
|
|
|
Long-term debt
|
|
840.8
|
|
|
700.4
|
|
|
Asset retirement obligations
|
|
5.5
|
|
|
5.2
|
|
|
Operating lease liabilities, net of current portion
|
|
13.5
|
|
|
—
|
|
|
Other non-current liabilities
|
|
18.2
|
|
|
17.3
|
|
|
Deficit
|
|
(142.5
|
)
|
|
(134.8
|
)
|
|
Total liabilities and deficit
|
|
$
|
767.8
|
|
|
$
|
624.6
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Alon Partnership
As part of the Delek/Alon Merger, we acquired a majority interest in 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 New Delek common stock for each limited partner unit of the Alon Partnership, resulting in the issuance of approximately 5.6 million shares of New 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 nine months ended September 30, 2018, none of which were recorded in the third quarter of 2018. Such costs were included in general and administrative expenses in the accompanying condensed consolidated statements of income.
Prior to the Merger Date, the Alon Partnership was a variable interest entity for which Delek was the primary beneficiary. As of September 30, 2019 and December 31, 2018, the Alon Partnership is included in Delek's condensed consolidated balance sheet as a wholly-owned subsidiary.
Note 6 - Equity Method Investments
Wink to Webster Pipeline LLC ("WWP")
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 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 it is anticipated that Delek Energy’s capital contributions will total approximately $340 million to $380 million over the course of construction (expected to be two to three years). During the three and nine months ended September 30, 2019, we made capital contributions totaling $75.3 million. Subsequent to September 30, 2019, we made additional capital contributions totaling $46.2 million based on capital calls received.
As of September 30, 2019, Delek's investment balance in WWP totaled $75.3 million, and we recognized nominal income on the investment for the three and nine months then ended. This investment is accounted for using the equity method and is included as part of total assets in corporate, other and eliminations in our segment disclosure.
Red River Pipeline Company LLC ("Red River")
In May 2019, Delek Logistics, through its wholly owned indirect subsidiary Delek Logistics Pipeline, LLC (“Delek Logistics 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, Delek Logistics Pipeline contributed $124.7 million, substantially all of which was financed under the Delek Logistics Credit Facility (as defined in Note 10), to Red River in exchange for a 33% membership interest in Red River and Delek Logistics Pipeline’s admission as a member of Red River. Red River owns a 16-inch crude oil pipeline running from Cushing, Oklahoma to Longview, Texas, with an expansion project planned to increase the pipeline capacity, which is expected to be completed during the first half of 2020. Delek Logistics contributed an additional $3.5 million related to such expansion project in May 2019. As of September 30, 2019, Delek's investment balance in Red River totaled $131.2 million, and we recognized income on the investment totaling $4.7 million and $7.0 million for the three and nine months then ended September 30, 2019, respectively. This investment is accounted for using the equity method and is included as part of total assets in our logistics segment.
Other Investments
Delek Logistics also has two joint ventures that own and operate logistics assets, and which serve third parties and subsidiaries of Delek. As of September 30, 2019 and December 31, 2018, Delek Logistics' investment balances in these joint ventures totaled $115.8 million and $104.8 million, respectively, and were accounted for using the equity method.
Delek Renewables, LLC, a wholly-owned subsidiary of Delek, has 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 September 30, 2019 and December 31, 2018, Delek Renewables, LLC's investment balance in this joint venture was $4.2 million and $2.4 million, respectively, and was accounted for using the equity method. The investment in this joint venture is reflected in the refining segment.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 7 for further discussion. As of September 30, 2019 and December 31, 2018, Delek's investment balance in the Brownwood, Texas joint venture was $33.7 million and $23.1 million, respectively. This investment is accounted for using the equity method and is included as part of total assets in corporate, other and eliminations in our segment disclosure.
Note 7 - Discontinued Operations and Assets Held for Sale
Asphalt Terminals
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 located in Femley, Nevada, to an affiliate of Andeavor. 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 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 nine months ended September 30, 2018 (none for the three months then ended). 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 in the second quarter of 2018, we recognized a gain of approximately $13.2 million, resulting primarily from the recognition of certain additional proceeds at closing associated with the asphalt terminals which were not previously determinable/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).
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 and our California renewable fuels facility (as previously defined, the "California Discontinued Entities"). 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 the California renewable fuels facility ("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. Upon final settlement (excluding contingent components), Delek expects to receive net cash proceeds of approximately $85.2 million, which included a post-closing working capital settlement, Delek’s portion of the biodiesel tax credit (the "BTC") for 2017 and certain customary adjustments. The sale resulted in a loss on sale of discontinued operations totaling approximately $41.4 million of which $41.2 million was recorded during the nine months ended September 30, 2018 (none for the three months ended September 30, 2018). Of the total expected proceeds, $70.4 million was received during the nine months ended September 30, 2018 ($14.9 million of which were included in net cash flows from investing activities in discontinued operations). Prior to the agreement reached with World Energy in August 2019 (see below), we had a remaining receivable from the buyer totaling approximately $14.8 primarily related to the working capital settlement. Additionally, Delek is entitled to its pro rata portion of any tax credits relating to AltAir activities in 2018 earned through the sale date if the 2018 BTC is re-enacted. A receivable for such additional contingent proceeds will be recorded when the criteria for recognition are met, which is predicated upon reenactment of the tax credit and determination of the amounts earned by AltAir.
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 (defined and further discussed in Note 13) against the working capital settlement receivable referenced above, and to convert the net receivable to a promissory note in the amount of $12.3 million (the "World Energy Note Receivable" or the "Note Receivable"). The World Energy Note Receivable bears interest at a fixed rate of 6.0% per annum payable monthly, and requires monthly principal payments totaling approximately $0.5 million beginning in January 2020. The Note Receivable matures on December 31, 2021, subject to acceleration clauses if certain events occur. In the event that the BTC is re-enacted for 2018 and/or 2019 resulting in proceeds to World Energy for Altair's qualifying credits, pre-payment of the lesser of the remaining outstanding balance (and all accrued interest) or the amount of the BTC proceeds received will be payable to Delek within 15 days of such receipt.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Operating Results
The operating results, net of tax, from discontinued operations associated with the California Discontinued Entities are presented separately in Delek’s condensed consolidated statements of income and the notes to the condensed consolidated financial statements have been adjusted to exclude the discontinued operations. Components of amounts reflected in income (loss) from discontinued operations prior to their disposal are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
September 30, 2018
|
|
September 30, 2018
|
|
Net revenues
|
$
|
—
|
|
|
$
|
32.5
|
|
|
Cost of sales:
|
|
|
|
|
Cost of materials and other
|
—
|
|
|
3.8
|
|
|
Operating expenses (excluding depreciation and amortization)
|
(0.6
|
)
|
|
(9.4
|
)
|
|
Total cost of sales
|
(0.6
|
)
|
|
(5.6
|
)
|
|
General and administrative expenses
|
—
|
|
|
(1.1
|
)
|
|
Other operating income, net
|
—
|
|
|
0.3
|
|
|
Interest income
|
—
|
|
|
3.0
|
|
|
Loss on sale of California Discontinued Entities
|
1.4
|
|
|
(39.8
|
)
|
|
Loss from discontinued operations before taxes
|
0.8
|
|
|
(10.7
|
)
|
|
Income tax benefit
|
0.3
|
|
|
(2.2
|
)
|
|
Loss from discontinued operations, net of tax (1)
|
$
|
0.5
|
|
|
$
|
(8.5
|
)
|
|
|
|
|
(1)
|
Included in loss from discontinued operations is net income attributable to non-controlling interest totaling $8.1 million related to AltAir for the nine months ended September 30, 2018 (none for the three months ended September 30, 2018).
|
Related to the California Discontinued Entities, all of which were disposed of by December 31, 2018, we retained certain obligations associated with various matters, including (but not necessarily limited to) California emissions credits requirements that were attributable to operations of the California Discontinued Entities for periods prior to disposition, litigations, claims or assessments related to matters/events that occurred prior to disposition, or indemnification of certain liabilities that related to the California Discontinued Entities and arose prior to disposition. Related to these matters, we recorded liabilities of $3.4 million and $5.0 million as of September 30, 2019 and December 31, 2018, respectively based on amounts that were deemed probable and could be reasonably estimated as of those dates. During the nine months ended September 30, 2019, we recorded an additional accrual for California emission credit obligation based upon our revised estimates totaling $3.4 million, none of which was recorded in the third quarter. Additionally, in July 2019, we resolved a pending litigation matter (the Ten-Tex Litigation -- see Note 13) that resulted in a decrease in our accrual totaling $2.4 million during the nine months ended September 30, 2019. Such adjustments are included in loss from discontinued operations on the accompanying condensed consolidated statements of income for those periods.
Note 8 - Inventory
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 all 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 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.
Carrying value of inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Refinery raw materials and supplies
|
|
$
|
432.8
|
|
|
$
|
289.0
|
|
|
Refinery work in process
|
|
94.4
|
|
|
58.9
|
|
|
Refinery finished goods
|
|
342.4
|
|
|
304.1
|
|
|
Retail fuel
|
|
5.6
|
|
|
8.0
|
|
|
Retail merchandise
|
|
25.7
|
|
|
25.4
|
|
|
Logistics refined products
|
|
7.7
|
|
|
5.5
|
|
|
Total inventories
|
|
$
|
908.6
|
|
|
$
|
690.9
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
At September 30, 2019, we recorded a pre-tax inventory valuation reserve of $23.9 million, $12.4 million of which related to LIFO inventory, due to a market price decline below our cost of certain inventory products. At December 31, 2018, we recorded a pre-tax inventory valuation reserve of $54.0 million, $39.4 million of which related to LIFO inventory, which reversed in the first quarter of 2019 due to the sale of inventory quantities that gave rise to the December 31, 2018 reserve. We recognized a net (increase) reduction in cost of materials and other in the accompanying condensed consolidated statements of income related to the change in pre-tax inventory valuation of $(21.4) million and $30.1 million for the three and nine months ended September 30, 2019, respectively, and $(0.1) million and $1.9 million for the three and nine months ended September 30, 2018, respectively.
Note 9 - Crude Oil Supply and Inventory Purchase Agreements
Delek has Supply and Offtake Agreements with J. Aron & Company ("J. Aron") in connection with its El Dorado, Big Spring and Krotz Spring refineries (collectively, the "Supply and Offtake Agreements"). 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 product financing arrangements under the fair value election provided by ASC 815 Derivatives and Hedging ("ASC 815") and ASC 825, Financial Instruments ("ASC 825").
Barrels subject to the Supply and Offtake Agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
El Dorado
|
|
Big Spring
|
|
Krotz Springs
|
|
Baseline Volumes pursuant to the respective Supply and Offtake Agreements
|
|
1.9
|
|
|
0.8
|
|
|
1.3
|
|
|
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of September 30, 2019 (1)
|
|
3.4
|
|
|
1.5
|
|
|
1.6
|
|
|
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of December 31, 2018 (1)
|
|
2.8
|
|
|
1.7
|
|
|
1.8
|
|
|
|
|
|
(1)
|
Includes Baseline Volumes plus/minus over/short quantities.
|
The El Dorado Supply and Offtake Agreement has a maturity date of April 30, 2020. The Big Spring and Krotz Springs Supply and Offtake Agreements have initial terms that expire in May 2021. J. Aron or Delek may elect to terminate the agreements at the Big Spring and Krotz Springs refineries in May 2020 on six months' prior notice. 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") will be based upon a fixed price. Prior to those amendments, the Baseline Step-Out Liabilities were based on market-indexed pricing. The amendments resulted in Baseline Step-Out Liabilities that are no longer subject to commodity price volatility, but for which its fair value is now subject to interest rate risk. As a result, we recorded gains on the change in fair value resulting from the modification of the instruments from commodities-based risk to interest rate risk in cost of materials and other in the periods in which the amendments occurred, including $7.6 million of which were recognized in the first quarter of 2019. Subsequent to these amendments, such Baseline Step-Out Liabilities will continue to be recorded at fair value, where the fair value will reflect changes in interest rate risk rather than commodity price risk under the fair value election provided by ASC 815 and ASC 825. Prior to the amendments, the Obligations under the Supply and Offtake Agreements were all classified as current based on the market-indexed nature of the liabilities. Subsequent to the amendments, 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. 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)
|
|
El Dorado
|
|
Big Spring
|
|
Krotz Springs
|
|
Total
|
|
Balances as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
Baseline Step-Out Liability
|
|
$
|
124.1
|
|
|
$
|
56.5
|
|
|
$
|
87.1
|
|
|
$
|
267.7
|
|
|
Revolving over/short product financing liability
|
|
80.4
|
|
|
32.8
|
|
|
27.7
|
|
|
140.9
|
|
|
Total Obligations Under Supply and Offtake Agreements
|
|
204.5
|
|
|
89.3
|
|
|
114.8
|
|
|
408.6
|
|
|
Less: Current portion
|
|
204.5
|
|
|
32.8
|
|
|
27.7
|
|
|
265.0
|
|
|
Obligations Under Supply and Offtake Agreements - Noncurrent portion
|
|
$
|
—
|
|
|
$
|
56.5
|
|
|
$
|
87.1
|
|
|
$
|
143.6
|
|
|
Other receivable for monthly activity true-up (included in current receivables)
|
|
$
|
(6.9
|
)
|
|
$
|
(2.4
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
El Dorado
|
|
Big Spring
|
|
Krotz Springs
|
|
Total
|
|
Balances as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Baseline Step-Out Liability
|
|
$
|
—
|
|
|
$
|
49.6
|
|
|
$
|
—
|
|
|
$
|
49.6
|
|
|
Revolving over/short product financing liability
|
|
—
|
|
|
46.9
|
|
|
—
|
|
|
46.9
|
|
|
Revolving Step-Out Liability (prior to January 2019 amendments)
|
|
152.6
|
|
|
—
|
|
|
113.1
|
|
|
265.7
|
|
|
Total Obligations Under Supply and Offtake Agreements
|
|
152.6
|
|
|
96.5
|
|
|
113.1
|
|
|
362.2
|
|
|
Less: Current portion
|
|
152.6
|
|
|
46.9
|
|
|
113.1
|
|
|
312.6
|
|
|
Obligations Under Supply and Offtake Agreements - Noncurrent portion
|
|
$
|
—
|
|
|
$
|
49.6
|
|
|
$
|
—
|
|
|
$
|
49.6
|
|
|
Other (receivable) payable for monthly activity true-up (included in current payables (receivables))
|
|
$
|
(7.8
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
1.4
|
|
|
$
|
(6.8
|
)
|
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. As of September 30, 2019, the effective interest rates related to the Supply and Offtake Agreements, as amended, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
El Dorado
|
|
Big Spring
|
|
Krotz Springs
|
|
Effective interest rate as of September 30, 2019
|
|
8.6
|
%
|
|
9.5
|
%
|
|
8.0
|
%
|
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)
|
|
El Dorado
|
|
Big Spring
|
|
Krotz Springs
|
|
Total
|
|
Recurring cash fees paid during the three months ended September 30, 2019
|
|
$
|
2.9
|
|
|
$
|
1.5
|
|
|
$
|
2.5
|
|
|
$
|
6.9
|
|
|
Recurring cash fees paid during the three months ended September 30, 2018
|
|
$
|
2.7
|
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
|
$
|
6.3
|
|
|
Recurring cash fees paid during the nine months ended September 30, 2019
|
|
$
|
8.5
|
|
|
$
|
4.4
|
|
|
$
|
7.6
|
|
|
$
|
20.5
|
|
|
Recurring cash fees paid during the nine months ended September 30, 2018
|
|
$
|
8.3
|
|
|
$
|
5.4
|
|
|
$
|
5.0
|
|
|
$
|
18.7
|
|
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)
|
|
El Dorado
|
|
Big Spring
|
|
Krotz Springs
|
|
Total
|
|
Interest expense for the three months ended September 30, 2019
|
|
$
|
3.7
|
|
|
$
|
2.0
|
|
|
$
|
2.7
|
|
|
$
|
8.4
|
|
|
Interest expense for the three months ended September 30, 2018
|
|
$
|
2.7
|
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
|
$
|
6.3
|
|
|
Interest expense for the nine months ended September 30, 2019
|
|
$
|
10.9
|
|
|
$
|
3.6
|
|
|
$
|
8.8
|
|
|
$
|
23.3
|
|
|
Interest expense for the nine months ended September 30, 2018
|
|
$
|
8.3
|
|
|
$
|
5.4
|
|
|
$
|
5.0
|
|
|
$
|
18.7
|
|
Reflected in interest expense are gains totaling $7.7 million and $11.4 million for the three and nine months September 30, 2019, respectively,
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)
|
|
El Dorado
|
|
Big Spring and Krotz Springs
|
|
Letters of credit outstanding as of September 30, 2019
|
|
$
|
180.0
|
|
|
$
|
44.0
|
|
|
Letters of credit outstanding as of December 31, 2018
|
|
$
|
120.0
|
|
|
$
|
24.0
|
|
In connection with the Krotz Springs Supply and Offtake Agreement, prior to September 30, 2019, we granted a security interest to J. Aron in certain assets (including all of its accounts receivable and inventory) to secure our obligations to J. Aron. Pursuant to an amendment to the security agreement effective September 30, 2019, no cash, deposit accounts or accounts receivable constitute collateral.
Note 10 - 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Revolving Credit Facility
|
|
$
|
160.0
|
|
|
$
|
300.0
|
|
|
Term Loan Credit Facility (1)
|
|
924.1
|
|
|
682.9
|
|
|
Delek Logistics Credit Facility
|
|
596.3
|
|
|
456.7
|
|
|
Delek Logistics Notes (2)
|
|
244.5
|
|
|
243.7
|
|
|
Reliant Bank Revolver
|
|
30.0
|
|
|
30.0
|
|
|
Promissory Notes
|
|
45.0
|
|
|
70.0
|
|
|
|
|
1,999.9
|
|
|
1,783.3
|
|
|
Less: Current portion of long-term debt and notes payable
|
|
64.5
|
|
|
32.0
|
|
|
|
|
$
|
1,935.4
|
|
|
$
|
1,751.3
|
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(1)
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Net of deferred financing costs of $3.7 million and $3.5 million and debt discount of $10.4 million and $8.4 million at September 30, 2019 and December 31, 2018, respectively.
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(2)
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Net of deferred financing costs of $4.2 million and $4.8 million and debt discount of $1.3 million and $1.5 million at September 30, 2019 and December 31, 2018, respectively.
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Outstanding Obligations/Facilities as of the Balance Sheet Dates
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 $300.0 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 all of which was recorded in the first quarter of 2018.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. The terms of the Incremental Term 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 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 Amendment.
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 London Interbank Offered Rate ("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 certain borrowings under the Term Loan Credit Facility and incorporate certain other changes. The First Amendment decreased the applicable margins for borrowings 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.
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 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, where the fee is at a rate of 0.25% or 0.375% per annum, depending on average commitment usage for such quarter. As of September 30, 2019, the unused line fee was 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 requires scheduled quarterly principal payments (which pursuant to the Incremental Amendment increased from $1.750 million to $2.375 million commencing with the quarterly principal payment due on June 28, 2019), with the balance of the principal due at maturity on March 30, 2025. 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 50.0% to 0% depending on Delek’s consolidated fiscal year end secured net leverage ratio. Delek may also make voluntarily prepayments under the Term Loan Credit Facility at any time, subject to a prepayment premium of 1.0% in connection with certain customary repricing events that may occur within six months after the First Incremental Effective Date, with no such premium applied after six months.
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 Partners, LP, 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, renewable identification numbers, 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Additional Information
At September 30, 2019, the weighted average borrowing rate under the Revolving Credit Facility was 5.25% and was comprised entirely of a base rate borrowing, and the principal amount outstanding thereunder was $160.0 million. Additionally, there were letters of credit issued of approximately $293.5 million as of September 30, 2019 under the Revolving Credit Facility. Unused credit commitments under the Revolving Credit Facility, as of September 30, 2019, were approximately $546.5 million.
At September 30, 2019, the weighted average borrowing rate under the Term Loan Credit Facility was approximately 4.29% comprised entirely of a LIBOR borrowing, and the principal amount outstanding thereunder was $938.2 million. As of September 30, 2019, the effective interest rate related to the Term Loan Credit Facility was 4.61%.
Delek Logistics Credit Facility
Prior to its amendment and restatement on September 28, 2018, Delek Logistics had a $700.0 million senior secured revolving credit agreement with Fifth Third Bank ("Fifth Third"), as administrative agent, and a syndicate of lenders (the "2014 Facility") with a $100.0 million accordion feature, bearing 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. 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 as administrative agent and a syndicate of lenders (hereafter, the "Delek Logistics Credit Facility"). Under the terms of the Delek Logistics Credit Facility, among other things, the lender commitments were increased from $700.0 million to $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 remain secured by first priority liens on substantially all of Delek Logistics' tangible and intangible assets. Additionally, a subsidiary of Delek continues to provide a limited guaranty of Delek Logistics' obligations under the Delek Logistics Credit Facility. The guaranty is (i) limited to an amount equal to the principal amount, plus unpaid and accrued interest, of a promissory note made by Delek in favor of the subsidiary guarantor (the "Holdings Note") and (ii) secured by the subsidiary guarantor's pledge of the Holdings Note to the Delek Logistics Credit Facility lenders. As of both September 30, 2019 and December 31, 2018, the principal amount of the Holdings Note was $102.0 million.
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 September 30, 2019, the weighted average borrowing rate was approximately 4.89%. 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 September 30, 2019, this fee was 0.50% per year.
As of September 30, 2019, Delek Logistics had $596.3 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 September 30, 2019, were $253.7 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 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.
At any time prior to May 15, 2020, the Issuers may redeem up to 35% of the aggregate principal amount of the Delek Logistics Notes with the net cash proceeds of one or more equity offerings by Delek Logistics at a redemption price of 106.750% of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to May 15, 2020, the Issuers may redeem all or part of the Delek Logistics Notes at a redemption price of the principal amount plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on May 15, 2020, the Issuers may, subject to certain conditions and limitations, redeem all or part of the 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In May 2018, the Delek Logistics Notes were exchanged for new notes with terms substantially identical in all material respects with the 2025 Notes except the new notes do not contain terms with respect to transfer restrictions.
As of September 30, 2019, we had $250.0 million in outstanding principal amount under the Delek Logistics Notes. As of September 30, 2019, the effective interest rate related to the Delek Logistics Notes was 7.24%.
Reliant Bank Revolver
Delek has an unsecured revolving credit agreement with Reliant Bank (the "Reliant Bank Revolver") that provides for unsecured loans of up to $30.0 million. The Reliant Bank Revolver matures June 28, 2020, bears interest at fixed rate of 4.75% per annum and requires us to pay a quarterly fee of 0.50% per year on the average unused revolving commitment. As of September 30, 2019, we had $30.0 million outstanding 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, require 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 September 30, 2019, a total principal amount of $45.0 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 and Reliant Bank Revolver, 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 September 30, 2019.
Certain of our debt facilities contain limitations on the incurrence of additional indebtedness, making of investments, creation of liens, dispositions and acquisitions of assets, and making of restricted payments and transactions with affiliates. Specifically, these covenants may limit the payment, in the form of cash or other assets, of dividends or other distributions, or the repurchase of shares with respect to the equity of the Company or certain of our subsidiaries. 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.
Instruments Outstanding as of September 30, 2018
Alon Convertible Senior Notes
In connection with the Delek/Alon Merger, Alon, New 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 3.00% Convertible Senior Notes due September 2018, which were previously convertible into Alon Common Stock, to thereafter be convertible into New Delek Common Stock based on the exchange rate applied in the Delek/Alon Merger (as previously defined, the “Convertible Notes”). Additionally, in connection with the Convertible Notes, Alon entered into equity instruments, including call options (as previously defined, the "Call Options") and warrants (as previously defined, the "Warrants"), designed, in combination, to hedge a portion of the economic risk associated with the potential exercise of the conversion feature of the Convertible Notes and to mitigate the dilutive effect of such potential conversion. The aggregate principal amount of the Convertible Notes was $150.0 million, and the effective interest rate as of September 30, 2018 was 5.92%, resulting in recognition of total interest expense during the three and nine months then ended of approximately $2.2 million and $6.6 million, respectively.
The Convertible Notes could be converted into shares of Delek Common Stock, into cash, or into a combination of cash and shares of New 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 New 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 New 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 New 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 condensed consolidated balance sheets.
Warrant Transactions
In connection with the Convertible Notes offering, Alon also entered into warrant transactions (as previously defined, the “Warrants”) 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 allow the Hedge Counterparties to purchase up to approximately 5.7 million shares of New Delek Common Stock, subject to customary anti-dilution adjustments. In November 2018, Delek entered into Warrant Unwind Agreements (as previously defined, the "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 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 Warrants were canceled and the associated rights and obligations terminated. Based on the provisions of the Unwind Agreements, the amount paid to warrant holders in satisfaction of the payment obligation totaled approximately $36.0 million.
Obligations Extinguished in Connection with the March 2018 Refinancing
During the first quarter 2018, Delek had outstanding various credit facilities/debt instruments as follows, all of which were extinguished in connection with the March 2018 Refinancing:
Wells ABL
Our subsidiary, Delek Refining, Ltd., had an asset-based loan credit facility with Wells Fargo Bank, National Association, as administrative agent, and a syndicate of lenders, which was previously amended and restated on September 29, 2016 (the "Wells ABL"). The Wells ABL consisted of (i) a $450.0 million revolving loan (the "Wells Revolving Loan") and (ii) a $70 million term loan ("Wells Term Loan"). Borrowings under the Wells Revolving Loan and Wells Term Loan bore interest based on separate predetermined pricing grids that allowed us to choose between base rate loans or LIBOR rate loans. Additionally, the Wells ABL required us to pay a quarterly unused credit commitment fee. This facility was amended and restated on March 30, 2018 in connection with the Refinancing and replaced by the New Credit Facilities, as previously defined.
Lion Term Loan
Our subsidiary, Lion Oil, had a term loan credit facility with Fifth Third Bank, as administrative agent, and a syndicate of lenders, with a total loan size of $275.0 million (the "Lion Term Loan"). For the period(s) it was outstanding, interest on the unpaid balance of the Lion Term Loan was computed at a rate per annum equal to LIBOR or a base rate, at our election, plus the applicable margins, subject in each case to an all-in interest rate floor of 5.50% per annum.
Alon Partnership Facilities
Revolving Credit Facility
Alon USA, LP, a wholly-owned subsidiary of the Alon Partnership had a $240.0 million asset-based revolving credit facility with Israel Discount Bank of New York, as administrative agent (the “Alon Partnership Credit Facility”). Borrowings under the Alon Partnership Credit Facility bore interest at LIBOR or base rate, at our election, plus the applicable margins.
Partnership Term Loan Credit Facility
The Alon Partnership had a $250.0 million term loan with Credit Suisse AG, as administrative agent (the “Alon Partnership Term Loan”). The Alon Partnership Term Loan bore interest at a rate per annum equal to LIBOR (subject to a floor of 1.25%) or a base rate plus the applicable margins.
Alon Term Loan Credit Facilities
Alon Energy Term Loan
Alon had a promissory note to Bank Hapoalim B.M. in an original principal amount of $38.0 million ("New Alon Energy Term Loan"). The New Alon Energy Term Loan incurred interest at an annual rate equal to LIBOR plus an applicable margin.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Alon Asphalt Term Loan
Alon had a term loan owed to Export Development Canada secured by liens on certain of our asphalt terminals (“Alon Asphalt Term Loan”) in an original principal amount of $35.0 million. The Alon Asphalt Term Loan bore interest at a rate equal to LIBOR plus an applicable margin.
Alon Retail Credit Agreement
Alon wholly-owned subsidiaries Southwest Convenience Stores, LLC and Skinny’s LLC, (collectively, “Alon Retail”), had a credit agreement (“Alon Retail Credit Agreement”), that was to mature in March 2019, with Wells Fargo Bank, National Association, as administrative agent. The Alon Retail Credit Agreement included a term loan in an original principal amount of $110.0 million and a $10.0 million revolving credit facility. Borrowings under the Alon Retail Credit Agreement bore interest at LIBOR or base rate, at our election, plus an applicable margin, determined quarterly based upon Alon Retail’s leverage ratio.
Total Amounts Outstanding and Repaid
Principal amounts outstanding and repaid in connection with the March 2018 Refinancing with respect to these credit facilities/debt instruments were as follows:
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(in millions)
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Amount Outstanding/Repaid at March 30, 2018
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Wells ABL
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$
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40.8
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Lion Term Loan
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206.3
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Alon Partnership Facilities
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236.9
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Alon Term Loan Credit Facilities
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38.0
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Alon Retail Credit Agreement
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86.4
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Total
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$
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608.4
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Additionally, on March 29, 2018, in anticipation of the March 2018 Refinancing, we also repaid $35 million of principal on the Alon Asphalt Term Loan.
Note 11 - 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 aimed at:
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•
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limiting the exposure to price fluctuations of commodity inventory above or below target levels at each of our segments;
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•
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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;
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•
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managing the cost of our credits for commitments required by the U.S. Environmental Protection Agency ("EPA") to blend biofuels into fuel products ("RINs Obligation") using future commitments to purchase or sell renewable identification numbers ("RINs") at fixed prices and quantities; and
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•
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limiting the exposure to interest rate fluctuations on our floating rate borrowings.
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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.
During the first quarter of 2018, we utilized interest rate swap agreements to hedge floating rate debt by exchanging interest rate cash flows, based on a notional amount from a floating rate to a fixed rate. Effective with the Delek/Alon Merger, we had four interest rate swap agreements (that had maturities in March 2019) which effectively fixed the variable LIBOR interest component of the term loan within the Alon Retail Credit Agreement. The aggregate notional amount under these agreements were to cover approximately 77% of the outstanding principal of these term loans throughout the duration of the interest rate swaps. These interest rate swap agreements were terminated due to the extinguishment of the Alon Retail Credit Agreement in connection with the Refinancing on March 30, 2018, resulting in a reclassification of unrealized loss of $0.6 million from accumulated other comprehensive income to interest expense on the condensed consolidated statements of income during
Notes to Condensed Consolidated Financial Statements (Unaudited)
the nine months ended September 30, 2018.
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 and are not accounted for as derivative instruments. Rather, such forward contracts are accounted for under other applicable GAAP. Forward contracts entered into for trading purposes that do not meet the normal purchases, normal sales exception are accounted for as derivative instruments at fair value with changes in fair value recognized in earnings in the period of change. As of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and September 30, 2018, our 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 condensed 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 RIN commitment contracts 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 RIN commitment contracts are recorded in cost of materials and other on the condensed 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 and our interest rate agreements have been designated as cash flow hedges and the change in fair value between the execution date and the end of period (or early termination date in regards to the four Alon retail interest rate swaps discussed above) has been 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.
The following table presents the fair value of our derivative instruments as of September 30, 2019 and December 31, 2018. 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 condensed consolidated balance sheets. See Note 12 for further information regarding the fair value of derivative instruments (in millions).
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September 30, 2019
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December 31, 2018
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Derivative Type
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Balance Sheet Location
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Assets
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Liabilities
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Assets
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Liabilities
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Derivatives not designated as hedging instruments:
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Commodity derivatives(1)
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Other current assets
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$
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272.5
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$
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(278.1
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)
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$
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158.3
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$
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(142.4
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)
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Commodity derivatives(1)
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Other current liabilities
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|
14.0
|
|
|
(16.4
|
)
|
|
—
|
|
|
(8.4
|
)
|
|
Commodity derivatives(1)
|
Other long-term assets
|
|
29.8
|
|
|
(29.6
|
)
|
|
2.1
|
|
|
(2.4
|
)
|
|
Commodity derivatives(1)
|
Other long-term liabilities
|
|
34.8
|
|
|
(38.6
|
)
|
|
93.0
|
|
|
(94.0
|
)
|
|
RIN commitment contracts(2)
|
Other current assets
|
|
5.9
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
RIN commitment contracts(2)
|
Other current liabilities
|
|
—
|
|
|
(3.5
|
)
|
|
—
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity derivatives (1)
|
Other current assets
|
|
18.1
|
|
|
(3.2
|
)
|
|
200.3
|
|
|
(157.0
|
)
|
|
Commodity derivatives (1)
|
Other current liabilities
|
|
1.7
|
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
Commodity derivatives (1)
|
Other long-term assets
|
|
1.7
|
|
|
(1.3
|
)
|
|
6.1
|
|
|
(4.8
|
)
|
|
Total gross fair value of derivatives
|
|
$
|
378.5
|
|
|
$
|
(372.0
|
)
|
|
$
|
461.8
|
|
|
$
|
(415.7
|
)
|
|
Less: Counterparty netting and cash collateral(3)
|
|
329.2
|
|
|
(358.0
|
)
|
|
399.9
|
|
|
(399.5
|
)
|
|
Total net fair value of derivatives
|
|
$
|
49.3
|
|
|
$
|
(14.0
|
)
|
|
$
|
61.9
|
|
|
$
|
(16.2
|
)
|
|
|
|
|
(1)
|
As of September 30, 2019 and December 31, 2018, we had open derivative positions representing 95,410,250 and 39,277,822 barrels, respectively, of crude oil and refined petroleum products. Additionally, as of September 30, 2019, we had open derivative positions representing 76,510,000 MMBTU of natural gas products. Of these open positions, contracts representing 2,752,000 and 16,461,000 barrels were designated as cash flow hedging instruments as of September 30, 2019 and December 31, 2018, respectively.
|
|
|
|
|
(2)
|
As of September 30, 2019 and December 31, 2018, we had open RIN commitment contracts representing 283,381,000 and 137,750,000 RINs, respectively.
|
|
|
|
|
(3)
|
As of September 30, 2019 and December 31, 2018, $28.8 million and $(0.4) million, respectively, of cash collateral (obligation) held by counterparties has been netted with the derivatives with each counterparty.
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Total gains (losses) on our hedging derivatives and RIN commitment contracts recorded in the condensed consolidated statements of income are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Gains (losses) on commodity derivatives not designated as hedging instruments recognized in cost of materials and other (1)
|
|
$
|
(8.0
|
)
|
|
$
|
(9.3
|
)
|
|
$
|
8.5
|
|
|
$
|
(23.7
|
)
|
|
Gains (losses) on commodity derivatives not designated as hedging instruments recognized in other operating income, net (1) (2)
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
0.2
|
|
|
(3.5
|
)
|
|
Realized gains (losses) reclassified out of AOCI and into cost of materials and other on commodity derivatives designated as cash flow hedging instruments
|
|
21.1
|
|
|
(9.6
|
)
|
|
55.0
|
|
|
(18.4
|
)
|
|
Gains (losses) recognized in cost of materials and other due to cash flow hedging ineffectiveness on commodity derivatives designated as hedging instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
Total gains (losses)
|
|
$
|
12.8
|
|
|
$
|
(19.5
|
)
|
|
$
|
63.7
|
|
|
$
|
(44.9
|
)
|
|
|
|
|
(1)
|
Gains (losses) on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of $0.5 million and $(30.1) million for the three and nine months ended September 30, 2019, respectively, and $13.0 million and $2.8 million for the three and nine months ended September 30, 2018, respectively. Of these amounts, approximately $(12.2) million and $(21.1) million for the three and nine months ended September 30, 2019, respectively, and $20.6 million and $1.4 million for the three and nine months ended September 30, 2018, respectively, represent unrealized gains (losses) where the instrument has matured but where it has not cash settled as of period end, including the reversal of prior period settlement timing differences. Derivative instruments that have matured but not cash settled at the balance sheet date continue to be reflected in derivative assets or liabilities on our balance sheet.
|
|
|
|
|
(2)
|
See separate table below for disclosures about "trading derivatives."
|
The effect of cash flow hedge accounting on the consolidated statements of income is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2019
|
|
Gain (loss) on cash flow hedging relationships recognized in cost of materials and other:
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
Hedged items
|
$
|
(21.1
|
)
|
|
$
|
(55.0
|
)
|
|
Derivative designated as hedging instruments
|
21.1
|
|
|
55.0
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and nine months ended September 30, 2019 or 2018. As of September 30, 2019, we estimate that $21.4 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 gains on our trading physical forward contract derivatives (none of which were designated as hedging instruments) recorded in other operating income (expense), net on the condensed consolidated statements of income are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Realized (losses) gains
|
|
$
|
(1.4
|
)
|
|
$
|
1.7
|
|
|
$
|
3.3
|
|
|
$
|
10.5
|
|
|
Unrealized gains
|
|
4.5
|
|
|
3.8
|
|
|
6.6
|
|
|
6.7
|
|
|
Total
|
|
$
|
3.1
|
|
|
$
|
5.5
|
|
|
$
|
9.9
|
|
|
$
|
17.2
|
|
Note 12 - Fair Value Measurements
Delek applies the provisions of ASC 820, Fair Value Measurements ("ASC 820"), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 requires disclosures that categorize 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
Commodity swaps, exchange-traded futures, options, physical commodity forward purchase and sale contracts (that do not qualify as normal purchases or normal sales), and interest rate swaps are generally valued using industry-standard models that consider various assumptions, including quoted forward prices, spot prices, interest rates, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines the classification as Level 2 or 3. Our contracts are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2. Commodity investments are valued using published market prices of the commodity on the applicable exchange and are, therefore, classified as Level 1.
Our Environmental Credits Obligation surplus or deficit is based on the amount of RINs or other emissions credits we must purchase, net of amounts internally generated and purchased and the price of those RINs or other emissions credits as of the balance sheet date, by refinery/obligor. The Environmental Credits Obligation surplus or deficit is categorized as Level 2, and is measured at fair value either directly through observable inputs or indirectly through market-corroborated inputs.
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 standard ("RIN Waivers") for the 2018 calendar year, which resulted in a reduction of our RINs Obligation and related cost of materials and other of approximately $20.7 million for the three and nine months ended September 30, 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 RINs Obligation and related cost of materials and other of approximately $90.9 million for the nine months ended September 30, 2018.
Our RIN 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 RINs Obligation. These RIN commitment contracts are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service. Changes in the fair value of these future RIN commitment contracts are recorded in cost of materials and other on the condensed consolidated statements of income.
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. As of and for the nine months ended September 30, 2019 and 2018, 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. Our J. Aron step-out liability was categorized as Level 2, and measured at fair value using market prices for the consigned crude oil and refined products we were required to repurchase from J. Aron at the end of the term of the Supply and Offtake Agreement prior to the December 2018/January 2019 amendments to each of the Supply and Offtake Agreements. The J. Aron step-out liability was presented in the Obligation under Supply and Offtake Agreement line item of our condensed consolidated balance sheets. Gains (losses) related to the change in fair value was recorded as a component of cost of materials and other in the condensed consolidated statements of income. With respect to the amended Supply and Offtake Agreements, such amendments being effective December 2018 for our Big Spring Agreement and January 2019 for our El Dorado and Krotz Springs Agreements and as all subsequently amended on September 19, 2019, we apply fair value measurement as follows: (1) we determine fair value for our amended fixed-price step-out liability based on changes in fair value related to interest rate risk where such obligation is categorized as Level 2 and is presented in the current or long-term portion, based on maturity of the agreement, of the Obligation under Supply and Offtake Agreements on our condensed consolidated balance sheets, and where gains (losses) related to changes in fair value are recorded as a component of interest expense in the condensed consolidated statements of income; and (2) we determine fair value of the short-term commodity-indexed financing facility 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 condensed consolidated balance sheets, and where gains (losses) related to the change in fair value are recorded as a component of cost of materials and other in the condensed consolidated statements of income.
Commodity investments represent those commodities (generally crude oil) physically on hand as a result of trading activities with physical forward contracts. Such investment stores, included in other current assets on the condensed consolidated balance sheets, are maintained on a weighted average cost basis for determining realized gains and losses on physical sales under forward contracts, and ending balances are adjusted to fair value at each reporting date. The unrealized gain (loss) on commodity investments for the three and nine months ended September 30, 2019 totaled $0.1 million and $(1.9) million, respectively.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
372.6
|
|
|
$
|
—
|
|
|
$
|
372.6
|
|
|
Commodity investments
|
|
6.0
|
|
|
—
|
|
|
—
|
|
|
6.0
|
|
|
RIN commitment contracts
|
|
—
|
|
|
5.9
|
|
|
—
|
|
|
5.9
|
|
|
Environmental Credits Obligation surplus
|
|
—
|
|
|
20.2
|
|
|
—
|
|
|
20.2
|
|
|
Total assets
|
|
6.0
|
|
|
398.7
|
|
|
—
|
|
|
404.7
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
—
|
|
|
(368.5
|
)
|
|
—
|
|
|
(368.5
|
)
|
|
RIN commitment contracts
|
|
—
|
|
|
(3.5
|
)
|
|
—
|
|
|
(3.5
|
)
|
|
Environmental Credits Obligation deficit
|
|
—
|
|
|
(16.7
|
)
|
|
—
|
|
|
(16.7
|
)
|
|
J. Aron step-out liability
|
|
—
|
|
|
(408.6
|
)
|
|
—
|
|
|
(408.6
|
)
|
|
Total liabilities
|
|
—
|
|
|
(797.3
|
)
|
|
—
|
|
|
(797.3
|
)
|
|
Net assets (liabilities)
|
|
$
|
6.0
|
|
|
$
|
(398.6
|
)
|
|
$
|
—
|
|
|
$
|
(392.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
459.8
|
|
|
$
|
—
|
|
|
$
|
459.8
|
|
|
Commodity investments
|
|
15.8
|
|
|
—
|
|
|
—
|
|
|
15.8
|
|
|
RIN commitment contracts
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
Environmental Credits Obligation surplus
|
|
—
|
|
|
10.3
|
|
|
—
|
|
|
10.3
|
|
|
Total assets
|
|
15.8
|
|
|
472.1
|
|
|
—
|
|
|
487.9
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
—
|
|
|
(409.0
|
)
|
|
—
|
|
|
(409.0
|
)
|
|
RIN commitment contracts
|
|
—
|
|
|
(6.7
|
)
|
|
—
|
|
|
(6.7
|
)
|
|
Environmental Credits Obligation deficit
|
|
—
|
|
|
(11.8
|
)
|
|
—
|
|
|
(11.8
|
)
|
|
J. Aron step-out liability
|
|
—
|
|
|
(362.2
|
)
|
|
—
|
|
|
(362.2
|
)
|
|
Total liabilities
|
|
—
|
|
|
(789.7
|
)
|
|
—
|
|
|
(789.7
|
)
|
|
Net assets (liabilities)
|
|
$
|
15.8
|
|
|
$
|
(317.6
|
)
|
|
$
|
—
|
|
|
$
|
(301.8
|
)
|
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 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 September 30, 2019 and December 31, 2018, $28.8 million and $(0.4) million, respectively, of cash collateral (obligation) was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty. See Note 11 for further information regarding derivative instruments.
Note 13 - 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 is included as of September 30, 2019 in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheet, and which reflects a $5.7 million increase in the accrual recorded during the nine months ended September 30, 2019, none of which was recorded for the third quarter. Additionally, through September 30, 2019, we have incurred $1.2 million of related legal expenses, of which none and $1.1 million was incurred during the three and nine months ended September 30, 2019, respectively, and has been recorded in general and administrative expenses in the accompanying condensed consolidated statements of income.
As of September 30, 2019 and December 31, 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 $0.3 million. Related to this obligation, we reduced our litigation accrual by $2.4 million during the nine months ended September 30, 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 the World Energy Note Receivable . As a result, this obligation is no longer reflected in our liabilities on the condensed consolidated balance sheet as of September 30, 2019. See Note 7 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, 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 soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured, 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.
The Big Spring refinery has been negotiating 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 the Consent Decree was agreed upon by Delek and the EPA/ United States Department of Justice (the "DOJ"), in late 2018 and was executed by Delek. The 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 Consent Decree, the Company will be required to expend capital for pollution control equipment that may be significant over the next 10 years.
As of September 30, 2019, we have recorded an environmental liability of approximately $142.8 million, primarily related to the estimated 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, which were already being performed by the former operators of the refineries and terminals prior to our acquisition of those facilities, for known
Notes to Condensed Consolidated Financial Statements (Unaudited)
contamination of soil and groundwater, as well as estimated costs for additional issues which have been identified subsequent to the acquisitions. Approximately $3.7 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.
Crude Oil and Other Releases
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. Cleanup operations and site maintenance and remediation efforts on these and other releases are at various stages of completion. The majority of the remediation efforts for these releases have been substantially completed or have received regulatory closure. Boom maintenance and confirmatory sampling is currently underway at some sites. We expect regulatory closure by the end of 2019 for some release sites that have not yet received it, with closure on a few remaining sites occurring in 2020.
Many of the releases have occurred on the SALA Gathering System. During the nine months ended September 30, 2019, we decommissioned certain sections of the SALA Gathering System in an effort to improve the safety and integrity of the system. The decommissioning of these sections was completed in August 2019. The decommissioning project did not have a material effect on the operational capabilities of the system.
On October 3, 2019, a finished product release involving one of our pipelines occurred near Sulphur Springs, Texas (the "Sulphur Springs Release"). Cleanup operations and site maintenance and remediation on this release are expected to be completed in the fourth quarter of 2019. We currently estimate the maintenance and remediation efforts to cost between $4.0 million and $6.0 million, excluding any fines or penalties assessed by regulatory agencies. We anticipate that we will incur certain fines or penalties but we cannot currently estimate those costs. No accrual is recorded for the Sulphur Springs Release as of September 30, 2019, as the release occurred subsequent to that date. We are evaluating whether there may be potential recoveries or indemnification of the costs incurred for the Sulphur Springs Release.
The DOJ, on behalf of the EPA, and the State of Arkansas, on behalf of the Arkansas Department of Environmental Quality, have been pursuing an enforcement action against Delek Logistics with regard to potential violations of the Clean Water Act and certain state laws arising from the release of crude oil from a pumping facility at its Magnolia Station near the El Dorado Refinery ( the "Magnolia Release") since June 2015. On July 13, 2018, the DOJ and the State of Arkansas filed a civil action against two of Delek Logistics’ wholly-owned subsidiaries, Delek Logistics Operating LLC and SALA Gathering Systems LLC, in the United States District Court for the Western District of Arkansas.
In December 2018, Delek, the United States and the state of Arkansas reached an agreement to settle the claims related to the Magnolia Release for $2.2 million and the claims against Delek Logistics were resolved and an additional demand for a compliance audit at the Magnolia terminal was abandoned pursuant to payment of monetary penalties and other relief. In July 2019, Delek signed and submitted to the DOJ, a consent decree (the "Magnolia Consent Decree") to settle the release, and on August 30, 2019, the Magnolia Consent Decree was lodged with the Court. We expect the Magnolia Consent Decree to be finalized and to settle the payable in the fourth quarter of 2019. As of September 30, 2019, $2.2 million for the Magnolia Release is recorded in accounts payable in our condensed consolidated balance sheet.
Letters of Credit
As of September 30, 2019, we had in place letters of credit totaling approximately $293.5 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 September 30, 2019.
Note 14 - Income Taxes
Under ASC 740, Income Taxes (“ASC 740”), companies are required to apply an estimated annual tax rate to interim period results on a year-to-date basis; however, the estimated annual tax rate should not be applied to interim financial results if a reliable estimate cannot be made. In this situation, the interim tax rate should be based on actual year-to-date results. We used an estimated annual tax rate to record income taxes for the three and nine months ended September 30, 2019 and September 30, 2018.
Our effective tax rate was 18.3% and 21.9% for the three and nine months ended September 30, 2019, respectively, compared to 21.5% and 22.0% for the three and nine months ended September 30, 2018, respectively. The difference between the effective tax rate and the statutory rate is generally attributable to permanent differences and discrete items. The change in our effective tax rate was primarily due to the reversal of a reserve for uncertain tax positions, net of an increase in a valuation allowance related to state net operating loss carryforwards, reflected in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 15 - Related Party Transactions
Our related party transactions consist primarily of transactions with our equity method investees (See Note 6 ). Transactions with our related parties were as follows for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues (1)
|
|
$
|
45.1
|
|
|
$
|
9.0
|
|
|
$
|
73.3
|
|
|
$
|
31.7
|
|
|
Cost of materials and other (2)
|
|
$
|
20.3
|
|
|
$
|
4.8
|
|
|
$
|
33.7
|
|
|
$
|
15.7
|
|
|
|
|
|
(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.
|
Note 16 - Other Assets and Liabilities
The detail of other current assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets
|
September 30, 2019
|
|
December 31, 2018
|
|
Short-term derivative assets (see Note 11)
|
$
|
48.7
|
|
|
$
|
61.9
|
|
|
Prepaid expenses
|
21.0
|
|
|
15.8
|
|
|
Environmental Credits Obligation surplus (see Note 12)
|
20.2
|
|
|
10.3
|
|
|
Income and other tax receivables
|
7.8
|
|
|
24.3
|
|
|
Commodity investments
|
6.0
|
|
|
15.6
|
|
|
Note receivable - current portion (see Note 7)
|
4.6
|
|
|
—
|
|
|
Other
|
6.8
|
|
|
7.8
|
|
|
Total
|
$
|
115.1
|
|
|
$
|
135.7
|
|
The detail of other non-current assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Assets
|
September 30, 2019
|
|
December 31, 2018
|
|
Supply and Offtake receivable
|
$
|
32.7
|
|
|
$
|
32.7
|
|
|
Note receivable - non-current portion (see Note 7)
|
7.7
|
|
|
—
|
|
|
Deferred financing costs
|
8.7
|
|
|
10.6
|
|
|
Other equity Investments
|
6.9
|
|
|
—
|
|
|
Long-term derivative assets (see Note 11)
|
0.6
|
|
|
1.0
|
|
|
Other
|
9.8
|
|
|
8.6
|
|
|
Total
|
$
|
66.4
|
|
|
$
|
52.9
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
The detail of accrued expenses and other current liabilities is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses and Other Current Liabilities
|
September 30, 2019
|
|
December 31, 2018
|
|
Crude liabilities
|
$
|
223.5
|
|
|
$
|
42.3
|
|
|
Income and other taxes payable
|
105.8
|
|
|
126.0
|
|
|
Employee costs
|
38.7
|
|
|
46.5
|
|
|
Product financing agreements
|
21.0
|
|
|
—
|
|
|
Environmental Credits Obligation deficit (see Note 12)
|
16.7
|
|
|
11.8
|
|
|
Interest payable
|
12.4
|
|
|
10.2
|
|
|
Short-term derivative liabilities (see Note 11)
|
10.2
|
|
|
16.2
|
|
|
Tank inspection liabilities
|
6.5
|
|
|
7.0
|
|
|
Accrued utilities
|
4.9
|
|
|
10.6
|
|
|
Environmental liabilities (see Note 13)
|
3.7
|
|
|
3.8
|
|
|
Other
|
44.2
|
|
|
33.3
|
|
|
Total
|
$
|
487.6
|
|
|
$
|
307.7
|
|
The detail of other non-current liabilities is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities
|
September 30, 2019
|
|
December 31, 2018
|
|
Pension and other postemployment benefit liabilities, net
|
$
|
16.2
|
|
|
$
|
17.6
|
|
|
Tank inspection liabilities
|
9.9
|
|
|
9.9
|
|
|
Liability for unrecognized tax benefits
|
7.2
|
|
|
19.2
|
|
|
Long-term derivative liabilities (see Note 11)
|
3.8
|
|
|
1.0
|
|
|
Above-market leases
|
—
|
|
|
9.2
|
|
|
Other
|
1.4
|
|
|
6.0
|
|
|
Total
|
$
|
38.5
|
|
|
$
|
62.9
|
|
Note 17 - Equity-Based Compensation
Delek US Holdings, Inc. 2006 and 2016 and Alon USA Energy, Inc. 2005 Long-Term Incentive Plans (collectively, the "Incentive Plans")
Compensation expense related to equity-based awards granted under the Incentive Plans amounted to $7.3 million ($5.8 million, net of taxes) and $18.7 million ($14.8 million, net of taxes) for the three and nine months ended September 30, 2019, respectively, and $5.4 million ($4.3 million, net of taxes) and $15.6 million ($12.3 million, net of taxes) for the three and nine months ended September 30, 2018, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income.
As of September 30, 2019, there was $51.3 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 2.3 years.
We issued 78,695 and 462,318 shares of common stock as a result of exercised or vested equity-based awards during the three and nine months ended September 30, 2019, respectively, and 90,552 and 535,613 shares for the three and nine months ended September 30, 2018, respectively. These amounts are net of 146,148 and 470,232 shares withheld to satisfy employee tax obligations related to the exercises and vestings during the three and nine months ended September 30, 2019, respectively, and 146,193 and 980,954 shares during the three and nine months ended September 30, 2018, respectively.
Delek Logistics GP, LLC 2012 Long-Term Incentive Plan
The Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") was adopted by the Delek Logistics GP, LLC board of directors in connection with the completion of Delek Logistics' initial public offering in November 2012. The LTIP is administered by the Conflicts Committee of the board of directors of Delek Logistics' general partner.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 18 - Stockholders' Equity
Dividends
During the nine months ended September 30, 2019, our Board of Directors declared the following dividends:
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|
|
|
|
|
|
|
|
|
Approval Date
|
|
Dividend Amount Per Share
|
|
Record Date
|
|
Payment Date
|
|
February 19, 2019
|
|
$0.27
|
|
March 5, 2019
|
|
March 19, 2019
|
|
April 30, 2019
|
|
$0.28
|
|
May 20, 2019
|
|
June 3, 2019
|
|
July 29, 2019
|
|
$0.29
|
|
August 19, 2019
|
|
September 3, 2019
|
Stock Repurchase Program
On November 6, 2018, our Board of Directors authorized a share repurchase program for up to $500.0 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 are 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. During the three and nine months ended September 30, 2019, 1,236,854 and 4,175,576 shares of our common stock were repurchased for a total of $43.0 million and $147.8 million, respectively, compared to repurchases of 1,906,308 and 4,847,511 shares during the three and nine months ended September 30, 2018 for a total of $92.1 million and $207.4 million, respectively. As of September 30, 2019, there was $261.9 million of authorization remaining under Delek's aggregate stock repurchase program.
Note 19 - Employees
Postretirement Benefits
The net periodic (benefit) cost for our postretirement benefit plans was not material for the three and nine months ended September 30, 2019 or 2018. Additionally, our estimated contributions to our pension plans during 2019 have not changed significantly from amounts previously disclosed in the notes to the consolidated financial statements for the year ended December 31, 2018.
Note 20 - Leases
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 stores and crude storage equipment.
As of September 30, 2019, $30.0 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents additional information related to our operating leases in accordance ASC 842, Leases ("ASC 842"):
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|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Lease Cost
|
|
|
|
|
Operating lease costs
|
$
|
13.5
|
|
|
$
|
44.1
|
|
|
Short-term lease costs (1)
|
4.0
|
|
|
11.3
|
|
|
Sublease income
|
(1.9
|
)
|
|
(6.4
|
)
|
|
Net lease costs
|
$
|
15.6
|
|
|
$
|
49.0
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
(13.5
|
)
|
|
$
|
(44.1
|
)
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
$
|
1.5
|
|
|
$
|
9.6
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Weighted-average remaining lease term (years) operating leases
|
|
|
6.69
|
|
|
Weighted-average discount rate operating leases (2)
|
|
|
6.2
|
%
|
(1) Includes an immaterial amount of variable lease cost.
(2) Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842.
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 September 30, 2019 (in millions) under the new lease guidance ASC 842:
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
|
Total
|
|
October 1 to December 31, 2019
|
|
$
|
14.7
|
|
|
2020
|
|
52.1
|
|
|
2021
|
|
40.6
|
|
|
2022
|
|
27.4
|
|
|
2023
|
|
21.7
|
|
|
Thereafter
|
|
76.4
|
|
|
Total future lease payments
|
|
232.9
|
|
|
Less: Interest
|
|
43.6
|
|
|
Present Value of Lease Liabilities
|
|
$
|
189.3
|
|
The following is an estimate of our future minimum lease payments for operating leases having remaining noncancelable terms in excess of one year as of December 31, 2018 (in millions) under the legacy lease guidance ASC 840, Leases:
|
|
|
|
|
|
|
|
|
Minimum Lease Payments
|
|
|
|
2019
|
|
$
|
48.1
|
|
|
2020
|
|
42.1
|
|
|
2021
|
|
39.5
|
|
|
2022
|
|
28.5
|
|
|
2023
|
|
23.4
|
|
|
Thereafter
|
|
77.9
|
|
|
Total future minimum lease payments
|
|
$
|
259.5
|
|
Note 21 - Subsequent Events
Dividend Declaration
On November 4, 2019, our Board of Directors voted to declare a quarterly cash dividend of $0.30 per share of our common stock, payable on December 2, 2019 to shareholders of record on November 18, 2019.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchase of Biofuel Production Assets
Effective October 1, 2019, we acquired certain assets of JNS Biofuel, LLC, a biodiesel facility located in New Albany, Mississippi for a total purchase price of $8.0 million. The assets acquired consisted primarily of real property and integral equipment.