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).
Effective July 1, 2017 (the "Effective Time"), we acquired the outstanding common stock of Alon (previously listed under NYSE: ALJ) (the "Delek/Alon Merger", as further discussed in
Note 2
), resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc. (“New Delek”), with Alon and the previous Delek US Holdings, Inc. (“Old Delek”) surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, as a result of the Delek/Alon Merger, the shares of common stock of Old Delek and Alon were delisted from the New York Stock Exchange ("NYSE") in July 2017, and their respective reporting obligations under the Exchange Act were terminated.
Unless otherwise indicated or the context requires otherwise, the disclosures and financial information included in this report for the periods prior to July 1, 2017 reflect that of Old Delek, and the disclosures and financial information included in this report for the periods beginning July 1, 2017 reflect that of New Delek. The terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Old Delek and its consolidated subsidiaries for the periods prior to July 1, 2017, and New Delek and its consolidated subsidiaries for the periods on or after July 1, 2017, unless otherwise noted. New Delek's Common Stock is listed on the NYSE under the symbol "DK."
During the third quarter 2017, we committed to a plan to sell certain assets associated with our Paramount and Long Beach, California refineries and Alon's California renewable fuels facility (collectively, the "California Discontinued Entities"), which were acquired as part of the Delek/Alon Merger. As a result of this decision and commitment to a plan, and because it was made within three months of the Delek/Alon Merger, we met the requirements under Accounting Standards Codification ("ASC") 205-20,
Presentation of Financial Statements - Discontinued Operations
("ASC 205-20") and ASC 360,
Property, Plant and Equipment
("ASC 360") to report the results of the California Discontinued Entities as discontinued operations and to classify the California Discontinued Entities as a group of assets held for sale. On March 16, 2018, Delek sold to World Energy, LLC (i) all of Delek’s membership interests in AltAir Paramount, LLC (Alon's California renewable fuels facility), (ii) certain refining assets and other related assets located in Paramount, California and (iii) certain associated tank farm and pipeline assets and other related assets located in California. The 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. See
Note 5
for further information regarding the California Discontinued Entities.
On February 12, 2018, Delek announced it had reached a definitive agreement to sell certain assets and operations of
four
asphalt terminals (included in Delek's corporate/other segment), as well as an equity method investment in an additional asphalt terminal, to an affiliate of Andeavor. This transaction includes asphalt terminal assets in Bakersfield, Mojave and Elk Grove, California and Phoenix, Arizona, as well as Delek’s
50 percent
equity interest in the Paramount-Nevada Asphalt Company, LLC joint venture that operates an asphalt terminal located in Fernley, Nevada. On May 21, 2018, Delek completed the transaction and received net proceeds of approximately
$110.8 million
, inclusive of the
$75.0 million
base proceeds as well as certain preliminary working capital adjustments. These associated assets did not meet the definition of held for sale pursuant to ASC 360 as of
December 31, 2017
, and therefore were not reflected as held for sale nor as discontinued operations in the consolidated financial statements as of and for the year ended
December 31, 2017
. See
Note 5
for further information regarding the disposal of these assets held for sale.
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 financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on
March 1, 2018
(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, 2017
included in our Annual Report on Form 10-K.
Our condensed consolidated financial statements include Delek Logistics Partners, LP ("Delek Logistics"), Alon USA Partners, LP (the "Alon Partnership") and AltAir Paramount LLC ("AltAir"), all variable interest entities as of
December 31, 2017
. However, Delek acquired the non-controlling interest in the Alon Partnership on February 7, 2018 and sold AltAir on March 16, 2018. Thus, Delek Logistics is Delek's only remaining variable interest entity as of
September 30, 2018
. 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
Certain prior period amounts have been reclassified in order to conform to the current period presentation. Additionally, certain changes to presentation of the prior period statements of income have been made in order to conform to the current period presentation, primarily relating to the addition of a subtotal entitled 'cost of sales' which includes all costs directly attributable to the generation of the related revenue, as defined by GAAP, and the retitling of what was previously referred to as 'cost of goods sold' to 'cost of materials and other'. In connection with this change in presentation, we have revised our related accounting policy as follows:
Cost of Materials and Other and Operating Expenses
For the refining segment, cost of materials and other includes (i) the direct cost of materials (such as crude oil and other refinery feedstocks, refined petroleum products and blendstocks, and ethanol feedstocks and products) that are a component of our products sold; (ii) costs related to the delivery (such as shipping and handling costs) of products sold; (iii) costs related to our environmental credit obligations to comply with various governmental and regulatory programs (such as the cost of renewable identification numbers as required by the EPA’s Renewable Fuel Standard and emission credits under various cap-and-trade systems); and (iv) gains and losses on our commodity derivative instruments.
Operating expenses for the refining segment include the costs to operate our refineries and biodiesel facilities, excluding depreciation and amortization. These costs primarily include employee-related expenses, energy and utility costs, catalysts and chemical costs, and repairs and maintenance expenses.
For the logistics segment, cost of materials and other includes (i) all costs of purchased refined products, additives and related transportation of such products, (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance, (iii) the cost of pipeline capacity leased from a third-party, and (iv) gains and losses related to our commodity hedging activities.
Operating expenses for the logistics segment include the costs associated with the operation of owned terminals and pipelines and terminalling expense at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business.
For the retail segment, cost of materials and other comprises the costs related to specific products sold at retail sites, primarily consisting of motor fuels and merchandise. Retail fuel cost of sales represents the cost of purchased fuel, including transportation costs. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions. Operating expenses related to the retail business include costs such as wages of employees, lease expense, utility expense and other costs of operating the stores, excluding depreciation and amortization, and are excluded from cost of sales because they primarily relate to costs associated with selling the products through our retail sites.
Depreciation and amortization is separately presented in our statement of income and disclosed by reportable segment in
Note 14
.
New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (the "FASB") issued guidance related to customers’ accounting for implementation costs incurred in a cloud computing arrangement that is considered a service contract. This pronouncement aligns the requirements for capitalizing implementation costs in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. 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 or before 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.
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 or before 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.
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 or before 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Reform Act"), which was signed into law on December 22, 2017. Consequently, the amendments eliminate the stranded tax effects related to items in accumulated other comprehensive income resulting from the Tax Reform Act. The new guidance may be applied retrospectively to each period in which the effect of the Tax Reform Act is recognized, or in the period of adoption. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We elected to early adopt this guidance effective January 1, 2018. As a result of adopting this guidance, we reclassified
$1.6 million
from AOCI to retained earnings. The effect of the Tax Reform Act on temporary differences related to amounts initially recorded in AOCI are provisional. As we finalize the accounting for tax effects of the Tax Reform Act on the related temporary differences, additional reclassification adjustments may be recorded in future periods. See
Note 11
for further discussion.
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 will be recognized within equity in the consolidated balance sheet as of the date of adoption. Early adoption is permitted, including in an interim period. If a company early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. We expect to adopt this guidance on or before 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.
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The modification accounting guidance applies if the value, vesting conditions or classification of the award changes. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance should be applied prospectively to an award modified on or after the adoption date. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations.
In March 2017, the FASB issued guidance that will require that an employer disaggregate the service cost component from the other components of net benefit cost with respect to defined benefit postretirement employee benefit plans. Service cost is required to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be reported outside the subtotal for operating income. Additionally, only the service cost component of net benefit costs are eligible for capitalization. The guidance became effective January 1, 2018. We adopted this guidance on January 1, 2018, which will retrospectively impact the presentation of our third and fourth quarter 2017 statements of income as a result of the pension and postretirement obligations assumed in the Delek/Alon Merger. As further discussed in
Note 18
, only the service cost component of net periodic benefit costs are included as part of general and administrative expenses in the accompanying condensed consolidated statements of income. The other components of net periodic benefit costs are included as part of other non-operating expenses (income), net. As a practical expedient, we used the amounts disclosed regarding our pension and other postretirement benefit plans for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements in our current Quarterly Report on Form 10-Q and will also do so in our 2018 Annual Report on Form 10-K. This will require recasting of prior periods subsequent to the Delek/Alon Merger. The following table details the impact of the retrospective adoption of this standard for the
three and nine
months ended
September 30, 2017
.
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Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2017
|
|
September 30, 2017
|
|
|
(in millions)
|
|
As Reported
|
Adjustment
|
As Adjusted
|
|
As Reported
|
Adjustment
|
As Adjusted
|
|
|
General and administrative expenses
|
$
|
61.8
|
|
$
|
6.2
|
|
$
|
68.0
|
|
|
$
|
115.8
|
|
$
|
6.2
|
|
$
|
122.0
|
|
|
|
Other expense (income), net
|
|
$
|
0.8
|
|
$
|
(6.2
|
)
|
$
|
(5.4
|
)
|
|
$
|
0.9
|
|
$
|
(6.2
|
)
|
$
|
(5.3
|
)
|
|
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The amendments in this guidance should be applied using either i) a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption or ii) a retrospective basis to each period presented in the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In January 2017, the FASB issued guidance concerning the goodwill impairment test that eliminates Step 2, which required a comparison of the implied fair value of goodwill of the reporting unit with the carrying amount of that goodwill for that reporting unit. It also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative assessment, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. As permitted under Accounting Standards Update 2017-04, we expect to early adopt this guidance in the fourth quarter of 2018 in connection with our 2018 goodwill impairment tests to be performed as of October 31, 2018. We do not anticipate that the adoption will have a material impact on our business, financial condition or results of operations.
In October 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on January 1, 2018. As a result of adopting this guidance, we decreased retained earnings by
$29.9 million
for the cumulative effect as of January 1, 2018.
In August 2016, the FASB issued guidance that clarifies eight cash flow classification issues pertaining to cash receipts and cash payments. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations, except for reclassifications of certain distributions received from equity method investees, due to Delek making an accounting policy election to classify distributions received from equity method investees using the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings (as adjusted for amortization of basis differences) recognized by the investor. When such an excess occurs, the current-period distribution up to this excess should be considered a return of investment and classified as cash inflows from investing activities. This resulted in a reclassification of
$10.9 million
of distributions received in the
nine
months ended
September 30, 2017
from the line item entitled dividends from equity method investments in net cash provided by (used in) operating activities to the line item entitled distributions from equity method investments in net cash provided by (used in) investing activities in the condensed consolidated statements of cash flows.
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. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance is effective for interim and annual periods beginning after December 15, 2019. We expect to adopt this guidance on or before 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.
In February 2016, 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. Subsequent guidance was issued to consider the impact of practical expedients. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt the new lease standard on January 1, 2019. We plan to elect the package of practical expedients which, among other things, allows us to carry forward the historical lease classification. We plan to also elect 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 plan to elect 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 do not plan to elect the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term.
As part of our efforts to prepare for adoption, beginning in 2018, we formed a project implementation team, as well as a project timeline, to evaluate the guidance. We have substantially completed our analysis of existing leases and the impact on our business processes and accounting systems. We continue to evaluate the impact of the guidance on our controls and financial statement disclosures, and expect to implement any changes to accommodate the new accounting and disclosure requirements prior to adoption on January 1, 2019. We anticipate adoption of the guidance will have a material impact on our consolidated balance sheet, but will not have a material impact on our consolidated income statement. We anticipate that the most significant impact will be the recognition of the lease liability and a right-of-use asset on our consolidated balance sheet.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In January 2016, the FASB issued guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. It will require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and will eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations.
In May 2014, the FASB issued guidance as codified in Accounting Standards Codification ("ASC") 606, “Revenue from Contracts with Customers ("ASC 606),” to clarify the principles for recognizing revenue. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and can be adopted retrospectively. We adopted this guidance on January 1, 2018, using the modified retrospective transition method applied to contracts which were not completed as of January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.
The Company has updated its policies as it relates to revenue recognition. Revenue is measured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or by providing services to a customer. The adoption of ASC 606 did not materially change our revenue recognition patterns, which are described below by reportable segment:
Refining
Revenues for products sold are recorded at the point of sale upon delivery of product, which is the point at which title to the product is transferred, the customer has accepted the product and the customer has significant risks and rewards of owning the product. We typically have a right to payment once control of the product is transferred to the customer. Transaction prices for these products are typically at market rates for the product at the time of delivery. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
Logistics
Revenues for products sold are generally recognized upon delivery of the product, which is when title and control of the product is transferred. Transaction prices for these products are typically at market rates for the product at the time of delivery. Service revenues are recognized as crude oil, intermediate and refined product are shipped through, delivered by or stored in our pipelines, trucks, terminals and storage facility assets, as applicable. We do not recognize product revenues for these services as the product does not represent a promised good in the context of ASC 606. All service revenues are based on regulated tariff rates or contractual rates. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
Retail
Fuel and merchandise revenue is recognized at the point of sale, which is when control of the product is transferred to the customer. Payments from customers are received at the time sales occur in cash or by credit or debit card. We derive service revenues from the sale of lottery tickets, money orders, car washes and other ancillary product and service offerings. Service revenue and related costs are recorded at gross amounts or net amounts, as appropriate, in accordance with the principal versus agent provisions in ASC 606.
Refer to
Note 14
for disclosure of our revenue disaggregated by segment, as well as a description of our reportable segment operations.
Sales, Use and Excise Taxes
Upon
the adoption of ASC 606,
we made the accounting policy election to exclude from revenue all taxes assessed by a governmental authority, including sales, use and excise taxes, that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. Sales, use and excise taxes were also excluded from revenue historically in accordance with the applicable guidance in ASC 605,
Revenue Recognition
.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2
- Acquisitions
In January 2017, we announced that Old Delek (and various related entities) entered into a merger agreement with Alon, as amended (the "Merger Agreement"). The related Merger (the "Merger" or the "Delek/Alon Merger") was effective July 1, 2017 (as previously defined, the “Effective Time”), resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc. (as previously defined, “New 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. Prior to the Merger, Old Delek owned a non-controlling equity interest of approximately
47%
of the outstanding shares of Alon, which was accounted for under the equity method of accounting (See
Note 4
).
Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each issued and outstanding share of Alon Common Stock, other than shares owned by Old Delek and its subsidiaries or held in the treasury of Alon, was converted into the right to receive
0.504
of a share of New Delek Common Stock, or, in the case of fractional shares of New Delek Common Stock, cash (without interest) in an amount equal to the product of (i) such fractional part of a share of New Delek Common Stock multiplied by (ii)
$25.96
per share, which was the volume weighted average price of the Old Delek Common Stock, par value
$0.01
per share as reported on the NYSE Composite Transactions Reporting System for the twenty consecutive NYSE full trading days ending on June 30, 2017. Each outstanding share of restricted Alon Common Stock was assumed by New Delek and converted into restricted stock denominated in shares of New Delek Common Stock, using the conversion rate applicable to the Merger. Committed but unissued share-based awards were exchanged and converted into rights to receive share-based awards indexed to New Delek Common Stock.
In addition, subject to the terms and conditions of the Merger Agreement, each share of Old Delek Common Stock or fraction thereof issued and outstanding immediately prior to the Effective Time (other than Old Delek Common Stock held in the treasury of Old Delek, which was retired in connection with the Merger) was converted at the Effective Time into the right to receive
one
validly issued, fully paid and non‑assessable share of New Delek Common Stock or such fraction thereof equal to the fractional share of New Delek Common Stock. All existing Old Delek stock options, restricted stock awards and stock appreciation rights were converted into equivalent rights with respect to New Delek Common Stock.
In connection with the 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, supplementing the Indenture, dated as of September 16, 2013 (the “Original Indenture”; the Original Indenture, as amended by the Supplemental Indenture, is referred to as the "Indenture"), pursuant to which Alon issued its
3.00%
Convertible Senior Notes due 2018 (the “Convertible Notes”), which were convertible into shares of Alon’s Common Stock, par value
$0.01
per share or cash or a combination of cash and Alon Common Stock, all as provided in the Indenture. The Supplemental Indenture provided that, as of the Effective Time, the right to convert each
$1,000
principal amount of the Convertible Notes based on a number of shares of Alon Common Stock equal to the Conversion Rate (as defined in the Indenture) in effect immediately prior to the Merger was changed into a right to convert each
$1,000
principal amount of Convertible Notes into or based on a number of shares of New Delek Common Stock (at the exchange rate of
0.504
), par value
$0.01
per share, equal to the Conversion Rate in effect immediately prior to the Merger. In addition, the Supplemental Indenture provided that, as of the Effective Time, New Delek fully and unconditionally guaranteed, on a senior basis, Alon’s obligations under the Convertible Notes. See
Note 8
for further discussion.
In connection with the Indenture, Alon also entered into equity instruments, including Call Options and 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 equity instruments, in addition to the conversion feature, represented equity instruments originally indexed to Alon Common Stock that were exchanged for instruments with terms designed to preserve the original economic intent of such instruments and indexed to New Delek Common Stock in connection with the Merger. See Note
8
for further discussion.
Alon was a refiner and marketer of petroleum products, operating primarily in the south central, southwestern and western regions of the United States. In connection with the Delek/Alon Merger, Delek acquired
100%
of the general partner and
81.6%
of the limited partner interests in the Alon Partnership, which owns a crude oil refinery in Big Spring, Texas with a crude oil throughput capacity of
73,000
barrels per day ("bpd") and an integrated wholesale marketing business. Delek acquired the non-controlling interest in the Alon Partnership on February 7, 2018. In addition, as a result of the Delek/Alon Merger, Delek acquired a crude oil refinery in Krotz Springs, Louisiana with a crude oil throughput capacity of
74,000
bpd. In connection with the Delek/Alon Merger, Delek also acquired crude oil refineries in California, which have not processed crude oil since 2012. On March 16, 2018, Delek sold to World Energy, LLC the Paramount, California refinery and the California renewables facility (AltAir). The transaction to dispose of certain assets and liabilities associated with the Long Beach, California refinery, to Bridge Point Long Beach, LLC, closed July 17, 2018. Alon was a marketer of asphalt, which it distributed through asphalt terminals located predominantly in the southwestern and western United States. On May 21, 2018, Delek sold
four
asphalt terminals (included in Delek's corporate/other segment) and its
50%
interest in an asphalt joint venture to an affiliate of Andeavor. See further discussion in
Note 1
and
Note 5
. Finally, in connection with the Delek/Alon Merger, Delek acquired Alon's retail business where Alon was the largest 7-Eleven licensee in the United States operating approximately
300
convenience stores which market motor fuels in central and west Texas and New Mexico.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 ) and
$18.4 million
and
$22.4 million
for the
three and nine
months ended
September 30, 2017
, respectively. Such costs were included in general and administrative expenses in the accompanying condensed consolidated statements of income.
The 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.
The components of the consideration transferred were as follows (dollars in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Delek common stock issued
|
|
19,250,795
|
|
|
|
|
Ending price per share of Delek Common Stock immediately before the Effective Time
|
|
$
|
26.44
|
|
|
|
|
Total value of common stock consideration
|
|
|
|
$
|
509.0
|
|
|
Additional consideration
(1)
|
|
|
|
21.7
|
|
|
Fair value of Delek's pre-existing equity method investment in Alon
(2)
|
|
|
|
449.0
|
|
|
|
|
|
|
$
|
979.7
|
|
The final allocation of the aggregate purchase price as of
September 30, 2018
(which was finalized as of June 30, 2018) is summarized as follows (in millions), and is inclusive of the California Discontinued Entities discussed in
Note 5
:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
215.3
|
|
|
Receivables
|
|
176.8
|
|
|
Inventories
|
|
266.3
|
|
|
Prepaids and other current assets
|
|
38.7
|
|
|
Property, plant and equipment
(3)
|
|
1,130.3
|
|
|
Equity method investments
|
|
31.0
|
|
|
Acquired intangible assets
(4)
|
|
86.7
|
|
|
Goodwill
(5)
|
|
870.7
|
|
|
Other non-current assets
|
|
37.0
|
|
|
Accounts payable
|
|
(263.4
|
)
|
|
Obligation under Supply & Offtake Agreements
|
|
(208.9
|
)
|
|
Current portion of environmental liabilities
|
|
(7.9
|
)
|
|
Other current liabilities
|
|
(308.6
|
)
|
|
Environmental liabilities and asset retirement obligations, net of current portion
|
|
(226.7
|
)
|
|
Deferred income taxes
|
|
(194.0
|
)
|
|
Debt
|
|
(568.0
|
)
|
|
Other non-current liabilities
(6)
|
|
(95.6
|
)
|
|
Fair value of net assets acquired
|
|
$
|
979.7
|
|
|
|
|
|
(1)
|
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.
|
(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.
(3)
This fair value of property, plant and equipment is based on a valuation using a combination of the income, cost and market approaches. The useful lives are based upon guidelines for similar equipment, chronological age since installation and consideration of costs spent on upgrades, repairs, turnarounds and rebuilds.
(4)
The acquired intangible assets amount includes the following identified intangibles:
|
|
|
|
•
|
Third-party fuel supply agreement intangible that is subject to amortization with a fair value of
$49.0 million
, which is being amortized over a
10
-year useful life. We recognized amortization expense for the
three and nine
months ended
September 30, 2018
of
$1.2 million
and
$3.6 million
, respectively. The estimated annual amortization is
$4.9 million
for the current and the four succeeding fiscal years.
|
|
|
|
|
•
|
Fuel trade name intangible valued at
$4.0 million
, which will be amortized over
5
years. We recognized amortization expense for the
three and nine
months ended
September 30, 2018
of
$0.2 million
and
$0.6 million
, respectively. The estimated annual amortization is
$0.8 million
for the current and the three succeeding fiscal years, with
$0.4 million
in the fourth succeeding year.
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
•
|
License agreements intangible valued at
$2.6 million
, which is being amortized over
8.7 years
. We recognized amortization expense for the
nine
months ended
September 30, 2018
of
$0.1 million
, as this intangible was sold in the first quarter of 2018.
|
|
|
|
|
•
|
Rights-of-way intangible valued at
$9.5 million
, which has an indefinite life.
|
|
|
|
|
•
|
Liquor license intangible valued at
$8.5 million
, which has an indefinite life.
|
|
|
|
|
•
|
Colonial Pipeline shipping rights intangible valued at
$1.7 million
, which has an indefinite life.
|
|
|
|
|
•
|
Refinery permits valued at
$3.1 million
, which have an indefinite life.
|
|
|
|
|
•
|
Below-market lease intangibles valued at
$8.3 million
, which is being amortized over the remaining lease term.
|
(5)
Goodwill generated as a result of the Delek/Alon Merger consists of the value of expected synergies from combining operations, the acquisition of an existing integrated refining, marketing and retail business located in areas with access to cost–advantaged feedstocks with an assembled workforce that cannot be duplicated at the same costs by a new entrant, and the strategic advantages of having a larger market presence. The total amount of goodwill that is expected to be deductible for tax purposes is
$15.5 million
. Goodwill has been allocated to reportable segments based on various relevant factors. The updated allocation of goodwill to reportable segments in connection with the purchase price allocation is as follows: Refining -
$801.3 million
and Retail-
$44.3 million
. The remainder relates to the asphalt operations, which was included in the corporate, other and eliminations segment, and which was subsequently written off as part of the impairment on assets held for sale during the first quarter of 2018.
(6)
The assumed other non-current liabilities include liabilities related to above-market leases fair valued at
$15.8 million
, which is being amortized over the remaining lease term.
The following unaudited pro forma financial information presents the condensed combined results of operations of Delek and Alon for the
nine
months ended
September 30, 2017
as if the Delek/Alon Merger had occurred on January 1, 2017, and reflects the final purchase price allocation. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been reported had the Delek/Alon merger been completed as of January 1, 2017, and should not be taken as indicative of New Delek's future consolidated results of operations. In addition, the unaudited pro forma condensed combined results of operations do not reflect any cost savings or associated costs to achieve such savings from operating efficiencies, synergies, debt refinancing or other restructuring that may result from the Delek/Alon Merger. The pro forma financial information also does not reflect certain non-recurring adjustments that have been or are expected to be recorded in connection with the Delek/Alon Merger, including any accrual for integration costs or transaction costs or additional transactions costs related to the Merger, nor any retrospective adjustments related to the conforming of Alon's accounting policies to Delek's accounting policies, as such adjustments are impracticable to determine, and such adjustments are not expected to be indicative of on-going operations of the combined company. Finally, the pro forma presentation of net revenues and net income is inclusive of the revenue and net income (loss) attributable to the California Discontinued Entities (which are generally not material as the majority of the California Discontinued Entities were non-operating during the pro forma period). Pro forma adjustments are tax-effected at the Company's estimated statutory tax rates.
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
Nine Months Ended September 30, 2017
(1)
|
|
Net revenues
|
|
$
|
6,994.1
|
|
|
Net income attributable to Delek
|
|
$
|
3.5
|
|
|
Earnings per share:
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
0.04
|
|
(1)
The pro forma information for the
nine
months ended
September 30, 2017
presented in our
September 30, 2017
Quarterly Report on Form 10-Q has been updated to reflect the final purchase price allocation in the table above.
The unaudited pro forma statements of operations reflect the following adjustments:
|
|
|
|
•
|
To eliminate transactions between Delek and Alon for purchases and sales of refined products, reducing revenue and the associated cost of materials and other. Such pro forma eliminations resulted in a decrease to combined pro forma revenue by
$59.0 million
for the
nine
months ended
September 30, 2017
.
|
|
|
|
|
•
|
To eliminate the non-recurring transaction costs incurred during the historical periods. Such adjustments to general and administrative expense have been estimated to result in an increase to pro forma pre-tax income attributable to Delek totaling
$11.5 million
for the
nine
months ended
September 30, 2017
.
|
|
|
|
|
•
|
To retrospectively reflect depreciation of property, plant and equipment and amortization of intangibles based on the fair value of the assets as of the acquisition date, as if that fair value had been reflected beginning January 1, 2017, and to retrospectively eliminate the amortization of any previously recorded intangibles. Such adjustments to depreciation and amortization have been estimated to result in an increase to pro forma pre-tax income attributable to Delek totaling
$34.7 million
for the
nine
months months ended
September 30, 2017
.
|
|
|
|
|
•
|
To retrospectively reflect the accretion of asset retirement obligations and certain environmental liabilities. Such adjustments to general and administrative expense have been estimated to result in a decrease to pro forma pre-tax income attributable to Delek totaling
$0.8 million
for the
nine
months ended
September 30, 2017
.
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
•
|
To retrospectively reflect adjustments to interest expense, including the impact of discounts or premiums created by the difference in fair value and outstanding amounts as of the acquisition date (collectively, the “new effective yield”), by applying the new effective yield to historical outstanding amounts in the pro forma period and reversing previously recognized interest expense. Such net adjustments to interest expense have been estimated to result in an increase to pro forma pre-tax income attributable to Delek totaling
$9.4 million
for the
nine
months ended
September 30, 2017
.
|
|
|
|
|
•
|
To eliminate Delek’s equity income previously recorded on its equity method investment in Alon, prior to the Merger. Such pro forma elimination resulted in a decrease to pro forma pre-tax income attributable to Delek totaling
$3.2 million
for the
nine
months ended
September 30, 2017
.
|
|
|
|
|
•
|
To eliminate the gain on remeasurement of the equity method investment in Alon totaling
$190.1 million
during the nine months ended
September 30, 2017
.
|
|
|
|
|
•
|
To record the tax effect on pro forma adjustments and additional tax benefit associated with dividends received from Alon at a combined U.S. (federal and state) income tax statutory blended rate of approximately
37%
for both the
nine
months ended
September 30, 2017
.
|
|
|
|
|
•
|
To adjust the weighted average number of shares outstanding based on
0.504
of a share of Delek common stock for each share of Alon common stock outstanding as of July 1, 2017, as if they were outstanding for the entire nine months ended
September 30, 2017
, reflecting the elimination of Alon historical weighted average shares outstanding and the addition of the estimated New Delek incremental shares issued.
|
Delek began consolidating Alon's results of operations on July 1, 2017. Alon operations contributed
$521.0 million
and
$2,262.3 million
to net revenues and
$153.0 million
and
$210.3 million
to pre-tax income for the
three and nine
months ended
September 30, 2018
, respectively, inclusive of the contribution of the California Discontinued Entities. Alon operations contributed
$1,008.8 million
to net revenues and and
$33.4 million
to pre-tax income for the
three and nine
months ended
September 30, 2017
, inclusive of the contribution of the California Discontinued Entities.
Updates to the Preliminary Purchase Price Allocation
During the
nine
months ended
September 30, 2018
, we finalized our procedures to determine the fair value of assets acquired and liabilities assumed in the Delek/Alon Merger, as anticipated and disclosed in our 2017 Annual Report on Form 10-K (all of which were completed by June 30, 2018). As a result, the following changes were made to the preliminary purchase price allocation disclosed in our Annual Report on Form 10-K:
|
|
|
|
|
|
|
|
|
Subsequent increases (decreases) to initial allocation of fair value of net assets acquired:
|
|
|
|
Receivables
(1)
|
|
$
|
10.7
|
|
|
Inventories
|
|
(0.5
|
)
|
|
Prepaids and other current assets
(2)
|
|
9.7
|
|
|
Property, plant and equipment
|
|
(0.2
|
)
|
|
Acquired intangible assets
(3)
|
|
7.7
|
|
|
Accounts payable
(4)
|
|
6.0
|
|
|
Obligation under Supply & Offtake Agreements
(5)
|
|
10.9
|
|
|
Current portion of environmental liabilities
|
|
0.4
|
|
|
Other current liabilities
(6)
|
|
22.3
|
|
|
Environmental liabilities and asset retirement obligations, net of current portion
(7)
|
|
65.3
|
|
|
Deferred income taxes
(8)
|
|
(8.4
|
)
|
|
Other non-current liabilities
(9)
|
|
(2.8
|
)
|
|
Resulting increase to goodwill
|
|
$
|
66.3
|
|
(1)
Change primarily relates to the recognition of a receivable associated with a third-party indemnification agreement for asset retirement obligations for one of the acquired refineries that was previously under review, and finalization of an accrued receivable estimate.
(2)
Change primarily relates to a reclassification of Renewable Identification Numbers ("RINs") assets from other current liabilities to other current assets.
(3)
Change is primarily due to the addition of an intangible asset for certain below-market leases that had previously been identified but for which the evaluation and determination of fair value was not complete at December 31, 2017.
(4)
Change is primarily due to the elimination of amounts in accounts payable in the retail segment that were determined not to have value combined with reclassifications of amounts to accounts receivable.
(5)
Change relates to true-up of certain accounts related to one of the acquired supply and offtake agreements for contractual terms that were previously under review.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(6)
Change is primarily due to an increase related to the reclassification of RINs assets from other current liabilities to other current assets and an increase related to the accrual of certain executive bonuses that were required under existing Alon employment agreements and related to service provided prior to the Delek/Alon Merger, net of adjustments to current income taxes payable to true up income taxes related to the acquired net assets.
(7)
Change is to record the long-term portion of additional asset retirement obligations and environmental liabilities identified and/or to update preliminary estimates based on additional information.
(8)
Change is related to adjustments to net deferred tax liabilities based on the updated purchase price allocation and revisions of preliminary tax estimates.
(9)
Change is related to the reversal of an accrual established in the purchase price allocation related to a pre-acquisition legal contingency that was resolved during the first quarter 2018 in our favor.
During the
nine
months ended
September 30, 2018
, certain immaterial catch-up 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.
Note 3
- 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, 2018
, 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
497,861
general partner units, in Delek Logistics and all of the incentive distribution rights.
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 our Big Spring, Texas refinery (the "Big Spring Logistic Assets Acquisition"), which included the execution of related commercial agreements. In addition, a new marketing agreement was entered into between the subsidiary of Delek Logistics and the Alon Partnership pursuant to which the subsidiary of Delek Logistics will provide marketing services for product sales from Big Spring. 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 DKL Credit Facility (as defined in
Note 8
of the condensed consolidated financial statements in Item 1, Financial Statements). Prior periods have not been recast in our Segment Data
Note 14
, as these assets did not constitute a business in accordance with the Accounting Standard Update, "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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Delek Logistics is a variable interest entity, as defined under GAAP, and is consolidated into our condensed consolidated financial statements, representing our logistics segment. With the exception of intercompany balances and the marketing agreement intangible asset and Delek's related deferred revenue which are eliminated in consolidation, the Delek Logistics condensed consolidated balance sheets as of
September 30, 2018
and
December 31, 2017
, as presented below, are included in the consolidated balance sheets of Delek (unaudited, in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19.0
|
|
|
$
|
4.7
|
|
|
Accounts receivable
|
|
21.8
|
|
|
23.0
|
|
|
Accounts receivable from related parties
|
|
51.2
|
|
|
1.1
|
|
|
Inventory
|
|
4.2
|
|
|
20.9
|
|
|
Other current assets
|
|
0.4
|
|
|
0.7
|
|
|
Property, plant and equipment, net
|
|
314.7
|
|
|
255.1
|
|
|
Equity method investments
|
|
105.2
|
|
|
106.5
|
|
|
Goodwill
|
|
12.2
|
|
|
12.2
|
|
|
Intangible assets, net
|
|
155.9
|
|
|
15.9
|
|
|
Other non-current assets
|
|
9.0
|
|
|
3.4
|
|
|
Total assets
|
|
$
|
693.6
|
|
|
$
|
443.5
|
|
|
LIABILITIES AND DEFICIT
|
|
|
|
|
|
Accounts payable
|
|
$
|
11.5
|
|
|
$
|
19.1
|
|
|
Accrued expenses and other current liabilities
|
|
14.7
|
|
|
12.6
|
|
|
Long-term debt
|
|
776.7
|
|
|
422.6
|
|
|
Asset retirement obligations
|
|
5.1
|
|
|
4.1
|
|
|
Other non-current liabilities
|
|
16.0
|
|
|
14.3
|
|
|
Deficit
|
|
(130.4
|
)
|
|
(29.2
|
)
|
|
Total liabilities and deficit
|
|
$
|
693.6
|
|
|
$
|
443.5
|
|
Alon Partnership
The Alon Partnership owns the assets and conducts the operations of the Big Spring refinery and the associated integrated wholesale marketing operations. On November 8, 2017, Delek and the Alon Partnership entered into a definitive merger agreement under which Delek agreed to acquire all of the outstanding limited partner units which Delek did not already own in an all-equity transaction (the "Alon Partnership Merger"). This transaction closed on February 7, 2018 (the "Merger Date"). 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.
The limited partner interests of the Alon Partnership prior to this acquisition were represented as common units outstanding. As of
December 31, 2017
, the
11,492,800
common units held by the public represented approximately
18.4%
of the Alon Partnership’s common units outstanding. Alon USA Partners GP, LLC (the “Alon General Partner”), our wholly-owned subsidiary, owns
100%
of the general partner interest in the Alon Partnership, which is a non-economic interest.
The limited partner interests in the Alon Partnership not owned by us as of
December 31, 2017
are reflected in non-controlling interest in subsidiaries in the accompanying condensed consolidated balance sheet.
Prior to the Alon Partnership Merger, we had agreements with the Alon Partnership, under which the Alon Partnership agreed to reimburse us for certain administrative and operational services provided by us and our subsidiaries to the Alon Partnership, indemnify us with respect to certain matters and establish terms for the supply of products by the Alon Partnership to us.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Prior to the Merger Date, the Alon Partnership was a variable interest entity, as defined under GAAP, and was consolidated into our condensed consolidated financial statements as part of the refining segment. We have elected to push down purchase accounting to the Alon Partnership, which resulted in the push-down of the preliminary fair value of equity as purchase price consideration based on the market value of the Alon Partnership units as of the Merger Date, and the fair valuing of assets and liabilities as of the Merger Date. Such push-down purchase accounting also resulted in a determination of the fair value of our non-controlling interest in the Alon Partnership, which was estimated to be
$120.6 million
. With the exception of intercompany balances, which are eliminated in consolidation, the Alon Partnership condensed consolidated balance sheet as of
December 31, 2017
(required disclosure for a consolidated variable interest entity), as presented below, is included in the consolidated balance sheet of Delek (unaudited, in millions).
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
|
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
|
$
|
252.8
|
|
|
Accounts receivable
|
|
96.7
|
|
|
Accounts receivable from related parties
|
|
640.0
|
|
|
Inventories
|
|
133.2
|
|
|
Prepaid expenses and other current assets
|
|
5.9
|
|
|
Property, plant and equipment, net
|
|
413.3
|
|
|
Goodwill
|
|
576.6
|
|
|
Other non-current assets
|
|
59.2
|
|
|
Total assets
|
|
$
|
2,177.7
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Accounts payable
|
|
$
|
44.5
|
|
|
Accounts payable to related parties
|
|
794.2
|
|
|
Accrued expenses and other current liabilities
|
|
161.9
|
|
|
Current portion of long-term debt
|
|
337.4
|
|
|
Obligation under Supply and Offtake Agreement
|
|
120.1
|
|
|
Deferred income tax liability
|
|
1.3
|
|
|
Other non-current liabilities
|
|
34.5
|
|
|
Equity
|
|
683.8
|
|
|
Total liabilities and equity
|
|
$
|
2,177.7
|
|
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
. Such costs were included in general and administrative expenses in the accompanying condensed consolidated statements of income.
As of
September 30, 2018
, the Alon Partnership is included in Delek's condensed consolidated balance sheet as a wholly-owned subsidiary.
Note 4
- Equity Method Investments
On May 14, 2015, Delek acquired from Alon Israel Oil Company, Ltd. ("Alon Israel") approximately
33.7 million
shares of common stock (the "ALJ Shares") of Alon pursuant to the terms of a stock purchase agreement with Alon Israel dated April 14, 2015 (the "Alon Acquisition"). The ALJ Shares represented an equity interest in Alon of approximately
48%
at the time of acquisition. Effective July 1, 2017, Alon became a wholly-owned subsidiary of New Delek in connection with the Delek/Alon Merger. See
Note 2
for further discussion.
Below are the summarized results of operations of Alon (in millions) for the
nine
months ended
September 30, 2017
, inclusive of the period through June 30, 2017 during which time Alon was accounted for as an equity method investment:
|
|
|
|
|
|
|
|
|
Income Statement Information
|
|
Nine Months Ended September 30, 2017
|
|
Revenue
|
|
$
|
2,269.7
|
|
|
Gross profit
|
|
351.2
|
|
|
Pre-tax income
|
|
20.0
|
|
|
Net income
|
|
15.0
|
|
|
Net income attributable to Alon
|
|
9.5
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Delek Logistics has
two
joint ventures that own and operate logistics assets, and which serve third parties and subsidiaries of Delek. As of
September 30, 2018
and
December 31, 2017
, Delek Logistics' investment balance in these joint ventures was
$105.2 million
and
$106.5 million
, respectively, and was accounted for using the equity method.
In July 2017, Delek Renewables, LLC invested in a joint venture with an unrelated third party that was formed to plan, develop, construct, own, operate and maintain a terminal consisting of an ethanol unit train facility with an ethanol tank in North Little Rock, Arkansas. This investment was financed through cash from operations. As of both
September 30, 2018
and
December 31, 2017
, Delek Renewables, LLC's investment balance in this joint venture was
$2.1 million
and was accounted for using the equity method. The investment in this joint venture is reflected in the refining segment.
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 5
for further discussion). As of
September 30, 2018
, Delek's investment balance in the Brownwood, Texas joint venture was
$24.0 million
and as of
December 31, 2017
, Delek's investment balance in both joint ventures was
$29.4 million
. These investments are accounted for using the equity method and are included as part of total assets in the corporate, other and eliminations segment.
Note 5
.
Discontinued Operations and Assets Held for Sale
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 (AltAir), which were acquired as part of the Delek/Alon Merger. As a result of this decision and commitment to a plan, and because it was made within three months of the Delek/Alon Merger, we met the requirements under ASC 205-20 and ASC 360 to report the results of the California Discontinued Entities as discontinued operations and to classify the California Discontinued Entities as a group of assets held for sale as of July 1, 2017. The property, plant and equipment of the California Discontinued Entities were recorded at fair value as part of the Delek/Alon Merger, and we have not recorded any depreciation of these assets since the Delek/Alon Merger.
On March 16, 2018, Delek sold to World Energy, LLC (i) all of Delek’s membership interests in AltAir (ii) certain refining assets and other related assets located in Paramount, California and (iii) certain associated tank farm and pipeline assets and other related assets located in California. Upon final settlement, Delek expects to receive net cash proceeds of approximately
$85.9 million
, subject to a post-closing working capital settlement, Delek’s portion of the expected biodiesel tax credit for 2017 and certain customary adjustments. The sale resulted in a loss on sale of discontinued operations totaling approximately
$41.2 million
during the
nine
months ended
September 30, 2018
(none during 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), with the remainder expected to be collected upon final settlement. In connection with the sale, the remaining assets and liabilities associated with the sold operations that were not included in the assets and liabilities acquired/assumed by the buyer were reclassified into assets and liabilities held and used (relating to continuing operations) and are presented as such in our
September 30, 2018
balance sheet.
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
three and nine
months ended
September 30, 2018
.
The carrying amount of the major classes of assets and liabilities of the California Discontinued Entities included in assets held for sale and liabilities associated with assets held for sale are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Assets held for sale:
|
|
|
|
Cash and cash equivalents
|
|
$
|
10.1
|
|
|
Accounts receivable
|
|
7.9
|
|
|
Inventory
|
|
1.9
|
|
|
Other current assets
|
|
1.3
|
|
|
Property, plant & equipment, net
|
|
130.0
|
|
|
Other intangibles, net
|
|
6.6
|
|
|
Other non-current assets
|
|
2.2
|
|
|
Assets held for sale
|
|
$
|
160.0
|
|
|
Liabilities associated with assets held for sale:
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
9.5
|
|
|
Deferred tax liabilities
|
|
63.9
|
|
|
Other non-current liabilities
|
|
32.5
|
|
|
Liabilities associated with assets held for sale
|
|
$
|
105.9
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Once the operating assets of the California Discontinued Entities met the criteria to be classified as assets held for sale, the operations associated with these properties qualified for reporting as discontinued operations. Accordingly, the operating results, net of tax, from discontinued operations 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. Classification as discontinued operations requires retrospective reclassification of the associated assets, liabilities and results of operations for all periods presented, beginning (in this case) as of the date of acquisition, which was July 1, 2017. Components of amounts reflected in income from discontinued operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Net revenues
|
|
$
|
—
|
|
|
38.3
|
|
|
32.5
|
|
|
38.3
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
—
|
|
|
(32.4
|
)
|
|
3.8
|
|
|
(32.4
|
)
|
|
Operating expenses (excluding depreciation and amortization)
|
|
(0.6
|
)
|
|
(8.4
|
)
|
|
(9.4
|
)
|
|
(8.4
|
)
|
|
Total cost of sales
|
|
(0.6
|
)
|
|
(40.8
|
)
|
|
(5.6
|
)
|
|
(40.8
|
)
|
|
General and administrative expenses
|
|
—
|
|
|
(2.9
|
)
|
|
(1.1
|
)
|
|
(2.9
|
)
|
|
Other operating income, net
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
Interest expense
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
|
Income (loss) on sale of California Discontinued Entities
|
|
1.4
|
|
|
—
|
|
|
(39.8
|
)
|
|
—
|
|
|
income (loss) from discontinued operations before taxes
|
|
0.8
|
|
|
(6.4
|
)
|
|
(10.7
|
)
|
|
(6.4
|
)
|
|
Income tax expense (benefit)
|
|
0.3
|
|
|
(2.3
|
)
|
|
(2.2
|
)
|
|
(2.3
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
0.5
|
|
|
$
|
(4.1
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(4.1
|
)
|
The net assets of the California Discontinued Entities include a non-controlling interest totaling
$10.5 million
as of
December 31, 2017
, related to AltAir. Net income attributable to non-controlling interest included
$8.1 million
related to AltAir for the
nine
months ended
September 30, 2018
(none for the three months ended
September 30, 2018
).
Asphalt Terminals Held for Sale
On February 12, 2018, Delek announced it had reached a definitive agreement to sell certain assets and operations of
four
asphalt terminals (included in Delek's corporate/other segment), as well as an equity method investment in an additional asphalt terminal, to an affiliate of Andeavor. This transaction includes asphalt terminal assets in Bakersfield, Mojave and Elk Grove, California and Phoenix, Arizona, as well as Delek’s
50 percent
equity interest in the Paramount-Nevada Asphalt Company, LLC joint venture that operates an asphalt terminal located in Fernley, Nevada. On May 21, 2018, Delek completed the transaction and received net proceeds of approximately
$110.8 million
, inclusive of the
$75.0 million
base proceeds as well as certain preliminary working capital adjustments. The assets associated with the owned terminals met the definition of held for sale pursuant to ASC 360 as of February 1, 2018, but did not meet the definition of discontinued operations pursuant to ASC 205-20, as the sale of these asphalt assets does not represent a strategic shift that will 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 ended
September 30, 2018
). All goodwill associated with the asphalt operations sold was written off in connection with the impairment charge discussed above. In connection with the completion of the sale transaction, we recognized a gain of approximately
$13.2 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). Such gain on sale of the asphalt assets is reflected in results of continuing operations on the accompanying consolidated income statement.
These associated assets did not meet the definition of held for sale pursuant to ASC 360 as of
December 31, 2017
, and therefore were not reflected as held for sale nor as discontinued operations in the consolidated financial statements as of and for the year ended
December 31, 2017
.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6
- Inventory
Crude oil, work in process, refined products, blendstocks and asphalt inventory for all of our operations, excluding the Tyler, Texas refinery (the "Tyler refinery") and merchandise inventory in our retail segment, are stated at the lower of cost determined using the FIFO basis or net realizable value. Cost of all inventory at the Tyler refinery is determined using the 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,
2018
|
|
December 31,
2017
|
|
Refinery raw materials and supplies
|
|
$
|
443.1
|
|
|
$
|
308.0
|
|
|
Refinery work in process
|
|
126.3
|
|
|
79.2
|
|
|
Refinery finished goods
|
|
312.1
|
|
|
366.4
|
|
|
Retail fuel
|
|
12.3
|
|
|
8.3
|
|
|
Retail merchandise
|
|
25.9
|
|
|
25.6
|
|
|
Logistics refined products
|
|
4.2
|
|
|
20.9
|
|
|
Total inventories
|
|
$
|
923.9
|
|
|
$
|
808.4
|
|
At
September 30, 2018
, we recorded a pre-tax inventory valuation reserve of
$0.6 million
,
$0.6 million
of which related to LIFO inventory due to a market price decline below our average cost of certain inventory products, which is subject to reversal in subsequent periods, not to exceed LIFO cost, should market prices recover. At
December 31, 2017
, we recorded a pre-tax inventory valuation reserve of
$2.4 million
,
$1.5 million
of which related to LIFO inventory, which reversed in the first quarter of
2018
, as the inventories associated with the valuation adjustment at the end of
2017
were sold or used. We recognized gains (losses) related to pre-tax inventory valuation of
$0.1 million
and
$1.8 million
for the
three and nine
months ended
September 30, 2018
, respectively, and
$12.0 million
and
$(1.5) million
for the
three and nine
months ended
September 30, 2017
, respectively. These gains (losses) were recorded as a component of cost of materials and other in the accompanying condensed consolidated statements of income.
Permanent Liquidations
We incurred a reduction in a LIFO layer resulting in liquidation (loss) gain in our refinery inventory of
$(0.1) million
and
$(0.3) million
during the
three and nine
months ended
September 30, 2018
, respectively, and
$0.4 million
and
$0.2 million
during the
three and nine
months ended
September 30, 2017
, respectively. These liquidation (losses) gains were recognized as a component of cost of materials and other in the accompanying condensed consolidated statements of income. Such liquidations become permanent to the extent that they do not reverse at the end of our annual period.
Note 7
- Crude Oil Supply and Inventory Purchase Agreements
Delek has Master Supply and Offtake Agreements (the "Supply and Offtake Agreements") with J. Aron & Company ("J. Aron").
El Dorado refinery operations
Throughout the term of the Supply and Offtake Agreement that supports the operations of our refinery located in El Dorado, Arkansas (the "El Dorado Supply and Offtake Agreement"), which was amended on February 27, 2017 to change, among other things, certain terms related to pricing and an extension of the maturity date to
April 30, 2020
, Lion Oil Company ("Lion Oil") (as the primary legal entity associated with the El Dorado refinery for purposes of this Agreement) and J. Aron will identify mutually acceptable contracts for the purchase of crude oil from third parties and J. Aron will supply up to
100,000
bpd of crude oil to the El Dorado refinery. Crude oil supplied to the El Dorado refinery by J. Aron will be purchased daily at an estimated average monthly market price by Lion Oil. J. Aron will also purchase all refined products from the El Dorado refinery at an estimated daily market price, as they are produced. These daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a receivable related to this monthly settlement of
$11.9 million
and
$0.3 million
as of
September 30, 2018
and
December 31, 2017
, respectively. Also pursuant to the El Dorado Supply and Offtake Agreement and other related agreements, Lion Oil will endeavor to arrange potential sales by either Lion Oil or J. Aron to third parties of the products produced at the El Dorado refinery or purchased from third parties. In instances where Lion Oil is the seller to such third parties, J. Aron will first transfer title to the applicable products to Lion Oil.
This arrangement is accounted for as a product financing arrangement. Delek incurred fees payable to J. Aron under the El Dorado Supply and Offtake Agreement of
$2.7 million
and
$8.3 million
during the
three and nine
months ended
September 30, 2018
, respectively, and
$2.5 million
and
$7.3 million
during the
three and nine
months ended
September 30, 2017
, respectively. These amounts are included as a component of interest expense in the condensed consolidated statements of income. Upon any termination of the El Dorado Supply and Offtake Agreement, including in connection with a force majeure event, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements.
Upon the expiration of the El Dorado Supply and Offtake Agreement on
April 30, 2020
, or upon any earlier termination, Delek will be required to repurchase the consigned crude oil and refined products from J. Aron at then prevailing market prices. At
September 30, 2018
and
December 31, 2017
, Delek had
3.0 million
barrels and
3.0 million
barrels, respectively, of inventory consigned from J. Aron under the El Dorado Supply and Offtake Agreement, and we have recorded liabilities associated with this consigned inventory of
$204.2 million
and
$181.9 million
, respectively, in the condensed consolidated balance sheets.
Alon refinery operations
Effective with the Delek/Alon Merger, we assumed Alon's existing Supply and Offtake Agreements and other associated agreements with J. Aron to support the operations of our Big Spring, Krotz Springs and California refineries (as further defined in
Note 14
) and certain of our asphalt terminals (together, the “Alon Supply and Offtake Agreements”). Pursuant to the Alon Supply and Offtake Agreements, (i) J. Aron agreed to sell to us, and we agreed to buy from J. Aron, at market prices, crude oil for processing at these refineries and (ii) we agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at these refineries. The Alon Supply and Offtake Agreements also provide for the sale, at market prices, of our crude oil and certain refined product inventories to J. Aron, 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. The Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries have initial terms that expire in May 2021. The Supply and Offtake Agreement for the California refineries, which had an initial expiration date in May 2019, contained early termination provisions, and we elected to terminate the Supply and Offtake Agreement at the California refineries effective on May 31, 2018. J. Aron may elect to terminate the Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries prior to the expiration of the initial term beginning in May 2019 and upon each anniversary thereafter, on
six months
' prior notice. We may elect to terminate the agreements at the Big Spring and Krotz Springs refineries in May 2020 on
six months
' prior notice.
These daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a net payable related to this monthly settlement of
$(0.3) million
and
$(4.4) million
as of
September 30, 2018
and
December 31, 2017
, respectively.
These arrangements are accounted for as product financing arrangements. Delek incurred fees payable to J. Aron of
$3.6 million
and
$10.4 million
during the
three and nine
months ended
September 30, 2018
, respectively, and
$2.3 million
during the three months ended
September 30, 2017
. These amounts are included as a component of interest expense in the condensed consolidated statements of income. Upon any termination of the Alon Supply and Offtake Agreements, including in connection with a force majeure event, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements.
Upon the expiration of the Alon Supply and Offtake Agreements, or upon any earlier termination, Delek will be required to repurchase the consigned crude oil and refined products from J. Aron at then prevailing market prices. At
September 30, 2018
and
December 31, 2017
, Delek had
3.3 million
barrels and
3.5 million
barrels, respectively, of inventory consigned from J. Aron under the Alon Supply and Offtake Agreements, and we have recorded liabilities associated with this consigned inventory of
$274.5 million
and
$253.7 million
, respectively, in the condensed consolidated balance sheets.
In connection with the Alon Supply and Offtake Agreement for our Krotz Springs refinery, we have granted a security interest to J. Aron in certain assets (including all of its accounts receivable and inventory) to secure its obligations to J. Aron.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 8
- 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,
2018
|
|
December 31,
2017
|
|
Revolving Credit Facility
|
|
$
|
300.0
|
|
|
$
|
—
|
|
|
Term Loan
Credit Facility
(1)
|
|
685.3
|
|
|
—
|
|
|
DKL Credit Facility
|
|
533.2
|
|
|
179.9
|
|
|
DKL Notes
(2)
|
|
243.5
|
|
|
242.7
|
|
|
Convertible Notes
(3)
|
|
—
|
|
|
146.0
|
|
|
Reliant Bank Revolver
|
|
30.0
|
|
|
17.0
|
|
|
Promissory Notes
|
|
70.0
|
|
|
95.1
|
|
|
Wells Term Loan
(4)
|
|
—
|
|
|
40.5
|
|
|
Wells Revolving Loan
|
|
—
|
|
|
45.0
|
|
|
Lion Term Loan Facility
(5)
|
|
—
|
|
|
203.4
|
|
|
Alon Partnership Credit Facility
|
|
—
|
|
|
100.0
|
|
|
Alon Partnership Term Loan
|
|
—
|
|
|
237.5
|
|
|
Alon Term Loan Credit Facilities
(6)
|
|
—
|
|
|
72.4
|
|
|
Alon Retail Credit Facilities
(7)
|
|
—
|
|
|
86.1
|
|
|
|
|
1,862.0
|
|
|
1,465.6
|
|
|
Less: Current portion of long-term debt and notes payable
|
|
32.0
|
|
|
590.2
|
|
|
|
|
$
|
1,830.0
|
|
|
$
|
875.4
|
|
|
|
|
|
(1)
|
The Term Loan Credit Facility is net of deferred financing costs of
$2.5 million
and debt discount of
$8.7 million
at
September 30, 2018
.
|
|
|
|
|
(2)
|
The DKL Notes are net of deferred financing costs of
$4.9 million
and
$5.6 million
, respectively, and debt discount of
$1.6 million
and
$1.7 million
, respectively, at
September 30, 2018
and
December 31, 2017
.
|
|
|
|
|
(3)
|
The Convertible Notes were extinguished on September 17, 2018, as further discussed below, and were net of debt discount of
$4.0 million
at
December 31, 2017
.
|
|
|
|
|
(4)
|
The Wells Term Loan was extinguished on March 30, 2018, as further discussed below, and was net of deferred financing costs of a nominal amount and debt discount
$0.3 million
at
December 31, 2017
.
|
|
|
|
|
(5)
|
The Lion Term Loan Facility was extinguished on March 30, 2018, as further discussed below, and was net of deferred financing costs of
$2.1 million
and debt discount of
$0.8 million
at
December 31, 2017
.
|
|
|
|
|
(6)
|
The Alon Term Loan Credit Facilities were extinguished on March 30, 2018, as further discussed below, and were net of debt discount of
$0.6 million
at
December 31, 2017
.
|
|
|
|
|
(7)
|
The Alon Retail Credit Facilities were extinguished on March 30, 2018, as further discussed below, and were net of debt discount of
$2.4 million
at
December 31, 2017
.
|
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, and the lenders from time to time party thereto, providing for a senior secured term loan facility in an amount of
$700 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
We recorded a loss on extinguishment of debt totaling approximately
$9.1 million
during the
nine
months ended
September 30, 2018
in connection with the Refinancing.
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 prospectively decreases 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 decreases to the applicable margins became effective upon execution of the First Amendment.
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 will require Delek to pay an unused line fee on the average amount of unused commitments thereunder in each quarter, which fee will be at a rate of
0.250%
or
0.375%
per annum, depending on average commitment usage for such quarter. The initial unused line fee is set at
0.375%
per annum through September 30, 2018.
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 of
$1.75 million
, with the balance of the principal due 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 prepayments with a variable percentage of Delek’s excess cash flow, ranging from
50%
to
0%
depending on Delek’s consolidated secured net leverage ratio from time to time. Delek may also make voluntarily prepayments under the Term Loan Credit Facility at any time, subject to a prepayment premium of
1.00%
in connection with certain customary repricing events that may occur within six months after the Closing Date, with no 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 the 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.
Additional Information
At
September 30, 2018
, the weighted average borrowing rate under the Revolving Credit Facility was
5.50%
and was comprised entirely of a base rate borrowing, and the principal amount outstanding thereunder was
$300.0 million
. Additionally, there were letters of credit issued of approximately
$143.5 million
as of
September 30, 2018
under the Revolving Credit Facility. Unused credit commitments under the Revolving Credit Facility, as of
September 30, 2018
, were approximately
$556.5 million
At
September 30, 2018
, the weighted average borrowing rate under the Term Loan Credit Facility was approximately
4.74%
comprised entirely of a LIBOR borrowing and the principal amount outstanding thereunder was approximately
$696.5 million
.
Notes to Condensed Consolidated Financial Statements (Unaudited)
DKL Credit Facility
At December 31, 2017, 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 (i) either a U.S. prime dollar rate or a LIBOR Rate for borrowings denominated in U.S. Dollars, or (ii) either a Canadian dollar prime rate, or a Canadian Dealer Offered Rate, for borrowing denominated in Canadian dollars (in each case plus applicable margins, at the election of the borrowers and as a function of draw down currency). The 2014 Facility had a maturity date of December 30, 2019. Outstanding borrowings at December 31, 2017 were
$179.9 million
. The obligations under the 2014 Facility were secured by a first priority lien on substantially all of Delek Logistics' tangible and intangible assets. Additionally, a subsidiary of Delek provided a limited guaranty of Delek Logistics' obligations under the 2014 Facility.
On
September 28, 2018
, Delek Logistics and all of its subsidiaries entered into a third amended and restated senior secured revolving credit agreement, which amended and restated the 2014 Facility (hereafter, the "DKL Credit Facility") with Fifth Third, as administrative agent, and a syndicate of lenders. The DKL Credit Facility contains a dual currency borrowing tranche that permits draw downs in U.S. or Canadian dollars. Under the terms of the DKL Credit Facility, among other things, the lender commitments were increased from
$700.0 million
to
$850.0 million
. The DKL Credit Facility also contains an accordion feature whereby the Partnership 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 DKL 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 DKL 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 DKL Credit Facility lenders. As of both
September 30, 2018
and December 31, 2017, the principal amount of the Holdings Note was
$102.0 million
.
The DKL Credit Facility has a maturity date of
September 28, 2023
. Borrowings under the DKL Credit Facility bear interest at either a
U.S. dollar prime rate
,
Canadian prime rate
,
LIBOR
, or a
Canadian Dealer Offered 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 DKL Credit Facility. At
September 30, 2018
, the weighted average borrowing rate was approximately
4.86%
. Additionally, the DKL Credit Facility requires Delek Logistics to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of
September 30, 2018
, this fee was
0.40%
per year.
As of
September 30, 2018
, Delek Logistics had
$533.2 million
of outstanding borrowings under the DKL Credit Facility, with no letters of credit in place. Unused credit commitments under the DKL Credit Facility, as of
September 30, 2018
, were
$316.8 million
.
DKL 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 “DKL Notes”) at a discount. The DKL Notes are general unsecured senior obligations of the Issuers. The DKL 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 DKL Notes rank equal in right of payme
nt 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 DKL 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 DKL 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 DKL 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,
th
e Issuers may, subject to certain conditions and limitations, redeem all or part of the DKL 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 DKL Notes from holders at a price equal to
101%
of the principal amount thereof, plus accrued and unpaid interest.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In connection with the issuance of the DKL Notes, the Issuers and the Guarantors entered into a registration rights agreement, whereby the Issuers and the Guarantors were required to exchange the DKL Notes for new notes with terms substantially identical in all material respects with the DKL Notes (except the new notes do not contain terms with respect to transfer restrictions). On April 25, 2018, Delek Logistics made an offer to exchange the DKL Notes and the related guarantees that were validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradeable, as required under the terms of the original indenture (the “Exchange Offer”). The Exchange Offer expired on May 23, 2018 (the "Expiration Date"). The terms of the exchange notes that were issued as a result of the Exchange Offer (also referred to as the "2025 Notes") are substantially identical to the terms of the original DKL Notes.
As of
September 30, 2018
, we had
$250.0 million
in outstanding principal amount under the DKL Notes.
Alon Convertible Senior Notes (share values in dollars)
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, supplementing the Indenture, dated as of September 16, 2013 (the “Original Indenture”; the Original Indenture, as amended by the Supplemental Indenture, is referred to as the "Indenture"), pursuant to which Alon issued its
3.00%
Convertible Senior Notes due 2018 (the “ Convertible Notes”) in the aggregate principal amount of
$150.0 million
, which were convertible into shares of Alon’s Common Stock, par value
$0.01
per share or cash or a combination of cash and Alon Common Stock, at Alon's election, all as provided in the Indenture. The Supplemental Indenture provided that, as of the Effective Time, the right to convert each
$1,000
principal amount of the Notes based on a number of shares of Alon Common Stock equal to the Conversion Rate (as defined in the Indenture) in effect immediately prior to the Merger was changed into a right to convert each
$1,000
principal amount of Notes into or based on a number of shares of New Delek Common Stock (at the exchange rate of
0.504
), par value
$0.01
per share, equal to the Conversion Rate in effect immediately prior to the Merger. In addition, the Supplemental Indenture provided that, as of the Effective Time, New Delek fully and unconditionally guaranteed, on a senior basis, Alon’s obligations under the Convertible Notes.
Interest on the Convertible Notes was payable in arrears in March and September of each year. The Convertible Notes were not redeemable at our option prior to maturity. Under the terms of the Convertible Notes, the holders of the Convertible Notes could not require us to repurchase all or part of the notes except for instances of a fundamental change, as defined in the indenture.
The holders of the Convertible Notes could convert their notes at any time after June 15, 2018 into a settlement amount determined in accordance with the terms of the Indenture. The Convertible Notes could be converted into shares of New 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. At
December 31, 2017
, the conversion feature equity instrument totaled
$26.6 million
and was included in additional paid-in capital on the accompanying condensed consolidated balance sheets.
Convertible Note Hedge Transactions
In connection with the Convertible Notes offering, Alon entered into convertible note hedge transactions with respect to Alon Common Stock (the “Call Options”) with the initial purchasers of the Convertible Notes (the “Hedge Counterparties”). In connection with the Delek/Alon Merger, Alon, Delek and the Hedge Counterparties entered into amended and restated Call Options permitting us to purchase up to approximately
5.7 million
shares of New Delek Common Stock, subject to customary anti-dilution adjustments, that underlie the Convertible Notes sold in the offering.
The Call Options were intended to reduce the potential dilution with respect to our common stock upon conversion of the Convertible Notes or upon settlement of the incremental value of the conversion options associated with the Convertible Notes in shares, as well as offset any potential cash payments we would be required to make in excess of the principal amount upon any conversion of the notes. As of
December 31, 2017
, the Call Options totaling
$23.3 million
were included as a reduction of additional paid-in capital on the condensed consolidated balance sheets. The Call Options were separate transactions and were not part of the terms of the Convertible Notes and were excluded from classification as a derivative as the amount could be settled in our stock. Holders of the Convertible Notes did not have any rights with respect to the Call Options.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. 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.
Warrant Transactions
In connection with the Convertible Notes offering, Alon also entered into warrant transactions (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. As of
September 30, 2018
, the Warrants had an adjusted strike price of approximately
$35
per share of New Delek Common Stock. The Warrants require settlement on a net-share basis and will expire in April 2019. As of both
September 30, 2018
and
December 31, 2017
, Warrants totaling
$14.3 million
have been included in additional paid-in capital on the condensed consolidated balance sheets.
The Warrants are separate transactions and are not part of the terms of the Convertible Notes and are excluded from classification as a derivative as the amount could be settled in our stock. Holders of the Convertible Notes did not have any rights with respect to the Warrants.
Reliant Bank Revolver
Delek has an unsecured revolving credit agreement with Reliant Bank (the "Reliant Bank Revolver"), which was amended on June 20, 2018 to extend the maturity by two years to June 28, 2020, reduce the fixed interest rate from
5.25%
to
4.75%
per annum and increase the maximum borrowing amount for loans from
$17.0 million
to
$30.0 million
. The Reliant Bank Revolver requires us to pay a quarterly fee of
0.50%
per year on the average available revolving commitment. As of
September 30, 2018
, we had
$30.0 million
outstanding and had
no
unused credit commitments under the Reliant Bank Revolver
Promissory Notes
Delek had a
$50.0 million
promissory note with Ergon, Inc. that required Delek to make annual amortization payments of
$10.0 million
each, commencing April 29, 2013, and with interest computed at a fixed rate equal to
4.0%
per annum. The Ergon Note matured on April 29, 2017 and was paid in full.
On May 14, 2015, in connection with the Company’s closing of the Alon Acquisition, the Company issued the Alon Israel Note in the amount of
$145.0 million
, which was payable to Alon Israel. The Alon Israel Note bears interest at a fixed rate of
5.5%
per annum and requires five annual principal amortization payments of
$25.0 million
beginning in January 2016 followed by a final principal amortization payment of
$20.0 million
at maturity on January 4, 2021. In October 2015, we prepaid the first annual principal amortization payment in the amount of
$25.0 million
, along with all interest due on the prepaid amount. On December 22, 2015, Alon Israel assigned the remaining
$120.0 million
of principal and all accrued interest due under the Alon Israel Note to assignees under four new notes in substantially the same form and on the same terms as the Alon Israel Note (collectively, the "Alon Successor Notes"). The
$120.0 million
total principal of the four Alon Successor Notes collectively require the same principal amortization payments and schedule as under the Alon Israel Note, with payments due under each Alon Successor Note commensurate to such note's pro rata share of
$120.0 million
in assigned principal. As of
September 30, 2018
, a total principal amount of
$70.0 million
was outstanding under the Alon Successor Notes.
As of
December 31, 2017
, one of our retail companies had a loan that was to mature in 2019 with an outstanding balance of
$0.1 million
and the interest rate was fixed at
9.70%
. This loan was extinguished in connection with the Refinancing on March 30, 2018.
Restrictive Covenants
Under the terms of our Revolving Credit Facility, Term Loan Credit Facility, DKL Credit Facility, DKL 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. The Convertible Notes did not contain any maintenance financial covenants. We believe we were in compliance with all covenant requirements under each of our credit facilities as of
September 30, 2018
.
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 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Obligations Extinguished in Connection with the 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 and on May 17, 2017 (the "Wells ABL"). This facility was amended and restated on March 30, 2018 in connection with the Refinancing. The Wells ABL consisted of (i) a
$450.0 million
revolving loan (the "Wells Revolving Loan"), which included a
$45.0 million
swing line loan sub-limit and a
$200.0 million
letter of credit sub-limit, (ii) a
$70.0 million
term loan (the "Wells Term Loan"), and (iii) an accordion feature that permitted an increase in the size of the revolving credit facility to an aggregate of
$725.0 million
, subject to additional lender commitments and the satisfaction of certain other conditions precedent. The Wells Revolving Loan was to mature on
September 29, 2021
and the Wells Term Loan was to mature on
September 29, 2019
. The Wells Term Loan was subject to repayment in level principal installments of approximately
$5.8 million
per quarter, with the final installment due on
September 29, 2019
. The obligations under the Wells ABL were secured by (i) substantially all the assets of Refining and its subsidiaries, with certain limitations, (ii) guaranties provided by the general partner of Delek Refining, Ltd., as well as by the parent of Delek Refining, Ltd., Delek Refining, Inc. (iii) a limited guarantee provided jointly and severally by Old and New Delek in an amount up to
$15.0 million
in the aggregate and (iv) a limited guarantee provided by Lion Oil in an amount equal to the sum of the face amount of all letters of credit issued on behalf of Lion Oil under the Wells ABL and any loans made by Refining or its subsidiaries to Lion Oil. Under the facility, revolving loans and letters of credit were provided subject to availability requirements which were determined pursuant to a borrowing base calculation as defined in the credit agreement. The borrowing base, as calculated, was primarily supported by cash, certain accounts receivable and certain inventory. 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.
Lion Term Loan
Our subsidiary, Lion Oil, had a term loan credit facility with Fifth Third, as administrative agent, and a syndicate of lenders, which, as amended and restated, had a total loan size of
$275.0 million
(the "Lion Term Loan"). This facility was extinguished in connection with the Refinancing on March 30, 2018. The Lion Term Loan required Lion Oil to make quarterly principal amortization payments of approximately
$6.9 million
each, commencing on
September 30, 2015
, with a final balloon payment due at maturity on
May 14, 2020
. The Lion Term Loan was secured by, among other things, (i) certain assets of Lion Oil and its subsidiaries, (ii) all shares in Lion Oil, (iii) any subordinated and common units of Delek Logistics held by Lion Oil, and (iv) the ALJ Shares. Additionally, the Lion Term Loan was guaranteed by Old and New Delek and the subsidiaries of Lion Oil. 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
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”) that was to mature on May 26, 2018. This facility was extinguished in connection with the Refinancing on March 30, 2018. The Alon Partnership Credit Facility could be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility amount or the borrowing base amount under the facility. Borrowings under the Alon Partnership Credit Facility bore interest at LIBOR or base rate, at our election, plus the applicable margins. The Alon Partnership Credit Facility was secured by a first priority lien on the Alon Partnership’s cash, accounts receivables, inventories and related assets and a second priority lien on the Alon Partnership’s fixed assets and other specified property. Additionally, the Alon Partnership Credit Facility required the payment of a quarterly fee on the average unused revolving commitment.
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”). This term loan was extinguished in connection with the Refinancing on March 30, 2018. The Alon Partnership Term Loan required principal payments of
$2.5 million
per annum paid in equal quarterly installments until maturity in November 2018, at which time a balloon payment was to be due for any remaining principal outstanding. 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. The Alon Partnership Term Loan was guaranteed by Alon USA Partners GP, LLC, Alon Assets, Inc. and certain subsidiaries of the Alon Partnership, and was secured by a first priority lien on all of the Alon Partnership’s fixed assets and other specified property, as well as on the general partner interest in the Alon Partnership held by the Alon General Partner, and a second priority lien on the Alon Partnership’s cash, accounts receivables, inventories and related assets.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Alon Term Loan Credit Facilities
Alon Energy Term Loan
On March 27, 2014, Alon issued a promissory note to Bank Hapoalim B.M. in an original principal amount of
$25.0 million
(“Alon Energy Term Loan”), that was to mature in March 2019, but was refinanced on December 29, 2017 with the proceeds of a new promissory note to Bank Hapoalim in an original principal amount of
$38.0 million
("New Alon Energy Term Loan"), maturing on December 29, 2022. The New Alon Energy Term Loan was extinguished in connection with the Refinancing on March 30, 2018. The New Alon Energy Term Loan required quarterly principal amortization payments of approximately
$1.4 million
each, commencing on March 30, 2018, and incurred interest at an annual rate equal to LIBOR plus an applicable margin. Additionally, Delek guaranteed all obligations under the New Alon Energy Term Loan.
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
. This loan was prepaid on March 29, 2018 in connection with the Refinancing on March 30, 2018. The Alon Asphalt Term Loan was guaranteed by Delek and certain subsidiaries of Alon and was also secured by pledges of equity of certain subsidiaries of Alon. The Alon Asphalt Term Loan required quarterly principal amortization payments of
$3.9 million
, commencing December 2018 until maturity in December 2020. The Alon Asphalt Term Loan bore interest at a rate equal to LIBOR plus an applicable margin.
Alon Energy Letter of Credit Facility
Alon had a Letter of Credit Facility with Israel Discount Bank of New York (the “Alon Energy Letter of Credit Facility”) that was used for the issuance of standby letters of credit. The facility was amended on November 30, 2017, to, among other things, extend the maturity date of the facility to February 28, 2018 and to reduce the maximum commitment under the facility from
$60.0 million
to
$45.0 million
effective December 31, 2017, and was again amended on February 27, 2018 to extend the maturity date to March 29, 2018 when it expired. As collateral for the Alon Energy Letter of Credit Facility, we were required to pledge sufficient Alon Partnership common units with an initial collateral value of at least
$100.0 million
. Alon Assets, Inc. (“Alon Assets”) was a guarantor under the Alon Energy Letter of Credit Facility. Additionally, the Alon Energy Letter of Credit Facility required the payment of a quarterly fee on the average unused commitment.
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. This credit agreement was extinguished in connection with the Refinancing on March 30, 2018. 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. The Alon Retail Credit Agreement also included an accordion feature that provided for incremental term loans up to
$30.0 million
. In August 2015, Alon borrowed
$11.0 million
using the accordion feature and amended the Alon Retail Credit Agreement to restore the undrawn amount of the accordion feature back to
$30.0 million
. 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. Principal payments on the term loan borrowings were made in quarterly installments based on a
15
-year amortization schedule. Obligations under the Alon Retail Credit Agreement were secured by a first priority lien on substantially all of the assets of Alon Retail and its subsidiaries. The Alon Retail Credit Agreement required us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment.
Future Principal Maturities
Principal maturities of Delek's existing third-party debt instruments for the next five years (inclusive of the remainder of 2018) and thereafter are as follows as of
September 30, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 to December 31, 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
Revolving Credit Facility
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
Term Loan Credit Facility
|
|
1.8
|
|
|
7.0
|
|
|
7.0
|
|
|
7.0
|
|
|
7.0
|
|
|
666.7
|
|
|
696.5
|
|
|
DKL Credit Facility
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
533.2
|
|
|
533.2
|
|
|
DKL Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
250.0
|
|
|
250.0
|
|
|
Reliant Bank Revolver
|
|
—
|
|
|
—
|
|
|
30.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30.0
|
|
|
Promissory Notes
|
|
—
|
|
|
25.0
|
|
|
25.0
|
|
|
20.0
|
|
|
—
|
|
|
—
|
|
|
70.0
|
|
|
Convertible Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
1.8
|
|
|
$
|
32.0
|
|
|
$
|
62.0
|
|
|
$
|
27.0
|
|
|
$
|
7.0
|
|
|
$
|
1,749.9
|
|
|
$
|
1,879.7
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Interest-Rate Derivative Instruments
Effective with the Delek/Alon Merger, we assumed Alon's interest rate swap agreements that were to mature in March 2019, which effectively fixed the variable LIBOR interest component of the term loans within the Alon Retail Credit Agreement. These interest rate swap agreements were terminated in connection with the Refinancing on March 30, 2018. These interest rate swaps were accounted for as cash flow hedges. See
Note 16
for further information regarding the interest rate swap agreements.
Note 9
- Other Assets and Liabilities
The detail of other current assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets
|
September 30,
2018
|
|
December 31,
2017
|
|
Prepaid expenses
|
$
|
15.0
|
|
|
$
|
17.6
|
|
|
Short-term derivative assets (see Note 16)
|
30.2
|
|
|
15.9
|
|
|
Income and other tax receivables
|
15.1
|
|
|
74.9
|
|
|
RINs Obligation surplus (see Note 15)
|
—
|
|
|
1.1
|
|
|
Commodity investments
|
6.9
|
|
|
—
|
|
|
Other
|
21.2
|
|
|
20.4
|
|
|
Total
|
$
|
88.4
|
|
|
$
|
129.9
|
|
The detail of other non-current assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Assets
|
September 30,
2018
|
|
December 31,
2017
|
|
Prepaid tax asset
|
$
|
—
|
|
|
$
|
56.2
|
|
|
Deferred financing costs
|
11.7
|
|
|
5.9
|
|
|
Long-term income tax receivables
|
2.1
|
|
|
2.1
|
|
|
Supply and Offtake receivable
|
32.7
|
|
|
46.3
|
|
|
Long-term derivative assets (see Note 16)
|
3.6
|
|
|
—
|
|
|
Other
|
9.9
|
|
|
16.3
|
|
|
Total
|
$
|
60.0
|
|
|
$
|
126.8
|
|
The detail of accrued expenses and other current liabilities is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses and Other Current Liabilities
|
September 30,
2018
|
|
December 31,
2017
|
|
Income and other taxes payable
|
$
|
128.1
|
|
|
$
|
154.1
|
|
|
Short-term derivative liabilities (see Note 16)
|
19.8
|
|
|
54.4
|
|
|
Interest payable
|
13.2
|
|
|
13.0
|
|
|
Employee costs
|
41.4
|
|
|
46.6
|
|
|
Environmental liabilities (see Note 17)
|
7.3
|
|
|
7.2
|
|
|
Product financing agreements
|
—
|
|
|
72.3
|
|
|
RINs Obligation deficit (see Note 15)
|
8.0
|
|
|
130.8
|
|
|
Accrued utilities
|
7.5
|
|
|
9.4
|
|
|
Tank inspection liabilities
|
7.7
|
|
|
10.7
|
|
|
Crude liabilities
|
127.1
|
|
|
34.5
|
|
|
Other
|
24.5
|
|
|
31.9
|
|
|
Total
|
$
|
384.6
|
|
|
$
|
564.9
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
The detail of other non-current liabilities is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities
|
September 30,
2018
|
|
December 31,
2017
|
|
Pension and other postemployment benefit liabilities, net
(see Note 18)
|
$
|
4.5
|
|
|
$
|
37.0
|
|
|
Long-term derivative liabilities (see Note 16)
|
0.4
|
|
|
0.9
|
|
|
Liability for unrecognized tax benefits
|
7.5
|
|
|
6.1
|
|
|
Above-market leases
|
9.8
|
|
|
11.2
|
|
|
Tank inspection liabilities
|
9.9
|
|
|
11.7
|
|
|
Other
|
5.7
|
|
|
16.1
|
|
|
Total
|
$
|
37.8
|
|
|
$
|
83.0
|
|
Note 10
- Stockholders' Equity
Changes to equity during the
nine
months ended
September 30, 2018
are presented below (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delek Stockholders' Equity
|
|
Non-Controlling Interest in Subsidiaries
|
|
Total Stockholders' Equity
|
|
Balance at December 31, 2017
|
|
$
|
1,650.6
|
|
|
$
|
313.6
|
|
|
$
|
1,964.2
|
|
|
Net income
|
|
224.0
|
|
|
29.0
|
|
|
253.0
|
|
|
Net unrealized loss on cash flow hedges, net of income tax benefit of $2.3 million and ineffectiveness gain of $0.7 million
|
|
(8.2
|
)
|
|
—
|
|
|
(8.2
|
)
|
|
Foreign currency translation loss
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
Other comprehensive income related to postretirement benefit plans
|
|
7.0
|
|
|
—
|
|
|
7.0
|
|
|
Other comprehensive income related to interest rate contracts
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
|
Common stock dividends ($0.70 per share)
|
|
(58.8
|
)
|
|
—
|
|
|
(58.8
|
)
|
|
Distributions to non-controlling interests
|
|
—
|
|
|
(21.5
|
)
|
|
(21.5
|
)
|
|
Equity-based compensation expense
|
|
15.3
|
|
|
0.3
|
|
|
15.6
|
|
|
Issuance of stock for non-controlling interest repurchase, net of tax
|
|
140.5
|
|
|
(127.0
|
)
|
|
13.5
|
|
|
De-recognition of non-controlling interest
|
|
—
|
|
|
(18.7
|
)
|
|
(18.7
|
)
|
|
Cumulative effect of adopting accounting principle regarding income tax effect of intra-equity transfers (see Note 1)
|
|
(29.9
|
)
|
|
—
|
|
|
(29.9
|
)
|
|
Shares issued in connection with settlement of Convertible Notes (see Note 8)
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
Shares received in connection with exercise of Call Options (see Note 8)
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
Repurchase of common stock
|
|
(207.4
|
)
|
|
—
|
|
|
(207.4
|
)
|
|
Taxes due to the net settlement of equity-based compensation
|
|
(10.8
|
)
|
|
—
|
|
|
(10.8
|
)
|
|
Balance at September 30, 2018
|
|
$
|
1,721.3
|
|
|
$
|
175.8
|
|
|
$
|
1,897.1
|
|
Dividends
During the
nine
months ended
September 30, 2018
, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Dividend Amount Per Share
|
|
Record Date
|
|
Payment Date
|
|
February 26, 2018
|
|
$0.20
|
|
March 12, 2018
|
|
March 26, 2018
|
|
May 7, 2018
|
|
$0.25
|
|
May 21, 2018
|
|
June 4, 2018
|
|
August 7, 2018
|
|
$0.25
|
|
August 21, 2018
|
|
September 4, 2018
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stock Repurchase Program
In December 2016, our Board of Directors authorized a share repurchase program for up to
$150.0 million
of Delek common stock. Any share repurchases under the repurchase program may be implemented through open market transactions or in privately negotiated transactions, in accordance with applicable securities laws. The timing, price and size of repurchases will be made at the discretion of management and will depend on prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate us to acquire any particular amount of stock and does not expire. We repurchased
762,623
shares, for a total of
$25.0 million
, pursuant to this repurchase program in December 2017.
During the
three and nine
months ended
September 30, 2018
,
1,906,308
and
4,847,511
shares of our common stock were repurchased, for a total of
$92.1 million
and
$207.4 million
, respectively. The purchases during the
nine
months ended
September 30, 2018
include the
2.0 million
shares of our common stock purchased from Alon Israel in connection with Delek’s rights pursuant to a Stock Purchase Agreement dated April 14, 2015, by and between Delek and Alon Israel. Alon Israel delivered a right of first offer notice to Delek on January 16, 2018, informing Delek of Alon Israel’s intention to sell the
2.0 million
shares, and Delek accepted such offer on January 17, 2018. The total purchase price for the 2.0 million shares was approximately
$75.3 million
, or
$37.64
per share.
On February 26, 2018, the Board of Directors approved a new
$150.0 million
authorization to repurchase Delek common stock. This amount has no expiration date and is in addition to any remaining amounts previously authorized. As of
September 30, 2018
, there was approximately
$67.6 million
of authorization remaining under Delek's aggregate stock repurchase program (based on repurchases that had settled as of
September 30, 2018
). On
November 6, 2018
, the Board of Directors authorized the repurchase of an additional
$500.0 million
of Delek common stock. This new authorization has no expiration and is in addition to any remaining amounts previously authorized.
Note 11
- 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, 2018
, and an actual year-to-date effective tax rate to record income taxes for the
three and nine
months ended
September 30, 2017
.
On December 22, 2017, the U.S. government enacted the Tax Reform Act, which makes broad and complex changes to the U.S. tax code, including a permanent reduction in the U.S. federal corporate tax rate from 35% to 21% (“Rate Reduction”). The Tax Reform Act also puts into place new tax laws that will apply prospectively, which include, but are not limited to, modifying the rules governing the deductibility of certain executive compensation; extending and modifying the additional first-year depreciation deduction to accelerate expensing of certain qualified property; creating a limitation on deductible interest expense; and, changing rules related to uses and limitations of net operating loss carryforwards.
We are applying the guidance in Staff Accounting Bulletin 118 (“SAB 118”), when accounting for the effects of the Tax Reform Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Reform Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Reform Act.
The Company has not completed the accounting for the income tax effects of the Tax Reform Act. At December 31, 2017, the Company recorded a discrete net tax benefit of
$166.9 million
primarily related to provisional amounts under SAB 118 for the remeasurement of U.S. deferred tax assets and liabilities due to the Rate Reduction. Upon further analyses of certain aspects of the Act and refinement of our calculations during the
three and nine
months ended
September 30, 2018
, we adjusted our provisional amounts by an additional benefit (expense) of
$0.5 million
and
$(2.1) million
, respectively, which is included as a component of income tax expense from continuing operations. We also had a reclassification of
$1.6 million
from accumulated other comprehensive income to retained earnings for stranded tax effects as of
September 30, 2018
resulting from the Tax Reform Act. See
Note 1
for further information. We will continue to analyze and refine our calculations related to the measurement of these balances as supplemental legislation, regulatory guidance or evolving technical interpretations become available.
On January 1, 2018, we decreased prepaid income taxes by
$59.4 million
, increased income taxes payable by
$3.0 million
, decreased deferred tax liabilities by
$32.5 million
and decreased retained earnings by
$29.9 million
for the cumulative effect related to new guidance that requires recognizing the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs - see
Note 1
for further information.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Our effective tax rate was
21.5%
and
20.3%
for the
three and nine
months ended
September 30, 2018
, respectively, compared to
53.0%
and
52.3%
for the
three and nine
months ended
September 30, 2017
, respectively. The change in our effective tax rate was primarily due to the following: reduction to Federal tax rate attributable to continued adjustments to properly consider the impact of the Tax Reform Act (which reduced the U.S. federal corporate tax rate from 35% to 21%, as discussed above), combined with income tax benefit for federal tax credits attributable to the Company’s biodiesel blending operations for 2017 and the reversal of the deferred tax asset related to the previously held equity method investment in Alon in the third quarter of 2017, partially offset by tax expense associated with the impairment of assets held for sale during the first quarter of 2017.
Note 12
- Equity-Based Compensation
Delek US Holdings, Inc. 2006 and 2016 and Alon USA Energy, Inc. 2005 Long-Term Incentive Plans (the "Incentive Plans")
On May 8, 2018, the Company’s stockholders approved an amendment to the Delek US Holdings, Inc. 2016 Long-Term Incentive Plan that increased the number of shares of Common Stock available for issuance under this plan by
4,500,000
shares to
8,900,000
shares.
Compensation expense related to equity-based awards granted under the Incentive Plans amounted to
$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, and
$4.1 million
(
$2.7 million
, net of taxes) and
$11.1 million
(
$7.2 million
, net of taxes) for the
three and nine
months ended
September 30, 2017
, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income.
As of
September 30, 2018
, there was
$50.3 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
3.1
years.
We issued
90,552
and
535,613
shares of common stock as a result of exercised or vested equity-based awards during the
three and nine
months ended
September 30, 2018
, respectively, and
57,149
and
257,602
during the
three and nine
months ended
September 30, 2017
, respectively. These amounts are net of
146,193
and
980,954
shares withheld to satisfy employee tax obligations related to the exercises and vestings during the
three and nine
months ended
September 30, 2018
, respectively, and
48,286
and
200,026
shares during the
three and nine
months ended
September 30, 2017
, respectively.
Delek Logistics GP, LLC 2012 Long-Term Incentive Plan
Compensation expense for Delek Logistics GP equity-based awards was
$0.2 million
(
$0.2 million
, net of taxes) and
$0.5 million
(
$0.4 million
, net of taxes) for the
three and nine
months ended
September 30, 2018
, respectively, and
$0.4 million
(
$0.3 million
, net of taxes) and
$1.3 million
(
$0.8 million
, net of taxes) for the
three and nine
months ended
September 30, 2017
, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of income.
As of
September 30, 2018
, there was
$0.4 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
0.6
years.
Note 13
- 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 not be anti-dilutive, and is inclusive of awards disclosed in
Note 12
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 (disclosed in
Note 2
), we assumed certain equity instruments, including conversion options (associated with Convertible Debt) and Warrants, that may be dilutive (see discussion of these instruments in
Note 8
). The Convertible Debt 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 are generally dilutive during the period they are 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 net loss for the period. We also assumed Call Options in connection with the Delek/Alon Merger which were not reflected in the diluted weighted average common shares outstanding because to do so would have been antidilutive.
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,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator for EPS - continuing operations
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
185.8
|
|
|
$
|
118.5
|
|
|
$
|
261.5
|
|
|
$
|
101.6
|
|
|
Less: Income from continuing operations attributed to non-controlling interest
|
|
6.5
|
|
|
10.0
|
|
|
20.9
|
|
|
19.8
|
|
|
Income from continuing operations attributable to Delek (numerator for basic EPS - continuing operations attributable to Delek)
|
|
179.3
|
|
|
108.5
|
|
|
240.6
|
|
|
81.8
|
|
|
Interest on convertible debt, net of tax
|
|
0.7
|
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
Numerator for diluted EPS - continuing operations attributable to Delek
|
|
$
|
180.0
|
|
|
$
|
108.5
|
|
|
$
|
243.1
|
|
|
$
|
81.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for EPS - discontinued operations
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
0.5
|
|
|
$
|
(4.1
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(4.1
|
)
|
|
Less: Income from discontinued operations attributed to non-controlling interest
|
|
—
|
|
|
—
|
|
|
8.1
|
|
|
—
|
|
|
Income (loss) from discontinued operations attributable to Delek
|
|
$
|
0.5
|
|
|
$
|
(4.1
|
)
|
|
$
|
(16.6
|
)
|
|
$
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (denominator for basic EPS)
|
|
83,575,122
|
|
|
80,581,762
|
|
|
83,294,473
|
|
|
68,272,918
|
|
|
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
|
|
1,586,276
|
|
|
663,643
|
|
|
1,600,298
|
|
|
703,056
|
|
|
Weighted average common shares outstanding, assuming dilution
|
|
89,021,260
|
|
|
81,245,405
|
|
|
88,369,113
|
|
|
68,975,974
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.15
|
|
|
$
|
1.35
|
|
|
$
|
2.89
|
|
|
$
|
1.20
|
|
|
Income (loss) from discontinued operations
|
|
$
|
0.01
|
|
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
(0.06
|
)
|
|
Total basic income per share
|
|
$
|
2.16
|
|
|
$
|
1.30
|
|
|
$
|
2.69
|
|
|
$
|
1.14
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.02
|
|
|
$
|
1.34
|
|
|
$
|
2.75
|
|
|
$
|
1.19
|
|
|
Income (loss) from discontinued operations
|
|
$
|
0.01
|
|
|
(0.05
|
)
|
|
$
|
(0.19
|
)
|
|
(0.06
|
)
|
|
Total diluted income per share
|
|
$
|
2.03
|
|
|
$
|
1.29
|
|
|
$
|
2.56
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
1,014,057
|
|
|
3,996,185
|
|
|
1,208,648
|
|
|
4,006,310
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive convertible debt instruments (because average share price is less than exercise price)
|
|
—
|
|
|
5,623,304
|
|
|
—
|
|
|
3,748,869
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive warrants (because average share price is less than exercise price)
|
|
—
|
|
|
5,612,581
|
|
|
—
|
|
|
3,741,721
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 14
- Segment Data
We aggregate our operating units into three reportable segments: refining, logistics and retail.
Our corporate activities, results of certain immaterial operating segments, including our Canadian crude trading operations, Alon's asphalt terminal operations effective with the Delek/Alon Merger, our equity method investment in Alon prior to the Delek/Alon Merger, as well as our discontinued Paramount and Long Beach, California refinery and California renewable fuels facility operations (acquired as part of the Delek/Alon Merger - see
Note 5
for further discussion), and intercompany eliminations are reported in the corporate, other and eliminations segment. On March 16, 2018, Delek sold to World Energy, LLC (i) all of Delek’s membership interests in the California renewable fuels facility, (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, as further discussed in
Note 5
. On May 21, 2018, Delek sold certain assets and operations of
four
asphalt terminals (included in Delek's corporate/other segment), as well as an equity method investment in an additional asphalt terminal, to an affiliate of Andeavor, as further discussed in
Note 5
. 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, as further discussed in
Note 5
.
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. Operations which are not specifically included in the reportable segments are included in the corporate and other category, which primarily consists of net revenues, operating costs and expenses, depreciation and amortization expense and interest income and expense associated with our discontinued operations (see
Note 5
for further discussion) and with our corporate headquarters.
The refining segment processes crude oil and other purchased feedstocks for the manufacture of transportation motor fuels, including various grades of gasoline, diesel fuel, aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-party product terminals. Prior to the Delek/Alon Merger, the refining segment had a combined nameplate capacity of
155,000
bpd, including the
75,000
bpd Tyler refinery and the
80,000
bpd El Dorado, Arkansas refinery (the "El Dorado refinery"). 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 Cleburn, Texas. Effective with the Delek/Alon Merger, our refining segment now also includes the operations of a refinery located in Big Spring, Texas with a nameplate capacity of
73,000
bpd (the "Big Spring refinery"), a refinery located in Krotz Springs, Louisiana with a nameplate capacity of
74,000
bpd (the "Krotz Springs refinery) and a refinery located in Bakersfield, California. The Bakersfield, California refinery has not processed crude oil since 2012 due to the high cost of crude oil relative to product yield and low asphalt demand. Alon's petroleum-based products are marketed primarily in the south central, southwestern and western regions of the United States and also ships and sells gasoline into wholesale markets in the Southern and Eastern United States. Motor fuels are sold under the Alon brand through various terminals to supply Alon branded retail sites, including our retail segment convenience stores. In addition, Alon sells motor fuels through its wholesale distribution network on an unbranded basis.
Our refining segment has service agreements with our logistics segment, which, among other things, requires the refining segment to pay service fees based on the number of gallons sold and a sharing of a portion of the margin achieved in return for providing marketing, sales and customer services at the Tyler refinery, and effective March 1, 2018, at the Big Spring refinery (see
Note 3
for further discussion regarding the new marketing agreement). These intercompany transaction fees in regards to the Tyler refinery were
$5.7 million
and
$16.2 million
during the
three and nine
months ended
September 30, 2018
, respectively, and
$5.2 million
and
$14.8 million
during the
three and nine
months ended
September 30, 2017
, respectively. The intercompany transaction fees in regards to the Big Spring refinery for the
three and nine
months ended
September 30, 2018
were
$3.3 million
and
$7.6 million
, respectively. Additionally, the refining segment pays crude transportation, terminalling and storage fees to the logistics segment for the utilization of pipeline, terminal and storage assets, including effective March 1, 2018, those related to the Big Spring Logistic Assets Acquisition discussed further in
Note 3
. These fees were
$54.1 million
and
$152.0 million
during the
three and nine
months ended
September 30, 2018
, respectively, and
$33.5 million
and
$97.7 million
during the
three and nine
months ended
September 30, 2017
, respectively. The logistics segment also sold
$0.3 million
and
$2.3 million
of RINs to the refining segment during the
three and nine
months ended
September 30, 2018
, respectively, and
$1.4 million
and
$3.9 million
during the
three and nine
months ended
September 30, 2017
, respectively. The refining segment recorded sales revenues from the retail segment of
$122.4 million
and
$340.9 million
and from sales of asphalt to our other segment of
$22.5 million
and
$33.6 million
during the
three and nine
months ended
September 30, 2018
, respectively, and sales revenues from the logistics segment of
$83.9 million
and
$265.7 million
during the
three and nine
months ended
September 30, 2018
, respectively. The refining segment recorded revenues from sales to the retail segment of
$90.6 million
and sales of asphalt to our other segment of
$7.7 million
during the
three and nine
months ended
September 30, 2017
. Refining sales revenues from the logistics segment were
$10.0 million
and
$27.1 million
during the
three and nine
months ended
September 30, 2017
, respectively. All inter-segment transactions have been eliminated in consolidation.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. The logistics segment is currently managing a long-term capital project on behalf of the Company for the construction of a gathering system in the Permian Basin and a long-haul crude oil pipeline that will originate in Midland, Texas and terminate in Houston, Texas. The logistics segment incurs the costs in connection with the construction of the assets and is subsequently reimbursed by the refining segment. These transactions are eliminated in consolidation.
Effective with the Delek/Alon Merger on July 1, 2017 (see
Note 2
), Delek's retail segment includes the operations of Alon's approximately
300
owned and leased convenience store sites located primarily in central and west Texas and New Mexico. These convenience stores typically offer various grades of gasoline and diesel under the Alon 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.
The following is a summary of business segment operating performance as measured by contribution margin for the period indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
(In millions)
|
|
Refining
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
|
|
Consolidated
|
|
Net revenues (excluding intercompany fees and sales)
|
|
$
|
2,146.8
|
|
|
$
|
100.3
|
|
|
$
|
246.4
|
|
|
$
|
1.7
|
|
|
$
|
2,495.2
|
|
|
Intercompany fees and sales
|
|
228.8
|
|
|
63.8
|
|
|
—
|
|
|
(292.6
|
)
|
|
—
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
1,937.3
|
|
|
105.6
|
|
|
204.4
|
|
|
(276.8
|
)
|
|
1,970.5
|
|
|
Operating expenses (excluding depreciation and amortization presented below)
|
|
118.8
|
|
|
15.4
|
|
|
26.7
|
|
|
3.1
|
|
|
164.0
|
|
|
Segment contribution margin
|
|
$
|
319.5
|
|
|
$
|
43.1
|
|
|
$
|
15.3
|
|
|
$
|
(17.2
|
)
|
|
360.7
|
|
|
Depreciation and amortization
|
|
33.8
|
|
|
6.7
|
|
|
5.3
|
|
|
3.4
|
|
|
49.2
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
58.0
|
|
|
Other operating income, net
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
$
|
255.2
|
|
|
Total assets
|
|
$
|
5,378.3
|
|
|
$
|
693.6
|
|
|
$
|
339.3
|
|
|
$
|
(252.5
|
)
|
|
$
|
6,158.7
|
|
|
Capital spending (excluding business combinations)
(1)
|
|
$
|
51.1
|
|
|
$
|
2.9
|
|
|
$
|
1.9
|
|
|
$
|
30.2
|
|
|
$
|
86.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
(In millions)
|
|
Refining
(2)
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
(2)
|
|
Consolidated
|
|
Net revenues (excluding intercompany fees and sales)
|
|
$
|
6,331.1
|
|
|
$
|
319.8
|
|
|
$
|
700.8
|
|
|
$
|
60.2
|
|
|
$
|
7,411.9
|
|
|
Intercompany fees and sales
|
|
640.2
|
|
|
178.5
|
|
|
—
|
|
|
(818.7
|
)
|
|
—
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
5,994.8
|
|
|
330.6
|
|
|
578.5
|
|
|
(713.8
|
)
|
|
6,190.1
|
|
|
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)
(1)
|
|
$
|
136.3
|
|
|
$
|
7.4
|
|
|
$
|
6.0
|
|
|
$
|
61.2
|
|
|
$
|
210.9
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Refining
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
|
|
Consolidated
|
|
Net revenues (excluding intercompany fees and sales)
|
|
$
|
2,005.5
|
|
|
$
|
90.6
|
|
|
$
|
213.9
|
|
|
$
|
60.6
|
|
|
$
|
2,370.6
|
|
|
Intercompany fees and sales
|
|
108.3
|
|
|
40.1
|
|
|
—
|
|
|
(148.4
|
)
|
|
—
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
1,823.2
|
|
|
89.1
|
|
|
174.6
|
|
|
(69.7
|
)
|
|
2,017.2
|
|
|
Operating expenses (excluding depreciation and amortization presented below)
|
|
110.5
|
|
|
10.7
|
|
|
25.8
|
|
|
6.2
|
|
|
153.2
|
|
|
Segment contribution margin
|
|
$
|
180.1
|
|
|
$
|
30.9
|
|
|
$
|
13.5
|
|
|
$
|
(24.3
|
)
|
|
200.2
|
|
|
Depreciation and amortization
|
|
33.2
|
|
|
5.5
|
|
|
3.7
|
|
|
4.5
|
|
|
46.9
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
68.0
|
|
|
Other operating expense, net
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
$
|
84.6
|
|
|
Total assets
(3)
|
|
$
|
4,269.0
|
|
|
$
|
422.9
|
|
|
$
|
371.8
|
|
|
$
|
505.4
|
|
|
$
|
5,569.1
|
|
|
Capital spending (excluding business combinations)
(4)
|
|
$
|
47.6
|
|
|
$
|
3.8
|
|
|
$
|
10.6
|
|
|
$
|
6.5
|
|
|
$
|
68.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Refining
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
|
|
Consolidated
|
|
Net revenues (excluding intercompany fees and sales)
|
|
$
|
4,240.9
|
|
|
$
|
270.5
|
|
|
$
|
213.9
|
|
|
$
|
58.1
|
|
|
$
|
4,783.4
|
|
|
Intercompany fees and sales
|
|
125.4
|
|
|
116.4
|
|
|
—
|
|
|
(241.8
|
)
|
|
—
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of materials and other
|
|
3,888.5
|
|
|
266.7
|
|
|
174.6
|
|
|
(119.1
|
)
|
|
4,210.7
|
|
|
Operating expenses (excluding depreciation and amortization presented below)
|
|
212.9
|
|
|
31.0
|
|
|
25.8
|
|
|
6.8
|
|
|
276.5
|
|
|
Segment contribution margin
|
|
$
|
264.9
|
|
|
$
|
89.2
|
|
|
$
|
13.5
|
|
|
$
|
(71.4
|
)
|
|
296.2
|
|
|
Depreciation and amortization
|
|
76.9
|
|
|
16.4
|
|
|
3.7
|
|
|
8.4
|
|
|
105.4
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
122.0
|
|
|
Other operating expense, net
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
$
|
67.8
|
|
|
Capital spending (excluding business combinations)
(4)
|
|
$
|
69.6
|
|
|
$
|
8.7
|
|
|
$
|
10.6
|
|
|
$
|
9.8
|
|
|
$
|
98.7
|
|
|
|
|
|
(1)
|
Capital spending excludes transaction costs capitalized in the amount of
$0.4 million
during the
nine
months ended
September 30, 2018
, that relate to the Big Spring Logistic Assets Acquisition.
|
|
|
|
|
(2)
|
The corporate, other and eliminations segment results of operations for the
nine
months ended
September 30, 2018
, includes Canada trading activity which was previously included and reported in the refining segment for the three months ended March 31, 2018.
|
|
|
|
|
(3)
|
Assets held for sale of
$167.2 million
are included in the corporate, other and eliminations segment as of
September 30, 2017
.
|
|
|
|
|
(4)
|
Capital spending excludes capital spending associated with the California Discontinued Entities of
$0.4 million
and the asset acquisition of pipeline assets totaling
$12.1 million
for the
three and nine
months ended
September 30, 2017
.
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Property, plant and equipment and accumulated depreciation as of
September 30, 2018
and depreciation expense by reporting segment for the
three and nine
months ended
September 30, 2018
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Logistics
|
|
Retail
|
|
Corporate,
Other and Eliminations
|
|
Consolidated
|
|
Property, plant and equipment
|
|
$
|
2,163.2
|
|
|
$
|
448.7
|
|
|
$
|
144.7
|
|
|
$
|
140.6
|
|
|
$
|
2,897.2
|
|
|
Less: Accumulated depreciation
|
|
(552.1
|
)
|
|
(134.1
|
)
|
|
(21.8
|
)
|
|
(46.8
|
)
|
|
(754.8
|
)
|
|
Property, plant and equipment, net
|
|
$
|
1,611.1
|
|
|
$
|
314.6
|
|
|
$
|
122.9
|
|
|
$
|
93.8
|
|
|
$
|
2,142.4
|
|
|
Depreciation expense for the three months ended September 30, 2018
|
|
$
|
31.7
|
|
|
$
|
6.7
|
|
|
$
|
5.2
|
|
|
$
|
3.4
|
|
|
$
|
47.0
|
|
|
Depreciation expense for the nine months ended September 30, 2018
|
|
$
|
92.0
|
|
|
$
|
19.6
|
|
|
$
|
16.3
|
|
|
$
|
10.8
|
|
|
$
|
138.7
|
|
In accordance with 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 of our property, plant and equipment as of
September 30, 2018
.
Note 15
- Fair Value Measurements
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of Delek’s assets and liabilities that fall under the scope of ASC 825,
Financial Instruments
("ASC 825").
Delek 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 applies to our commodity and interest rate derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material to our financial statements as of
September 30, 2018
.
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 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 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.
The U.S. Environmental Protection Agency ("EPA") requires certain refiners to blend biofuels into the fuel products they produce pursuant to the EPA’s Renewable Fuel Standard - 2. Alternatively, credits called RINs, which may be generated and/or purchased, can be used to satisfy this obligation instead of physically blending biofuels ("RINs Obligation"). Our RINs Obligation surplus or deficit is based on the amount of RINs we must purchase, net of amounts internally generated and purchased and the price of those RINs as of the balance sheet date. The RINs Obligation surplus or deficit is categorized as Level 2, and is measured at fair value based on quoted prices from an independent pricing service.
In both March 2018 and March 2017, the El Dorado refinery received approval from the EPA for a small refinery exemption from the requirements of the renewable fuel standard for the 2017 and 2016 calendar years, respectively, which resulted in a reduction of our RINs Obligation and related cost of materials and other of approximately
$59.3 million
and
$47.5 million
for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively. In March 2018, the Krotz Springs refinery received such approval as well, which resulted in a reduction of our RINs Obligation and related cost of materials and other of approximately
$31.6 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
We have 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 is categorized as Level 2, and is measured at fair value using market prices for the consigned crude oil and refined products we are required to repurchase from J. Aron at the end of the term of the Supply and Offtake Agreement. The J. Aron step-out liability is 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 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 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 loss on the commodity investments for the
three and nine
months ended
September 30, 2018
totaled
$3.5 million
and
$3.3 million
, respectively.
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at
September 30, 2018
and
December 31, 2017
, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
589.1
|
|
|
$
|
—
|
|
|
$
|
589.1
|
|
|
Commodity investments
|
|
6.9
|
|
|
—
|
|
|
—
|
|
|
6.9
|
|
|
RIN commitment contracts
|
|
—
|
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
Total assets
|
|
6.9
|
|
|
591.4
|
|
|
—
|
|
|
598.3
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
—
|
|
|
(601.9
|
)
|
|
—
|
|
|
(601.9
|
)
|
|
RIN commitment contracts
|
|
—
|
|
|
(8.4
|
)
|
|
—
|
|
|
(8.4
|
)
|
|
RINs Obligation deficit
|
|
—
|
|
|
(8.0
|
)
|
|
—
|
|
|
(8.0
|
)
|
|
J. Aron step-out liability
|
|
—
|
|
|
(478.7
|
)
|
|
—
|
|
|
(478.7
|
)
|
|
Total liabilities
|
|
—
|
|
|
(1,097.0
|
)
|
|
—
|
|
|
(1,097.0
|
)
|
|
Net liabilities
|
|
$
|
6.9
|
|
|
$
|
(505.6
|
)
|
|
$
|
—
|
|
|
$
|
(498.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
178.0
|
|
|
$
|
—
|
|
|
$
|
178.0
|
|
|
RIN commitment contracts
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
|
RINs Obligation surplus
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.1
|
|
|
Total assets
|
|
—
|
|
|
180.5
|
|
|
—
|
|
|
180.5
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
Commodity derivatives
|
|
—
|
|
|
(203.9
|
)
|
|
—
|
|
|
(203.9
|
)
|
|
RIN commitment contracts
|
|
—
|
|
|
(24.0
|
)
|
|
—
|
|
|
(24.0
|
)
|
|
RINs Obligation deficit
|
|
—
|
|
|
(130.8
|
)
|
|
—
|
|
|
(130.8
|
)
|
|
J. Aron step-out liability
|
|
—
|
|
|
(435.6
|
)
|
|
—
|
|
|
(435.6
|
)
|
|
Total liabilities
|
|
—
|
|
|
(795.2
|
)
|
|
—
|
|
|
(795.2
|
)
|
|
Net liabilities
|
|
$
|
—
|
|
|
$
|
(614.7
|
)
|
|
$
|
—
|
|
|
$
|
(614.7
|
)
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 2018
and
December 31, 2017
,
$32.5 million
and
$10.0 million
, respectively, of cash collateral was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty. See
Note 16
for further information regarding derivative instruments.
Note 16
- 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:
|
|
|
|
•
|
limiting the exposure to price fluctuations of commodity inventory above or below target levels at each of our segments;
|
|
|
|
|
•
|
managing our exposure to commodity price risk associated with the purchase or sale of crude oil, feedstocks and finished grade fuel products at each of our segments;
|
|
|
|
|
•
|
managing the cost of our RINs Obligation using future commitments to purchase or sell RINs at fixed prices and quantities; and
|
|
|
|
|
•
|
limiting the exposure to interest rate fluctuations on our floating rate borrowings.
|
We primarily utilize commodity swaps, futures, forward contracts and options contracts, generally with maturity dates of
three years
or less, and from time to time interest rate swap agreements to achieve these objectives. Futures contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Commodity swap and futures contracts require cash settlement for the commodity based on the difference between a fixed or floating price and the market price on the settlement date, and options require payment of an upfront premium. Because these derivatives are entered into to achieve objectives specifically related to our inventory and production risks, such gains and losses (to the extent not designated as accounting hedges and recognized on an unrealized basis in other comprehensive income) are recognized in cost of materials and other.
Interest rate swap agreements economically 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 (maturing March 2019) that effectively fixed the variable LIBOR interest component of the term loans 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 income statement during the nine months ended September 30, 2018 - see
Note 8
for further information.
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
Derivatives and Hedging
("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. As of and for the
three and nine
months ended
September 30, 2018
, all of our forward contracts that were accounted for as derivative instruments 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 inventory that will be used in production, such unrealized and realized gains and losses are recognized in other operating income (expense), net rather than cost of materials and other on the accompanying condensed consolidated incomes statement. There were no forward contract transactions that were accounted for as derivatives during the
three and nine
months ended
September 30, 2017
, and there were no forward contract derivative assets or liabilities outstanding as of
December 31, 2017
.
Futures, swaps or other commodity related derivative instruments that are utilized to specifically hedge our Canadian forward contract or investment positions are recognized in other operating income (expense), net because that is where the related underlying transactions are reflected.
At this time, we do not believe there is any material credit risk with respect to the counterparties to any of our derivative contracts.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 effective portion of 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 effective portion of the fair value of these contracts is recognized in income at the time the positions are closed and the hedged transactions are recognized in income. In regards to our interest rate swap agreements, the amount of losses in accumulated other comprehensive income were reclassified into earnings as a result of the discontinuance of cash flow hedges since the originally forecasted Alon Retail Credit Agreement interest payments will not occur by the end of the originally specified time period due to the Refinancing on March 30, 2018, as discussed above.
The following table presents the fair value of our derivative instruments as of
September 30, 2018
and
December 31, 2017
. 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 15
for further information regarding the fair value of derivative instruments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Derivative Type
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
(1)
|
Other current assets
|
|
$
|
376.6
|
|
|
$
|
(378.7
|
)
|
|
$
|
164.6
|
|
|
$
|
(162.0
|
)
|
|
Commodity derivatives
(1)
|
Other current liabilities
|
|
18.0
|
|
|
(28.4
|
)
|
|
13.4
|
|
|
(28.3
|
)
|
|
Commodity derivatives
(1)
|
Other long-term assets
|
|
45.3
|
|
|
(46.4
|
)
|
|
—
|
|
|
—
|
|
|
Commodity derivatives
(1)
|
Other long-term liabilities
|
|
0.7
|
|
|
(1.1
|
)
|
|
—
|
|
|
—
|
|
|
RIN commitment contracts
(2)
|
Other current assets
|
|
2.3
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
RIN commitment contracts
(2)
|
Other current liabilities
|
|
—
|
|
|
(8.4
|
)
|
|
—
|
|
|
(24.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
(1)
|
Other current assets
|
|
128.5
|
|
|
(131.8
|
)
|
|
—
|
|
|
—
|
|
|
Commodity derivatives
(1)
|
Other current liabilities
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(13.6
|
)
|
|
Commodity derivatives
(1)
|
Other long-term assets
|
|
20.0
|
|
|
(15.3
|
)
|
|
—
|
|
|
—
|
|
|
Interest rate derivatives
|
Other long term-liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
Total gross fair value of derivatives
|
|
$
|
591.4
|
|
|
$
|
(610.3
|
)
|
|
$
|
179.4
|
|
|
$
|
(228.8
|
)
|
|
Less: Counterparty netting and cash collateral
(3)
|
|
557.6
|
|
|
(590.1
|
)
|
|
163.5
|
|
|
(173.6
|
)
|
|
Total net fair value of derivatives
|
|
$
|
33.8
|
|
|
$
|
(20.2
|
)
|
|
$
|
15.9
|
|
|
$
|
(55.2
|
)
|
|
|
|
|
(1)
|
As of
September 30, 2018
and
December 31, 2017
, we had open derivative positions representing
152,355,222
and
35,978,000
barrels, respectively, of crude oil and refined petroleum products. Of these open positions, contracts representing
16,013,000
and
575,000
barrels were designated as cash flow hedging instruments as of
September 30, 2018
and
December 31, 2017
, respectively.
|
|
|
|
|
(2)
|
As of
September 30, 2018
and
December 31, 2017
, we had open RIN commitment contracts representing
58,955,000
and
163,361,320
RINs, respectively.
|
|
|
|
|
(3)
|
As of
September 30, 2018
and
December 31, 2017
,
$32.5 million
and
$10.0 million
, respectively, of cash collateral held by counterparties has been netted with the derivatives with each counterparty.
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Total losses on our hedging derivatives and RIN commitment contracts recognized in the condensed consolidated statements of income are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Losses on commodity derivatives not designated as hedging instruments recognized in cost of materials and other
(1)
|
|
$
|
(9.3
|
)
|
|
$
|
(15.5
|
)
|
|
$
|
(23.7
|
)
|
|
$
|
(5.6
|
)
|
|
Losses on commodity derivatives not designated as hedging instruments recognized in other operating income (expense), net
(1) (2)
|
|
(0.6
|
)
|
|
—
|
|
|
(3.5
|
)
|
|
—
|
|
|
Realized (losses) gains reclassified out of OCI on commodity derivatives designated as cash flow hedging instruments
|
|
(9.6
|
)
|
|
1.0
|
|
|
(18.4
|
)
|
|
(38.5
|
)
|
|
Gains recognized on commodity derivatives due to cash flow hedging ineffectiveness
|
|
—
|
|
|
0.1
|
|
|
0.7
|
|
|
0.5
|
|
|
Total losses
|
|
$
|
(19.5
|
)
|
|
$
|
(14.4
|
)
|
|
$
|
(44.9
|
)
|
|
$
|
(43.6
|
)
|
|
|
|
|
(1)
|
Losses on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of
$13.0 million
and
$2.8 million
for the
months ended
September 30, 2018
, respectively, and
$(10.9) million
and
$(11.0) million
for the
months ended
September 30, 2017
, respectively. Of these amounts, approximately
$5.9 million
for the
months ended
September 30, 2018
, and
$(6.5) million
for the
months ended
September 30, 2017
, respectively, represent unrealized gains (losses) where the instrument has matured but where it has not cash settled as of period end. 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."
|
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, 2018
or
2017
. As of
September 30, 2018
and
December 31, 2017
, gains of
$1.1 million
(related to Midland to Cushing crude price differentials at our refineries) and gains of
$7.6 million
(related to future purchases of crude oil), respectively, on cash flow hedges, net of tax, remained in accumulated other comprehensive income. Losses of
$14.5 million
, net of tax, on settled commodity contracts were reclassified into cost of materials and other in the condensed consolidated statements of income during both the
three and nine
months ended
September 30, 2018
. Losses of
$0.7 million
and
$25.0 million
, net of tax, on settled commodity contracts were reclassified into cost of materials and other in the condensed consolidated statements of income during the
three and nine
months ended
September 30, 2017
, respectively. We estimate that
$3.5 million
of deferred losses 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.
As of
December 31, 2017
, gains of
$0.4 million
, net of tax, related to the interest rate cash flow hedges, remained in accumulated other comprehensive income. Related to Alon's interest rate swap cash flow hedges during the
nine
months ended
September 30, 2018
, we recognized
$0.1 million
and
$0.6 million
in interest expense on the condensed consolidated statements of income in regards to normal settlements and for early termination settlements reclassified from accumulated other comprehensive income into income as a result of the discontinuation of cash flow hedge accounting, respectively. There was
no
cash flow hedge ineffectiveness for the
nine
months ended
September 30, 2018
in regards to Alon's interest rate swap cash flow hedges.
Total gains on our trading 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,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Realized gains
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
10.5
|
|
—
|
|
$
|
—
|
|
|
Unrealized gains
|
|
3.8
|
|
|
—
|
|
|
6.7
|
|
|
—
|
|
|
Total
|
|
$
|
5.5
|
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
$
|
—
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 17
- Commitments and Contingencies
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our financial statements. Certain environmental matters that have or may result in penalties or assessments are discussed below in the
"
Environmental, Health and Safety" section of
Note 17
.
Self-insurance
Delek records a self-insurance accrual for workers’ compensation claims up to a
$1.0 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
$1.0 million
deductible on a per accident basis for claims incurred in recent periods, and up to a
$4.0 million
deductible for remaining claims from certain prior periods.
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, and we expect that Consent Decree with modifications to become final in the fourth quarter of 2018. We anticipate the Consent Decree will require payment of a
$0.5 million
civil penalty and capital expenditures for pollution control equipment that may be significant over the next
five years
. While the required capital expenditures may be material, they cannot yet be reasonably estimated until the scope of required equipment is determined.
The Big Spring refinery had been in discussions with the EPA since March 2016 to resolve alleged violations regarding six batches of gasoline produced in 2012-2013 that exceeded the applicable Reid Vapor Pressure standard. The issue, which was previously accrued in the Delek/Alon Merger purchase price allocation, was resolved in January 2018, resulting in payment of a penalty of approximately
$0.4 million
.
Alon USA’s Paramount Petroleum subsidiary had been in discussions with the State of California since December 2016 regarding alleged violations of the state’s Low Carbon Fuel Standard (“LCFS”) program related to reporting of fuel transactions. The issue, which was previously accrued in the Delek/Alon Merger purchase price allocation, was resolved in March 2018, resulting in payment of a penalty of approximately
$0.3 million
.
As of
September 30, 2018
, we have recorded an environmental liability of approximately
$143.4 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 contamination of soil and groundwater, as well as estimated costs for additional issues which have been identified subsequent to the acquisitions. Approximately
$7.3 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
We have experienced several crude oil releases from pipelines owned by our logistics segment, including, but not limited to:
|
|
|
|
•
|
Magnolia Station in March 2013 (the "Magnolia release")
|
|
|
|
|
•
|
A pipeline segment east of El Dorado, Arkansas in February 2018 (the Sandy Bend - Urbana release)
|
The United States Department of Justice (the "DOJ"), on behalf of the EPA, and the State of Arkansas, on behalf of the Arkansas Department of Environmental Quality, are currently pursuing an enforcement action against the Partnership with regard to potential violations of the Clean Water Act and certain state laws arising from the Magnolia Release. Although we have been negotiating a resolution to this matter with the EPA and the State of Arkansas, which will include monetary penalties and other relief, the DOJ and the State of Arkansas filed a civil action, on July 13, 2018, against two of Delek Logistics’ wholly-owned subsidiaries, Delek Logistics Operating LLC and SALA Gathering Systems LLC, with regard to the Magnolia Release seeking monetary penalties and injunctive relief. As of
September 30, 2018
, we have accrued
$1.0 million
, which we recorded in pipeline release liabilities in our condensed consolidated balance sheet, for the Magnolia Release in connection with these proceedings. We believe this amount is adequate to cover our expected obligations related to these proceedings and that these proceedings will not have a material adverse effect upon Delek's business, financial condition or result of operations.
Letters of Credit
As of
September 30, 2018
, we had in place letters of credit totaling approximately
$143.5 million
with various financial institutions securing obligations primarily with respect to our commodity purchases for the refining segment and our workers’ compensation and auto liability insurance programs.
No
amounts were drawn by beneficiaries of these letters of credit at
September 30, 2018
.
Note 18
-
Employees
Postretirement Benefits
The components of net periodic benefit cost related to our benefit plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Components of net periodic (benefit) cost:
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Service cost
|
$
|
0.1
|
|
|
$
|
1.0
|
|
|
$
|
0.5
|
|
|
$
|
1.0
|
|
|
Interest cost
|
1.3
|
|
|
1.3
|
|
|
3.7
|
|
|
1.3
|
|
|
Expected return on plan assets
|
(2.1
|
)
|
|
(1.4
|
)
|
|
(5.7
|
)
|
|
(1.4
|
)
|
|
Recognition due to settlement
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
Recognition due to curtailment gain
|
(2.4
|
)
|
|
(6.1
|
)
|
|
(2.4
|
)
|
|
(6.1
|
)
|
|
Net periodic benefit
|
$
|
(3.1
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
(5.2
|
)
|
The service cost component of net periodic benefit is included as part of general and administrative expenses in the accompanying condensed consolidated statements of income. The other components of net periodic benefit are included as part of other non-operating expense (income), net in the accompanying condensed consolidated statements of income. During the
nine
months ended
September 30, 2018
, we completely settled the supplemental retirement income plan of the retail segment, and we had a partial settlement of Alon's executive non-qualified restoration plan. During the
three
months ended September 30, 2018, we entered into an agreement with the International Union of Operating Engineers (the "Union") to extend the Union agreement to March 31, 2022, and to freeze Alon's qualified pension plan for union employees effective July 31, 2018. As part of the extended Union agreement, the Company agreed to compensate each pension-eligible employee in the Union for the loss of the pension benefit over the remaining union contract period in four annual installments, where payments are contingent upon continued employment at each annual payment date. The payments, the first of which was made in July 2018, are expected to total approximately
$6.9 million
in the aggregate without considering forfeitures (which cannot yet be estimated). The related expense has been or will be recognized over the remaining union contract period as follows (estimated without considering forfeitures): approximately
$0.3 million
during the
three and nine
months ended
September 30, 2018
and approximately
$0.5 million
for the remainder of 2018; approximately
$2.0 million
during each of the years 2019, 2020 and 2021, and approximately
$0.1 million
in 2022.
Our estimated contributions to our pension plans during 2018 have not changed significantly from amounts previously disclosed in the notes to the consolidated financial statements for the year ended
December 31, 2017
. For the
three and nine
months ended
September 30, 2018
, we made
$20.0 million
of contributions to our funded qualified pension plan, and we made contributions of a nominal amount and
$4.2 million
related to payments to participants in our unfunded pension plans for the
three and nine
months ended
September 30, 2018
, respectively.
Note 19
. Subsequent Events
On November 5, 2018, Alon and certain of its subsidiaries including Alon Bakersfield Property, Inc. (collectively, "ABPI") entered into a Settlement and Release Agreement (the "Settlement Agreement") with Equilon Enterprises, LLC, doing business as Shell Oil Products, US ("Shell"), a former owner of our non-operating refinery located in Bakersfield, California (the "Bakersfield Refinery") which was acquired by Delek in connection with the Delek/Alon Merger. The Settlement Agreement resolved certain disputed indemnification matters related to environmental obligations and asset retirement obligations at the Bakersfield Refinery. As a result of this Settlement Agreement, Shell will pay ABPI a lump sum payment of
$34.0 million
and convey to APBI ownership of a non-operating terminal located on the site of the Bakersfield Refinery (deemed to have little or no value) and the parties will terminate a nominal lease agreement related to such terminal. Of this total lump sum settlement payment,
$14.0 million
was previously recognized as an indemnification receivable in the purchase price allocation associated with the Delek/Alon Merger as of July 1, 2017 because such amounts represented indemnification that was deemed by the Company to be probable of realization based on existing indemnification agreements in place on the date of the acquisition and that related to identified asset retirement obligations that were also recognized in the purchase price allocation. The payment is expected to be received in the fourth quarter of 2018 at which point we expect to recognize the benefit of the remaining
$20.0 million
not previously recognized.
On
November 6, 2018
, our Board of Directors voted to declare a quarterly cash dividend of
$0.26
per share of our common stock, payable on
December 4, 2018
to shareholders of record on
November 20, 2018
. Additionally, on
November 6, 2018
, the Board of Directors authorized the repurchase of an additional
$500.0 million
of Delek common stock. This new authorization has no expiration and is in addition to any remaining amounts previously authorized.
On November 9, 2018, Delek entered into a Warrant Unwind Agreement (the "Unwind Agreement") with the holders of our outstanding common stock Warrants (as defined in Note 8). Pursuant to the terms of the Unwind Agreement, we will settle for cash all outstanding Warrants with the holders at various prices per Warrant as provided in the Unwind Agreement. The settlement amount will be 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 will be canceled and the associated rights and obligations terminated. Based on the provisions of the Unwind Agreement, we estimate that the initial liability as of the effective date of the Unwind Agreement is approximately
$36 million
.